Edgar Filing: ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-32085

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

Delaware

36-4392754

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

222 Merchandise Mart, Suite 2024

Chicago, IL 60654

(Address of principal executive offices)

(312) 506-1200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of July 31, 2012, there were 171,386,035 shares of the registrant’s $0.01 par value common stock outstanding.

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

FORM 10-Q

TABLE OF CONTENTS


		PAGE
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011		3
	Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011		4
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2012 and 2011		5
	Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011		6
	Notes to Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		45
Item 4.	Controls and Procedures		45
PART II. OTHER INFORMATION			46
Item 1.	Legal Proceedings		46
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities		46
Item 6.	Exhibits		46
SIGNATURES			47

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(In thousands, except per share amounts)	June 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	120,373		$	157,753
Accounts receivable, net of allowance of $16,732 and $12,505 at June 30, 2012 and December 31, 2011, respectively		363,050			362,793
Deferred taxes, net		40,607			40,600
Inventories		1,262			2,059
Prepaid expenses and other current assets		130,099			117,444

Total current assets		655,391			680,649
Long-term marketable securities		1,640			1,675
Fixed assets, net		139,233			122,563
Software development costs, net		108,789			98,378
Intangible assets, net		457,725			489,848
Goodwill		1,039,364			1,039,364
Deferred taxes, net		5,017			5,017
Other assets		73,920			79,847

Total assets	$	2,481,079		$	2,517,341

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	59,068		$	41,215
Accrued expenses		99,809			103,381
Accrued compensation and benefits		27,494			31,784
Deferred revenue		308,503			288,900
Current maturities of long-term debt and capital lease obligations		68,121			45,477

Total current liabilities		562,995			510,757
Long-term debt		420,921			322,664
Deferred revenue		19,709			18,891
Deferred taxes, net		128,898			119,728
Other liabilities		67,818			68,581

Total liabilities		1,200,341			1,040,621
Commitments and contingencies
Stockholders’ equity:
Preferred stock: $0.01 par value, 1,000 shares authorized, no shares issued and outstanding at June 30, 2012 and December 31, 2011		0			0
Common stock: $0.01 par value, 349,000 shares authorized at June 30, 2012 and December 31, 2011; 255,964 and 171,292 shares issued and outstanding at June 30, 2012, respectively, 254,691 and 190,382 shares issued and outstanding at December 31, 2011, respectively		2,560			2,547
Treasury stock: at cost, 84,672 and 63,951 shares at June 30, 2012 and December 31, 2011, respectively		(278,036	)		(52,075	)
Additional paid-in capital		1,559,563			1,543,167
Accumulated deficit		(2,583	)		(16,377	)
Accumulated other comprehensive loss		(766	)		(542	)

Total stockholders’ equity		1,280,738			1,476,720

Total liabilities and stockholders’ equity	$	2,481,079		$	2,517,341

The accompanying notes are an integral part of these consolidated financial statements.

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands, except per share amounts)	2012			2011			2012			2011
Revenue:
System sales	$	46,565		$	64,866		$	87,273		$	119,362
Professional services		67,380			58,134			138,866			113,729
Maintenance		113,899			103,249			228,715			203,583
Transaction processing and other		142,112			130,582			279,814			255,465

Total revenue		369,956			356,831			734,668			692,139

Cost of revenue:
System sales		35,063			35,902			66,648			70,816
Professional services		57,024			48,439			118,726			94,062
Maintenance		36,282			35,076			72,286			68,123
Transaction processing and other		84,097			69,619			163,841			131,493

Total cost of revenue		212,466			189,036			421,501			364,494

Gross profit		157,490			167,795			313,167			327,645
Selling, general and administrative expenses		92,291			101,532			189,608			205,680
Research and development		38,240			24,764			74,362			46,768
Amortization of intangible assets		9,255			9,422			18,510			18,649

Income from operations		17,704			32,077			30,687			56,548
Interest expense		(4,358	)		(5,050	)		(8,212	)		(12,977	)
Interest income and other, net		150			355			542			759

Income before income taxes		13,496			27,382			23,017			44,330
Provision for income taxes		(5,515	)		(11,506	)		(9,223	)		(15,841	)

Net income	$	7,981		$	15,876		$	13,794		$	28,489

Earnings per share—basic and diluted	$	0.04		$	0.08		$	0.07		$	0.15

The accompanying notes are an integral part of these consolidated financial statements.

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2012			2011			2012			2011
Net income	$	7,981		$	15,876		$	13,794		$	28,489
Other comprehensive (loss) income:
Unrealized (loss) gain on marketable securities, net of tax		(1	)		(1	)		4			1
Derivatives:
Unrealized loss on derivative financial instruments		(368	)		(3,473	)		(1,111	)		(3,304	)
Reclassification adjustment for loss included in net income		469			516			944			993
Tax effect		(40	)		1,151			66			897

Unrealized gain (loss) on derivative financial instruments, net of tax		61			(1,806	)		(101	)		(1,414	)
Change in foreign currency translation adjustments		(1,034	)		(33	)		(127	)		842

Total other comprehensive loss		(974	)		(1,840	)		(224	)		(571	)

Comprehensive income	$	7,007		$	14,036		$	13,570		$	27,918

The accompanying notes are an integral part of these consolidated financial statements.

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30,
(In thousands)	2012			2011
Cash flows from operating activities:
Net income	$	13,794		$	28,489
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		72,885			63,712
Stock-based compensation expense		17,656			19,221
Excess tax benefits from stock-based compensation		(101	)		(7,051	)
Deferred taxes		7,052			14,787
Other losses		1,130			2,231
Changes in operating assets and liabilities:
Accounts receivable, net		(146	)		(39,629	)
Inventories		757			623
Prepaid expenses and other assets		(9,333	)		(17,402	)
Accounts payable		15,997			(2,238	)
Accrued expenses		(3,657	)		11,309
Accrued compensation and benefits		(3,669	)		(10,028	)
Deferred revenue		20,481			55,556
Other liabilities		594			(433	)

Net cash provided by operating activities		133,440			119,147
Cash flows from investing activities:
Capital expenditures		(38,732	)		(21,178	)
Capitalized software		(26,936	)		(30,323	)
Purchases of marketable securities and other investments		0			(12,900	)
Sales and maturities of marketable securities and other investments		41			32
Proceeds received from sale of fixed assets		0			20,000
Change in restricted cash		0			2,225

Net cash used in investing activities		(65,627	)		(42,144	)
Cash flows from financing activities:
Proceeds from issuance of common stock		3,862			19,977
Excess tax benefits from stock-based compensation		101			7,051
Taxes paid related to net share settlement of equity awards		(3,621	)		0
Payments of capital lease obligations		(431	)		(718	)
Credit facility payments		(204,045	)		(115,005	)
Credit facility borrowings, net of issuance costs		324,185			47,362
Repurchase of common stock		(225,961	)		(50,051	)

Net cash used in financing activities		(105,910	)		(91,384	)

Effect of exchange rate changes on cash and cash equivalents		717			649

Net decrease in cash and cash equivalents		(37,380	)		(13,732	)
Cash and cash equivalents, beginning of period		157,753			129,403

Cash and cash equivalents, end of period	$	120,373		$	115,671

The accompanying notes are an integral part of these consolidated financial statements.

ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Allscripts Healthcare Solutions, Inc. and our wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Unaudited Interim Financial Information

The unaudited interim consolidated financial statements as of and for the three and six months ended June 30, 2012 have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the consolidated financial statements for the periods presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012.

Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with GAAP have been omitted in accordance with the SEC’s rules and regulations for interim reporting. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2011.

Use of Estimates

The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates.

Significant Accounting Policies

We have updated our revenue recognition accounting policy disclosure from our Annual Report on Form 10-K for the year ended December 31, 2011 to include discussion of additional revenue elements. There has been no change in our accounting for revenue. Also, there have been no other changes to our significant accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Revenue Recognition

Revenue represents the fair value of consideration received or receivable from clients for goods and services provided by the Company. Revenue from system sales includes software and related hardware. Revenue from professional services includes implementation, training and consulting services. Revenue from maintenance includes post contract customer support and maintenance services. Revenue from transaction processing and other includes electronic data interchange (“EDI”) services, Software-as-a-Service (“SaaS”) transactions, software hosting services, and outsourcing. For some clients, we host the software applications licensed from us remotely using our own or third party servers, which saves these clients the cost of procuring and maintaining hardware and related facilities. For other clients, we offer an outsourced solution in which we assume partial to total responsibility for a healthcare organization’s information technology operations using our employees.

Revenue from software licensing arrangements where the service element is not considered essential to the functionality of the other elements of the arrangement is recognized upon delivery of the software or as services are performed, provided persuasive evidence of an arrangement exists, fees are considered fixed or determinable, and collection of the receivable is probable. The revenue recognized for each separate element of a multiple-element software contract is based upon vendor-specific objective evidence of fair value, which is based upon the price the customer is required to pay when the element is sold separately or renewed. For arrangements in which vendor-specific objective evidence of fair value only exists for the undelivered elements, the delivered elements (which is generally software licenses) are accounted for using the residual method.

Revenue from software licensing arrangements, where the service element is considered essential to the functionality of the other elements of the arrangement, is accounted for on an input basis under percentage of completion accounting using actual hours worked as a percentage of total expected hours required by the arrangement, provided that persuasive evidence of an arrangement exists, the fee is fixed or determinable and collection of the receivable is probable. Maintenance and support from these agreements is recognized over the term of the support agreement based on vendor-specific objective evidence of fair value of the maintenance revenue, which is based upon contractual renewal rates. For income statement presentation, consideration from agreements accounted for under percentage of completion accounting is allocated between software and services based on vendor specific evidence of our hourly services rate multiplied by the amount of hours performed with the residual amount allocated to software license fee.

Revenue from certain value-added reseller (“VAR”) relationships in which software is directly sold to VARs is recognized upon delivery of the software assuming all other revenue recognition criteria have been met. Revenue recognition is deferred until the software is delivered to the ultimate end user if the arrangement terms do not satisfy the criteria for revenue recognition upon delivery of the software to the VAR.

Fees related to SaaS arrangements are recognized as revenue ratably over the contract terms beginning on the date our solutions are made available to customers. These arrangements include professional services fees related to the implementation and set-up of our solutions and are generally billed upfront and recorded as deferred revenue until our solutions are made available to the customer. The implementation and set-up fees are recognized as revenue ratably over the estimated customer relationship period. The estimated length of a customer relationship period is based on our experience with customer contract renewals and consideration of the period over which such customers utilize our SaaS solutions.

Software hosting services are provided to clients that have purchased a perpetual license to our software solutions and contracted with us to host the software. Generally, these arrangements provide the client with a contractual right to take possession of the software at any time during the hosting period without significant penalty and it is feasible for the client to either use the software on its own equipment or to contract with an unrelated third party to host the software. Hosting services are not deemed to be essential to the functionality of the software or other elements of the arrangement; accordingly, for these arrangements, we recognize software license revenues as system sales revenue upon delivery, assuming all other revenue recognition criteria have been met, and separately recognize fees for the hosting services as transaction processing and other revenue over the term of the hosting arrangement.

We also enter into multiple-element arrangements that may include a combination of various software-related and nonsoftware-related products and services. Management applies judgment to ensure appropriate accounting for multiple deliverables, including the allocation of arrangement consideration among multiple units of accounting, the determination of whether undelivered elements are essential to the functionality of delivered elements, and the timing of revenue recognition, among others. In such arrangements, we first allocate the total arrangement consideration based on a selling price hierarchy at the inception of the arrangement. The selling price for each element is based upon the following selling price hierarchy: vendor-specific objective evidence of fair value if available, third-party evidence of fair value if vendor-specific objective evidence of fair value is not available, or estimated selling price if neither vendor-specific objective evidence or third-party evidence of fair value is available (a description as to how we determine vendor-specific objective evidence of fair value, third-party evidence of fair value and estimated selling price is provided below). Upon allocation of consideration to the software elements as a whole and nonsoftware elements, we then further allocate consideration within the software group to the respective elements following higher-level, industry-specific guidance and our policies described above. After the arrangement consideration has been allocated to the elements, we account for each respective element in the arrangement as described above.

To determine the selling price in multiple-element arrangements, we establish vendor-specific objective evidence of fair value using the price charged for a deliverable when sold separately and contractual renewal rates for maintenance fees. For nonsoftware multiple element arrangements, third-party evidence of fair value is established by evaluating similar and interchangeable competitor products or services in standalone arrangements with similarly situated customers. If we are unable to determine the selling price because vendor-specific objective evidence or third-party evidence of fair value does not exist, we determine an estimated selling price by considering several external and internal factors including, but not limited to, pricing practices, margin objectives, competition, customer demand, internal costs and overall economic trends. The determination of an estimated selling price is made through consultation with and approval by our management, taking into consideration our go-to-market strategy. As our, or our competitors’, pricing and go-to-market strategies evolve, we may modify our pricing practices in the future. These events could result in changes to our determination of vendor-specific objective evidence of fair value, third-party evidence of fair value and estimated selling price. Selling prices are analyzed on an annual basis or more frequently if we experience significant changes in our selling prices.

For those arrangements where the deliverables do not qualify as separate units of accounting, revenue recognition is evaluated for the combined deliverables as a single unit of accounting and generally the recognition pattern of the final deliverable will dictate the revenue recognition pattern for the single, combined unit of accounting. Changes in circumstances and customer data may affect management’s analysis of separation criteria which may lead to an upward or downward adjustment to the amount of revenue recognized under the arrangement.

We assess whether fees are fixed or determinable at the time of sale and recognize revenues if all other revenue recognition requirements are met. Our payment arrangements with clients typically include milestone-based software license fee payments and payments based upon delivery for services and hardware.

While most of our arrangements include short-term payment terms, we periodically provide extended payment terms to clients from the date of contract signing. We do not recognize revenue under extended payment term arrangements until such payments become due. In certain circumstances, where all other revenue recognition criteria have been met, we occasionally offer discounts to clients with extended payment terms, in order to accelerate the timing of when payments are made. Changes to extended payment term arrangements have not had a material impact on our consolidated results of operations.

Maintenance fees are recognized ratably over the period of the contract based on vendor specific objective evidence of fair value based upon contractual renewal rates. Revenue from EDI services is recognized as services are provided and is determined based on the volume of transactions processed.

We provide outsourcing services to our clients under arrangements that typically range from five to ten years in duration. Under these arrangements we assume full, partial or transitional responsibilities for a healthcare organization’s IT operations using our employees. Our outsourcing services include facilities management, network outsourcing and transition management. Revenue from these arrangements is recognized as services are performed.

Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities. We record as revenue any amounts billed to customers for shipping and handling costs and record as cost of revenue the actual shipping costs incurred.

The Company records reimbursements for out-of-pocket expenses incurred as professional services revenue in the statement of operations.

Revenue earned on contracts in excess of billings is included in the balance of accounts receivable. Billings are expected to occur according to the contract terms.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued updated authoritative guidance for testing goodwill for impairment. This guidance allows entities to use a qualitative approach to test goodwill for impairment. The guidance permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. This guidance will not have a material impact on the consolidated financial statements.

In May 2011, the FASB issued additional authoritative guidance related to fair value measurements and disclosures to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards. This guidance changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2011 and will be applied prospectively. We do not currently have Level 3 fair value instruments. This guidance did not have a material impact on the consolidated financial statements.

2. Fair Value Measurements

The fair values of assets and liabilities required to be measured at fair value are categorized based upon the level of judgment associated with the inputs used to measure their value. Hierarchical levels are as follows:

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. Our Level 1 investments include money market funds valued daily by the fund companies, and the valuation is based on the publicly reported net asset value of each fund.

Level 2: Inputs, other than quoted prices included in Level 1, are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. Our Level 2 non-derivative investments include marketable securities and consist of mortgage and asset-backed bonds. Marketable securities are recorded at fair value determined using a market approach, based on prices and other relevant information generated by market transactions involving identical or comparable assets which are considered to be Level 2 inputs. Our Level 2 derivative financial instrument represents an interest rate swap contract which is valued based upon observable values for underlying interest rates and market determined risk premiums.

Level 3: Inputs are unobservable for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. We have no Level 3 financial instruments.

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of the respective balance sheet dates:


	Balance Sheet	June 30, 2012								December 31, 2011
(In thousands)	Classifications	Level 1		Level 2			Total			Level 1		Level 2			Total
Money market funds	Cash equivalents	$	11,512	$	0		$	11,512		$	14,071	$	0		$	14,071
Marketable securities	Long-term marketable securities		0		1,640			1,640			0		1,675			1,675
Derivatives	Other liabilities		0		(1,921	)		(1,921	)		0		(1,754	)		(1,754	)

Total		$	11,512	($	281	)	$	11,231		$	14,071	($	79	)	$	13,992

We hold investments in certain non-marketable equity securities in which we do not have a controlling interest or significant influence. These investments are recorded at cost with a carrying value of $13 million at June 30, 2012 and are included in other assets in the accompanying consolidated balance sheets. We measure our cost method investments at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. If an evaluation is required, the fair value of these investments will be determined based on valuation techniques using the best information available and may include quoted market prices, market comparables, and discounted cash flow projections.

Our long-term financial liabilities consist of long-term debt with a carrying value that approximates fair value since the interest rate approximates current market rates.

3. Stockholders’ Equity

Stock-based Awards

We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize the expense over the appropriate service period typically on a straight-line basis, net of estimated forfeitures. The fair value of restricted stock units and restricted stock awards are measured at their underlying closing share price on the date of grant.

We recorded stock-based compensation expense as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2012		2011		2012		2011
Total stock-based compensation expense	$	9,929	$	10,474	$	17,656	$	19,221

Stock-based compensation expense is reflected in cost of revenue and the functional lines within operating expenses. No stock-based compensation costs were capitalized during the three and six months ended June 30, 2012 and 2011.

We granted stock-based awards as follows:


	Three Months Ended June 30, 2012				Six Months Ended June 30, 2012
			Weighted-Average				Weighted-Average
			Grant Date				Grant Date
(In thousands, except per share amounts)	Shares		Fair Value		Shares		Fair Value
Service-based restricted stock units		2,561	$	10.94		2,876	$	11.86
Service-based restricted stock units with a performance condition		1,099	$	13.42		1,099	$	13.42
Deferred stock units		150	$	10.99		152	$	11.09

		3,810	$	11.66		4,127	$	12.25

Stock Repurchases

In April 2011, our Board of Directors approved a stock repurchase program under which we may purchase up to $200 million of our common stock over three years expiring on May 9, 2014 or such earlier time that the total dollar amount authorized by these resolutions has been used. In April 2012, our Board of Directors approved the repurchase of an additional $200 million bringing the total repurchase authorization to $400 million. Any share repurchases may be made through open market transactions, block trades, privately negotiated transactions (including accelerated share repurchase transactions) or other means. Any repurchase activity will depend on factors such as our working capital needs, cash requirements for investments, debt repayment obligations, our stock price, and economic and market conditions. Our stock repurchase program may be accelerated, suspended, delayed or discontinued at any time.

During the six months ended June 30, 2012, we repurchased approximately 21 million shares of our common stock for approximately $226 million pursuant to this stock repurchase program. As of June 30, 2012, the amount available for repurchase of common stock under this program was approximately $123 million.

Net Share-settlements

Beginning in 2011, upon vesting, restricted stock units and awards are generally net share-settled to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock. The majority of restricted stock units and awards that have vested in 2012 were net-share settled such that we withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities. The total shares withheld were 227 thousand for the six months ended June 30, 2012, and were based on the value of the restricted stock units and awards on their vesting date as determined by our closing stock price. Total payments for the employees’ tax obligations to the taxing authorities are reflected as a financing activity within the consolidated statements of cash flows. These net-share settlements had the effect of share repurchases by us as they reduced the number of shares that would have otherwise been issued as a result of the vesting.

Stockholder Rights Plan

The Company is authorized to issue up to 1 million shares of preferred stock, of which 349 thousand shares have been designated as Series A Junior Participating Preferred Stock in connection with the adoption of a rights agreement discussed below. As of June 30, 2012 and December 31, 2011, no shares of preferred stock were issued or outstanding.

On May 5, 2012, our Board of Directors adopted a stockholder rights plan (“Rights Plan”) and declared a dividend distribution of one right (each, a “Right”) for each outstanding share of the Company’s common stock to stockholders of record at the close of business on May 17, 2012. Each Right entitles its holder, under certain circumstances, to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock of the Company at an exercise price of $45.00 per Right, subject to adjustment. The description and terms of the Rights are set forth in a Rights Agreement, dated as of May 7, 2012 (the “Rights Agreement”), between the Company and Computershare Shareowner Services LLC, as Rights agent.

Under the terms of the Rights Plan, the Rights will be exercisable if a person or group, without Board approval, acquires 10% or more of Allscripts’ common stock (including in the form of synthetic ownership through derivative positions) or announces a tender offer which would result in the ownership of 10% or more of Allscripts’ common stock. The Rights will trade with Allscripts’ common stock, unless and until they are separated upon the occurrence of certain future events. Under certain circumstances (including the acquisition by a person or group of 10% or more of Allscripts’ common stock), the Rights will entitle the holders to buy shares of Allscripts’ common stock at a 50% discount. Allscripts’ Board generally may redeem the Rights prior to the tenth day following the first public announcement of the acquisition by a person or group of 10% or more of the common stock.

The Rights Plan exempts any person or group owning 10% or more of Allscripts’ common stock immediately prior to the first public announcement of the Rights Plan. However, the Rights also will be exercisable if a person or group that already owns 10% or more of the common stock acquires any additional shares (including through derivatives). The Rights Plan will expire on May 6, 2013.

4. Earnings Per Share

Basic income per share is computed by dividing net income by the weighted-average shares of outstanding common stock. For purposes of calculating diluted earnings per share, the denominator includes both the weighted average shares of common stock outstanding and dilutive potential common stock equivalents. Dilutive common stock equivalent shares consist of stock options and restricted stock unit awards using the treasury stock method.

The calculations of earnings per share are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands, except per share amounts)	2012		2011		2012		2011
Basic Earnings per Common Share:
Net income	$	7,981	$	15,876	$	13,794	$	28,489

Net income available to common shareholders	$	7,981	$	15,876	$	13,794	$	28,489

Weighted average common shares outstanding		182,145		189,630		186,353		189,506


Basic Earnings per Common Share	$	0.04	$	0.08	$	0.07	$	0.15
Earnings per Common Share Assuming Dilution:
Net income	$	7,981	$	15,876	$	13,794	$	28,489

Net income available to common shareholders	$	7,981	$	15,876	$	13,794	$	28,489


Weighted average common shares outstanding		182,145		189,630		186,353		189,506
Dilutive effect of stock options and restricted stock units and awards		2,433		3,557		2,047		3,265

Weighted average common shares outstanding assuming dilution		184,578		193,187		188,400		192,771

Earnings per Common Share Assuming Dilution	$	0.04	$	0.08	$	0.07	$	0.15

The following stock options and share awards are not included in the computation of diluted earnings per share as the effect of including such stock options and share awards in the computation would be anti-dilutive:

Three Months Ended June 30,

Six Months Ended June 30,

(In thousands)

2012

2011

2012

2011

Shares subject to anti-dilutive stock options and share awards excluded from calculation

1,276

481

660

465

5. Goodwill and Intangible Assets

Goodwill and intangible assets consist of the following:


	June 30, 2012							December 31, 2011
(In thousands)	Gross Assets		Accumulated Amortization			Intangible Assets, Net		Gross Assets		Accumulated Amortization			Intangible Assets, Net
Intangibles subject to amortization
Proprietary technology	$	361,660	($	183,770	)	$	177,890	$	361,660	($	170,157	)	$	191,503
Customer contracts and relationships		534,355		(306,520	)		227,835		534,355		(288,010	)		246,345

Total	$	896,015	($	490,290	)	$	405,725	$	896,015	($	458,167	)	$	437,848

Intangibles not subject to amortization
Registered trademarks						$	52,000						$	52,000
Goodwill							1,039,364							1,039,364

Total						$	1,091,364						$	1,091,364

In connection with the integration of the Eclipsys operations, we recently realigned certain functions within our business. After the realignment and based upon the information used by management for making operating decisions and assessing performance, we identified the following operating and reportable segments: Software Delivery, Services Delivery, Client Support, Pathway Solutions and IT Outsourcing. Refer to Note 10 Business Segments for additional information. We are in the process of assessing our reporting units and the related allocation of goodwill as a result of the changes to our operating segments.

6. Debt

Debt outstanding consisted of the following:


(In thousands)	June 30, 2012		December 31, 2011
Senior Secured Credit Facilities (long-term portion)	$	420,921	$	322,664
Senior Secured Credit Facilities (current portion)		67,375		44,677

Total debt	$	488,296	$	367,341

Interest expense consisted of the following:


	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2012		2011		2012		2011
Interest expense	$	3,098	$	3,131	$	5,693	$	7,820
Debt cost amortization		1,260		1,853		2,519		3,217
Write off of unamortized deferred debt issuance costs		0		66		0		1,940

Total interest expense	$	4,358	$	5,050	$	8,212	$	12,977

Credit Facility

On June 11, 2012, we entered into an Incremental Assumption Agreement (the “Agreement”) with J. P. Morgan Securities LLC, Mizuho Corporate Bank, LTD., SunTrust Robinson Humphrey, Inc. and other participating lenders to borrow additional amounts under our existing Amended and Restated Credit Agreement (the “Credit Agreement”) in the form of a new incremental term loan. Proceeds from the incremental term loan of $150 million were used to partially refinance the $175 million outstanding under our revolving credit facility, which is provided for in the Credit Agreement. We also made a voluntary repayment of the revolver totaling $20 million at the time of the refinancing. The interest rate charged, debt covenants and other terms that apply to the term loan are defined by the terms of the Credit Agreement. We incurred debt issuance costs totaling $1 million related to the incremental term loan, which were deferred and included within other assets on the balance sheet.

The aggregate principal amount of the incremental term loan of $150 million is payable in quarterly installments commencing on September 30, 2012 as follows (in thousands):


Quarterly Periods Ending	Quarterly Principal Amount
September 30, 2012 to June 30, 2013	$	3,750
September 30, 2013 to June 30, 2014		5,625
September 30, 2014 to June 30, 2015		7,500
September 30, 2015 to March 31, 2016		11,250
June 11, 2016		Remaining balance

The following table summarizes our future payments under the senior secured credit facilities including the incremental term loan as of June 30, 2012:


(Dollar amounts in thousands)	Principal Payments
Remaining payments due in 2012	$	31,309
Payments due in 2013		80,647
Payments due in 2014		107,192
Payments due in 2015		209,148
Payments due in 2016		60,000
Thereafter		0

		488,296
Senior Secured Credit Facilities (current portion)		67,375

Senior Secured Credit Facilities (long-term portion)	$	420,921

As of June 30, 2012, $483 million in term loans, $5 million under the revolving credit facility, and $2 million in letters of credit were outstanding under the Credit Agreement. As of June 30, 2012, the interest rate on the senior secured credit facilities was LIBOR plus 1.75%, which totaled 2.00%. Refer to Note 8 for a discussion of our interest rate swap agreement. There was no default under the Credit Agreement as of June 30, 2012. Unamortized deferred debt issuance costs totaled $13 million, and are included within other assets on the balance sheet at June 30, 2012.

As of June 30, 2012, we had $243 million available, net of outstanding letters of credit, under our revolving credit facility. There can be no assurance that we will be able to draw on the full available balance of our Credit Agreement if the financial institutions that have extended such credit commitments become unwilling or unable to fund such borrowings.

7. Income Taxes

The provision for income taxes reflects our estimate of the effective tax rate expected to be applicable for the full year. To the extent that actual pre-tax results for the year differ from the forecasted estimates applied at the end of the most recent interim period, the actual tax rate recognized during calendar 2012 could be different from the forecast rate. Our provision for income taxes differs from the tax computed at the U.S. federal statutory income tax rate due primarily to state taxes and changes in state tax rates. The effective tax rates were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
(Dollar amounts in thousands)	2012			2011			2012			2011
Income before income taxes		13,496			27,382			23,017			44,330
Provision for income taxes		(5,515	)		(11,506	)		(9,223	)		(15,841	)
Effective tax rate		40.9	%		42.0	%		40.1	%		35.7	%

The effective tax rate for the three months ended June 30, 2012 is lower compared to the prior year comparable period primarily due to the prior year recognition of the impact of state tax legislation that partially offset the tax benefit previously recognized as a result of the refinement of state apportionment factors, and subsequent revaluation of deferred tax liabilities. Also contributing to the decrease is lower state tax expense, which is expected to recur, compared to the prior year.

The effective tax rate for the six months ended June 30, 2012 is higher compared to 2011 primarily due to the recognition in the prior year of the net tax benefit associated with the revaluation of deferred tax liabilities discussed above.

We file income tax returns in the U.S. federal jurisdiction, numerous states and multiple international countries. We are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact our consolidated financial statements.

Our unrecognized income tax benefits were $43 million as of June 30, 2012, which is consistent with the balance at December 31, 2011. The results and timing of the resolution of income tax audits is highly uncertain, and we are unable to estimate the range of possible changes to the balance of unrecognized income tax benefits. We report interest and penalties related to uncertain income tax positions in the provision for income taxes line of our consolidated statements of operations. With regard to the acquired tax position indemnified by Misys plc totaling $29 million at June 30, 2012, we expect a resolution of this matter within the next twelve months. The indemnification asset currently recorded is expected to fully cover the tax exposure and related interest.

8. Derivative Financial Instruments

Interest Rate Swap Agreement

We entered into an interest rate swap agreement with an effective date of October 29, 2010 that has the economic effect of modifying the variable rate component of the interest obligations associated with a portion of our original variable rate term loan. The initial notional amount of the interest rate swap agreement is $300 million, with scheduled step downs in the future, and a final termination date of October 31, 2014. The interest rate swap agreement converts the one-month LIBOR rate on the corresponding notional amount of debt to an effective fixed rate of 0.896% (exclusive of the applicable margin currently charged under the Senior Secured Credit Facilities). The critical terms of the interest rate swap agreement and the related debt agreement match and allow us to designate the interest rate swap agreement as a highly effective cash flow hedge under GAAP. The interest rate swap agreement protects us against changes in interest payments due to benchmark interest rate movements. The change in fair value of this interest rate swap agreement is recognized in other comprehensive income with the corresponding amounts included in other assets or other liabilities in our consolidated balance sheet. Amounts accumulated in other comprehensive income are indirectly recognized in earnings as periodic settlements of the swap occur and the fair value of the swap declines to zero.

The interest rate swap agreement is currently our only derivative instrument and it is not used for trading purposes. Allscripts has not entered into any foreign currency hedging contracts. In the future we may enter into foreign currency exchange contracts to offset certain operational exposures from the impact of changes in foreign exchange rates.

The fair value of the derivative instrument was as follows:


(In thousands)	June 30, 2012			December 31, 2011
Fair value of interest rate swap agreement	($	1,921	)	($	1,754	)

We recognized the following activity related to our interest rate swap agreement:


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2012			2011			2012			2011
Effective Portion
Gain (loss) recognized in OCI	$	101		($	2,957	)	($	167	)	($	2,311	)
Tax effect		(40	)		1,151			66			897

Net	$	61		($	1,806	)	($	101	)	($	1,414	)

Loss reclassified from OCI to interest expense	$	469		$	516		$	944		$	993
Amount excluded from Effectiveness Assessment and Ineffective Portion
Gain (loss) recognized in other income (expense)	$	0		$	0		$	0		$	0

We estimate that approximately $1 million of derivative losses included in other comprehensive income (“OCI”) will be reclassified into earnings within the next 12 months. This amount has been calculated assuming the variable effective interest rate 2.00% as of June 30, 2012 remains the same through the next 12 months. No gains (losses) were reclassified from OCI into earnings as a result of forecasted transactions that failed to occur during the three and six months ended June 30, 2012 and 2011. We held no other derivative instruments during the three and six months ended June 30, 2012 and 2011.

There were no realized gains (losses) on derivatives other than those related to the periodic settlement of the swap.

9. Contingencies

On August 4, 2009, a lawsuit was filed in the United States District Court for the Northern District of Illinois against the Company, Glen Tullman and William Davis by the Plumbers and Pipefitters Local Union No. 630 Pension-Annuity Trust Fund on behalf of a purported class consisting of stockholders who purchased Allscripts common stock between May 8, 2007 and February 13, 2008. On October 13, 2009, David Robb was appointed lead plaintiff, and on November 25, 2009, an amended complaint was filed containing allegations that the Company, Tullman and Davis made materially false and misleading statements and/or omissions in connection with the release of TouchWorks EHR, Version 11. On September 19, 2011, the Court entered an order certifying a class. On February 7, 2012, the parties agreed, subject to execution of settlement documents and Court approval, to settle this matter on a class-wide basis. The settlement amount totaling approximately $10 million will be funded by the Company’s directors’ and officers’ liability insurance carrier and therefore has no material impact on the Company’s financial condition or results of operations. On March 16, 2012, the parties entered into a written settlement agreement and filed a motion with the Court for approval of the settlement. On July 13, 2012, the Court entered an order granting final approval of the settlement.

On February 11, 2011, Medical Services Associates, Inc. (“MSA”) filed binding arbitration against the Company alleging that the Company negligently caused a loss of medical billing data, negligently or intentionally misrepresented certain facts regarding the computer system being sold to MSA, and/or breached certain aspects of a contract to provide certain software-related goods and services to MSA. The Company filed its counterclaim on March 11, 2011. In June 2012, the parties and the Company’s insurance carrier agreed in principle, subject to execution of settlement documentation, to settle this matter for an undisclosed amount that will be funded by the Company’s insurance carrier and therefore it is not expected to have a material impact on the Company’s financial condition or results of operations.

On September 14, 2010, Pegasus Imaging Corporation (“Pegasus”) filed a lawsuit against the Company and AllscriptsMisys, LLC in the Circuit Court of the Thirteenth Judicial Circuit of the State of Florida in and for Hillsborough County, Florida. The lawsuit also named former officers Jeffrey Amrein and John Reinhart as defendants. Prior to serving the complaint, Pegasus filed an amended complaint dropping two of the claims that had been asserted and adding two additional defendants, which are two now-defunct Florida corporations that formerly did business with the Company. The amended complaint asserts causes of action against defendants for fraudulent misrepresentations, negligent misrepresentations, and deceptive and unfair trade practices under Florida law, arising from previous business dealings between Pegasus and Advanced Imaging Concepts, Inc., a software company based in Louisville, Kentucky that the Company purchased in August 2003. On or about November 1, 2010, Defendants moved to transfer the case to the special court for complex business litigation that resides in Hillsborough County, Florida. The Florida Business Court granted Defendants’ motion for transfer on January 13, 2011. The Defendants have answered the complaint and filed counterclaims against the Plaintiff alleging breach of license, breach of warranty, and breach of contract. On April 30, 2012, Plaintiff filed a motion seeking leave to amend its Complaint to add a claim alleging breach of a click-through license agreement and punitive damages. The Company has also recently moved for leave to amend its counterclaims to add a claim for negligent misrepresentations. Discovery in this matter is ongoing. The case is currently expected to be set for trial in May, June or July of 2013. The Company intends to continue to defend this matter vigorously. We believe that we have strong defensive positions in such matter, but the outcomes of intellectual property lawsuits are often uncertain.

In the opinion of management, there was not at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of a recorded accrual, with respect to the above matter. However, the outcome of the foregoing litigation is inherently uncertain, and we may incur substantial defense costs and expenses. Therefore, if this legal matter was resolved against the Company for an amount in excess of management’s expectations, the Company’s consolidated financial statements of a particular reporting period could be materially adversely affected.

On December 22, 2011, in connection with a federal grand jury investigation of third parties, we received a subpoena requesting that we provide documents regarding Allscripts’ interactions with several healthcare and educational organizations. At this time, we are unable to determine the impact of the foregoing on Allscripts. We are cooperating with the United States Attorney’s Office in connection with such subpoena.

On May 1, 2012, Physicians Healthsource, Inc. (hereinafter “Plaintiff”) filed a class action Complaint in U.S. District Court for the Northern District of Illinois against Allscripts-Misys Healthcare Solutions Inc., Allscripts, LLC and Allscripts Healthcare Solutions, Inc. (“Allscripts”). The Complaint alleges that on multiple occasions between July 2008 and December 2011, Allscripts or its agent sent advertisements by fax to the Plaintiff and a class of similarly situated persons, without first receiving the recipients’ express permission or invitation in violation of the Telephone Consumer Protection Act, 47 U.S.C. § 227 (“TCPA”). The Complaint seeks $500 for each alleged violation of the TCPA, treble damages if the Court finds the violations to be willful, knowing or intentional, and injunctive and other relief. Allscripts was served with the Complaint and Plaintiff’s Motion for Class Certification on May 7, 2012 and the Company responded by filing a Motion to Dismiss. Discovery in this matter has been stayed pending a decision of the 7th Circuit Court of Appeals in the case of Holtzman v. Turza, which involves issues raised in the Company’s Motion. The Company has also filed a Motion requesting denial of Plaintiff’s Motion for Class certification. The Company intends to vigorously defend against these claims.

On May 2, 2012, a lawsuit was filed in the United States District Court for the Northern District of Illinois against the Company, Glen Tullman and William Davis, the former Chief Financial Officer of the Company, by the Bristol County Retirement System for itself and on behalf of a purported class consisting of stockholders who purchased Allscripts common stock between November 18, 2010 and April 26, 2012. The Complaint alleges that the Company, Mr. Tullman and Mr. Davis made materially false and misleading statements and/or omissions during the putative class period regarding the Company’s progress in integrating Allscripts’ and Eclipsys’ business following the August 24, 2010 merger and that the Company lacked a reasonable basis for certain statements regarding the Company’s post-merger integration efforts, operations, results and projections of future financial performance. Two groups of plaintiffs have filed motions for appointment as lead plaintiff and for appointment as lead plaintiff’s counsel. These motions were fully briefed as of July 31, 2012. Defendants’ time to answer or otherwise plead is stayed pending appointment of lead plaintiff and lead plaintiffs’ counsel. The Company intends to vigorously defend against these claims.

On June 27, 2012, a purported shareholder, Richard Devereaux, filed a shareholder derivative action in the Circuit Court of Cook County Illinois against Glen Tullman, William Davis, Paul Black, Dennis Chookaszian, Robert Cindrich, Marcel Gamache, Philip Green, Michael Kluger, and Allscripts Healthcare Solutions, Inc. as nominal defendant. The suit alleges breach of fiduciary duties and unjust enrichment against former and current executives of Allscripts who allegedly made misleading claims about the Company’s business and financial state, causing its stock prices to be artificially inflated and then drop sharply when the Company reported earnings below expectations and disclosed a “leadership dispute” in an SEC filing. The Company has not yet responded to this lawsuit.

In the opinion of management, there is a reasonable possibility the Company may incur losses with respect to the three matters immediately above. However, given the current early stage of the matters, it is not possible to estimate the possible loss or range of loss at this time. We will continue to evaluate the potential exposure related to these matters in future periods.

In addition to commitments and obligations in the ordinary course of business, we are subject to various claims, other pending and potential legal actions for damages and other matters arising in the normal conduct of our business, including intellectual property infringement, misappropriation or other intellectual property violation claims.

10. Business Segments

Prior to 2012, we utilized three reportable segments: Clinical Solutions, Hospital Solutions, and Health Solutions. In connection with the integration of the Eclipsys operations, we recently realigned certain functions within our business. This realignment included the integration of our sales and services functions in the first quarter of 2012 as well as our solutions research and development team. After the realignment and based upon the information used by the chief operating decision maker to allocate resources, make operating decisions and assess performance, we now use the following reportable segments: Software Delivery, Services Delivery, Client Support, Pathway Solutions and IT Outsourcing. Pathway Solutions and IT Outsourcing, which were reported under the Managed Services segment in the first quarter of 2012, are now separately presented consistent with changes in our internal reporting to our chief operating decision maker.

Software delivery primarily includes revenue from system solutions, which is comprised of software license fees and hardware revenue, and recurring revenue from SaaS contracts and other subscription-based arrangements, which are included in transaction processing and other, and the related expenses incurred to deliver these solutions to our clients. Services delivery derives its revenue through implementation, training and other professional services provided to clients and includes the related expenses incurred to provide these services. Client support derives its revenue through software and hardware maintenance contracts and includes the related expenses incurred to provide support to our customers. Pathway solutions includes revenue and the related expenses incurred from EDI medical claims processing for clients and our patient portal SaaS solution, and IT outsourcing derives its revenue from services provided to clients where we assume partial to total responsibility for a healthcare organization’s IT operations using our employees and assets, and includes the related expenses incurred to deliver IT outsourcing solutions to our clients. Segment data for 2011 presented below has been restated to conform to the current presentation.

Our chief operating decision maker uses segment revenues and income from operations as measures of performance and to allocate resources. In determining revenue and income from operations for our segments, we do not include the amortization of acquisition-related deferred revenue adjustments in revenue and we exclude amortization of intangible assets and stock-based compensation expense from the operating expense segment data provided to our chief operating decision maker. Accordingly, these amounts are not included in our reportable segment results and are included in the unallocated amounts within All Other.

Corporate general and administrative expenses are centrally managed and solutions research and development expenses, including the amortization of software development costs, are not attributed to an operating segment. As a result, these expenses are not allocated to our reportable segments because they are not part of the segment profitability results reviewed by management. Additionally, we do not track our assets by segment.

Remote Hosting is an operating segment that does not meet the quantitative thresholds for determining reportable segments; however, we have presented the revenues and income from operations related to this segment within our reconciliation to consolidated amounts in the table below.


	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2012			2011			2012			2011
Revenue:
Software Delivery	$	90,491		$	103,409		$	173,861		$	196,112
Services Delivery		64,783			57,991			135,207			113,725
Client Support		114,156			105,641			229,042			210,279
Pathway Solutions		44,048			40,646			87,321			83,005
IT Outsourcing		40,210			36,499			78,001			67,122
All Other
Remote Hosting		18,017			17,158			34,936			34,084
Unallocated Amounts		(1,749	)		(4,513	)		(3,700	)		(12,188	)

Total All Other		16,268			12,645			31,236			21,896

Total revenue	$	369,956		$	356,831		$	734,668		$	692,139

Income from operations:
Software Delivery	$	20,276		$	29,735		$	31,390		$	50,985
Services Delivery		8,566			8,226			17,643			17,587
Client Support		77,456			70,146			155,368			140,905
Pathway Solutions		27,346			25,489			53,601			53,761
IT Outsourcing		8,488			7,445			16,320			13,494
All Other
Remote Hosting		120			1,442			478			2,759
Unallocated Amounts		(124,548	)		(110,406	)		(244,113	)		(222,943	)

Total All Other		(124,428	)		(108,964	)		(243,635	)		(220,184	)

Total income from operations	$	17,704		$	32,077		$	30,687		$	56,548

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

Allscripts is a leading provider of clinical, financial, connectivity and information solutions and related professional services that empower hospitals, physicians and post-acute organizations, such as nursing homes, to deliver world-class outcomes. We deliver innovative solutions that provide healthcare professionals with the information, insights and connectivity required to transform healthcare by improving the quality and efficiency of patient care.

We primarily derive our revenue from sales of our proprietary software and related hardware, professional services and IT outsourcing services. These sales also are the basis for our recurring service contracts for software maintenance and certain transaction processing services. Prior to 2012, we used three reportable segments: Clinical Solutions, Hospital Solutions, and Health Solutions. In connection with the integration of the Eclipsys operations, we recently realigned certain functions within our business. This realignment included the integration of our sales and services functions in the first quarter of 2012 as well as our solutions research and development team. After the realignment and based on the information used by management for making operating decisions and assessing performance, we use the following reportable segments: Software Delivery, Services Delivery, Client Support, Pathway Solutions and IT Outsourcing. Pathway Solutions and IT Outsourcing, which were reported under the Managed Services segment in the first quarter of 2012, are now separately presented consistent with changes in our internal reporting to our chief operating decision maker.

We believe that the HITECH Act and other provisions provided by the American Recovery and Reinvestment Act (ARRA) will continue to be one of the biggest drivers of healthcare IT adoption in 2012. Management believes that to date the HITECH program has resulted in additional related new orders for all of our Electronic Health Record (“EHR”) products. Large physician groups will continue to purchase EHR technology; however, the number of very large practices with over 100 physicians that have not yet acquired such technology is decreasing. Such practices may choose to replace older EHR technology in the future as “meaningful use” requirements and business realities dictate the need for updates and upgrades, as well as additional features and functionality.

We believe small- and medium-sized physician practices (those with three or fewer physicians, and four to 40 physicians, respectively) are increasingly adopting technology driven by a variety of factors, including a desire to maximize federal incentive payments, align with local hospitals, and merge with other practices, as well as other drivers. We have also experienced greater demand from small physician practices for our hosted solutions which reflects their motivation to reduce capital outlays. These offices typically require less time to implement and train than larger offices, so the need to plan implementations well in advance is not as critical as in larger physician organizations.

We have also seen an evolution of buying decisions toward an increase in local community-based buying activity whereby individual hospitals, health systems and integrated delivery networks are subsidizing the purchase of EHR licenses or related services for their affiliated physicians to leverage buying power and take advantage of the HITECH incentives across their employed physician base. This activity has also resulted in a pull-through effect where smaller practices affiliated with a community hospital are incentivized to participate while the subsidizing health system expands connectivity within the local provider community. This pull-through effect has resulted in new orders for Allscripts Professional EHR (targeting mid-size physician practices) and Allscripts MyWay (for small physician practices). Management believes that the focus on new orders driven by the HITECH program and related to EHR and community-based activity will continue to expand as physicians seek to qualify for the HITECH incentives. The associated challenge we face is to successfully position, sell, implement and support our products to the hospital, health system or integrated delivery network that is subsidizing its affiliated physicians.

The vast majority of our acute care and ambulatory customers continue to focus on achieving “meaningful use” under HITECH. As a result, during the remainder of 2012 much of our professional services deployment capacity will be consumed by demand from our customers who wish to upgrade to the most current release of our EHR products which are certified as meeting “meaningful use” requirements, as well as implementation of any additional modules required to achieve “meaningful use”. Our professional services margins could be impacted as we supplement our staff with third-party resources to help meet the demand. We expect this trend to continue into the near future as “meaningful use” Stage 2 requirements are defined and customers react to such requirements.

Although we believe that we have taken and continue to take the proper steps to take advantage of the opportunity presented by HITECH, given the effects the law is having on our customers, there can be no assurance that it will continue to result in significant new orders for us in the near term, and if it does, that we will have the capacity to meet the additional market demand in a timely fashion.

Allscripts today provides one of the most comprehensive solution offerings for healthcare organizations of every size and setting. By combining physician-office and post-acute care solutions with enterprise solutions for hospitals and health systems, we offer a unified portfolio of clinical, financial, connectivity and information solutions.

Given the breadth of our solutions portfolio and customer types, we are uniquely positioned to connect physicians, other care providers and patients across all health care provider settings including hospitals, small or large physician practices, post-acute care facilities, or in a home care setting. We continue to compete for net-new opportunities among community hospitals and health systems that are looking to one information technology vendor to provide a single, end-to-end solution across all points of care. We believe our leading market share in the ambulatory space, in particular, gives us a competitive advantage in this regard as hospitals and health systems increasingly seek to leverage the EHR to build referring relationships with independent physicians across the communities they serve.

Additionally, recently enacted public laws reforming the U.S. healthcare system may have an impact on our business. The Patient Protection and Affordable Care Act (H.R. 3590; Public Law 111-148) (“PPACA”) and The Health Care and Education and Reconciliation Act of 2010 (H.R. 4872) (the “Reconciliation Act”), which amends the PPACA (collectively the “Health Reform Laws”), were signed into law in March 2010. The Health Reform Laws contain various provisions which may impact the Company and our customers. Some of these provisions may have a positive impact, by expanding the use of electronic health records in certain federal programs, for example, while others, such as reductions in reimbursement for certain types of providers, may have a negative impact by reducing the resources available to purchase our products. Increases in fraud and abuse enforcement and penalties may also adversely affect participants in the healthcare sector, including the Company. Additionally, conversations continue in Congress around the Medicare Sustainable Growth Rate reimbursement model and possible replacement payment methodologies, some of which would further encourage the adoption of health information technology in order to satisfy possible new requirements to report on quality measurements to receive payment through Medicare but which also currently raise ambiguity among physician populations and healthcare organizations.

Critical Accounting Policies and Estimates

There were no material changes to our critical accounting policies and estimates as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Second Quarter 2012 Summary

Our results for the three months ended June 30, 2012 reflect stability within our business. Bookings, which reflect the value of executed contracts for our solutions, totaled $194 million for the second quarter and were comparable to our first quarter bookings; however, we realized an improvement in the mix of bookings during the current quarter. Ambulatory bookings from the mid-size physician market were a driver of bookings during the current quarter. Bookings were lower compared with the prior year bookings of $245 million.

Revenue increased to $370 million compared with $357 million in the prior year. Increases in all revenue categories offset a decline in system sales as we experienced a decline in orders as a number of our clients and prospects delayed purchase decisions as we continue our efforts to improve product performance and delivery execution. Revenue increased compared to first quarter revenue of $365 million. Sequentially we realized a $5 million increase in system sales which offset a decrease in professional services revenue as meaningful use upgrade services begin to decline.

Our operating cash flow remains strong with approximately $59 million generated in the second quarter which compares with $52 million in the prior year.

Gross research and development spending increased significantly compared with the prior year. We remain on track for approximately $190 million of gross research and development spending in 2012 and the release of several important upgrades, product enhancements and innovative solutions.

Following the largest client upgrade cycle in our history, we continue to work hard to improve client satisfaction with all aspects of our services and support capabilities. We added additional support resources domestically in the second quarter as we prepare for the increased demands we anticipate associated with ICD-10. We have also enhanced our initial training for new associates and will deliver additional and more frequent training to our existing support professionals.

Overview of Consolidated Results

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollar amounts in thousands)	2012			2011			% Change			2012			2011			% Change
Revenue:
System sales	$	46,565		$	64,866			(28.2	%)	$	87,273		$	119,362			(26.9	%)
Professional services		67,380			58,134			15.9	%		138,866			113,729			22.1	%
Maintenance		113,899			103,249			10.3	%		228,715			203,583			12.3	%
Transaction processing and other		142,112			130,582			8.8	%		279,814			255,465			9.5	%

Total revenue		369,956			356,831			3.7	%		734,668			692,139			6.1	%

Cost of revenue:
System sales		35,063			35,902			(2.3	%)		66,648			70,816			(5.9	%)
Professional services		57,024			48,439			17.7	%		118,726			94,062			26.2	%
Maintenance		36,282			35,076			3.4	%		72,286			68,123			6.1	%
Transaction processing and other		84,097			69,619			20.8	%		163,841			131,493			24.6	%

Total cost of revenue		212,466			189,036			12.4	%		421,501			364,494			15.6	%

Gross profit		157,490			167,795			(6.1	%)		313,167			327,645			(4.4	%)
% of Revenue		42.6	%		47.0	%					42.6	%		47.3	%
Selling, general and administrative expenses		92,291			101,532			(9.1	%)		189,608			205,680			(7.8	%)
Research and development		38,240			24,764			54.4	%		74,362			46,768			59.0	%
Amortization of intangible assets		9,255			9,422			(1.8	%)		18,510			18,649			(0.7	%)

Income from operations		17,704			32,077			(44.8	%)		30,687			56,548			(45.7	%)
Interest expense		(4,358	)		(5,050	)		(13.7	%)		(8,212	)		(12,977	)		(36.7	%)
Interest income and other, net		150			355			(57.7	%)		542			759			(28.6	%)

Income before income taxes		13,496			27,382			(50.7	%)		23,017			44,330			(48.1	%)
Provision for income taxes		(5,515	)		(11,506	)		(52.1	%)		(9,223	)		(15,841	)		(41.8	%)

Effective tax rate		40.9	%		42.0	%					40.1	%		35.7	%
Net income	$	7,981		$	15,876			(49.7	%)	$	13,794		$	28,489			(51.6	%)

Revenue


	Three Months Ended June 30,							Six Months Ended June 30,
(Dollar amounts in thousands)	2012		2011		% Change			2012		2011		% Change
Revenue:
System sales	$	46,565	$	64,866		(28.2	%)	$	87,273	$	119,362		(26.9	%)
Professional services		67,380		58,134		15.9	%		138,866		113,729		22.1	%
Maintenance		113,899		103,249		10.3	%		228,715		203,583		12.3	%
Transaction processing and other		142,112		130,582		8.8	%		279,814		255,465		9.5	%

Total revenue		369,956		356,831		3.7	%		734,668		692,139		6.1	%

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

Total revenue increased during the three and six months ended June 30, 2012 compared to the prior year comparable periods as we realized increases in all revenue categories with the exception of system sales. The increase in professional services revenue was driven by an increase in professional services headcount which increased our ability to provide more billable services. We increased headcount primarily in response to the demand associated with increases in implementation and consulting services including the implementation of third-party solutions. Maintenance revenue and transaction processing revenue both increased primarily related to growth in our customer base. IT Outsourcing revenues are included in transaction processing and other and contributed $4 million and $11 million of the increase in revenue compared to the three and six months ended June 30, 2011, respectively, as we expanded our services to existing customers while also expanding our customer base. SaaS and hosting revenues also contributed to this increase as we expanded our customer base. Partially offsetting these increases in revenue for the three and six months ended June 30, 2012 is a decrease in system sales which consists of a $15 million and $21 million decrease in software revenue, respectively, and a $4 million and $11 million decrease in hardware revenue, respectively, as we experienced a decline in orders as a number of our clients and prospects delayed purchase decisions as we continue our efforts to improve product performance and delivery execution. Additionally, we continue to experience a shift in sales to smaller physician practices which typically require less robust hardware solutions.

Gross Profit


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollar amounts in thousands)	2012			2011			% Change			2012			2011			% Change
Total cost of revenue		212,466			189,036			12.4	%		421,501			364,494			15.6	%
Gross profit		157,490			167,795			(6.1	%)		313,167			327,645			(4.4	%)
% of Revenue		42.6	%		47.0	%					42.6	%		47.3	%

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

Gross profit decreased during the three and six months ended June 30, 2012 as the increase in total revenue was offset by an increase in costs of revenue compared to the prior year comparable period. During the three and six months ended June 30, 2012, we recognized a $3 million and $7 million increase in the amortization of software development costs, respectively, and an increase in professional services cost of revenue primarily due to the increased use of third-party resources to assist us in meeting demand attributable to increases in implementation and consulting services, including the implementation of third-party solutions, which offset an increase in professional services revenue. Gross profit was further impacted by an increase in transaction processing and other revenue that was offset by higher costs as we added headcount and made infrastructure improvements in response to increased demand for our SaaS and hosting solutions. Gross profit as a percent of revenue declined compared to the prior year due primarily to a higher mix of third-party systems sales which carry lower gross margin and the increases in amortization of software development costs, professional services costs and transaction processing-related costs.

Selling, General and Administrative Expenses


	Three Months Ended June 30,							Six Months Ended June 30,
(Dollar amounts in thousands)	2012		2011		% Change			2012		2011		% Change
Selling, general and administrative expenses		92,291		101,532		(9.1	%)		189,608		205,680		(7.8	%)

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

Selling, general and administrative expenses decreased during the three and six months ended June 30, 2012 primarily due to a decrease in expenses incurred relating to the Eclipsys Merger and other integration-related costs and a decrease in people-related expenses. Partially offsetting these decreases is an increase in legal expenses related to general legal matters, including expenses related to addressing claims involving the Company.

Research and Development


	Three Months Ended June 30,							Six Months Ended June 30,
(Dollar amounts in thousands)	2012		2011		% Change			2012		2011		% Change
Research and development	$	38,240	$	24,764		54.4	%	$	74,362	$	46,768		59.0	%

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

Research and development expenses increased in the three and six months ended June 30, 2012 primarily due to an increase in people-related expenses as we increased headcount in order to accelerate development efforts to improve performance and accelerate product integration and innovation. Also contributing to the increase for the six months ended June 30, 2012 is a decrease in the capitalization of software development costs as certain quality and efficiency development efforts were not eligible for capitalization.

Amortization of Intangible Assets


	Three Months Ended June 30,							Six Months Ended June 30,
(Dollar amounts in thousands)	2012		2011		% Change			2012		2011		% Change
Amortization of intangible assets	$	9,255	$	9,422		(1.8	%)	$	18,510	$	18,649		(0.7	%)

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

Amortization of intangible assets recognized during the three and six months ended June 30, 2012 is in line with the prior period amounts.

Interest Expense


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollar amounts in thousands)	2012			2011			% Change			2012			2011			% Change
Interest expense		($4,358	)		($5,050	)		(13.7	%)		($8,212	)		($12,977	)		(36.7	%)

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

Interest expense decreased during the three and six months ended June 30, 2012 due to lower average debt balances during the periods in 2012. Interest expense is expected to trend higher due to interest expense associated with the incremental term loan executed during the current quarter. Also, interest expense for the six months ended June 30, 2011 includes the write-off of deferred debt issuance costs totaling $2 million in connection with the execution of an amendment to our credit facility agreement.

Interest Income and Other, Net


	Three Months Ended June 30,							Six Months Ended June 30,
(Dollar amounts in thousands)	2012		2011		% Change			2012		2011		% Change
Interest income and other, net		$150		$355		(57.7	%)		$542		$759		(28.6	%)

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

Interest income and other decreased during the three and six months ended June 30, 2012 due primarily to non-recurring charges recorded in the current period.

Provision for Income Taxes


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollar amounts in thousands)	2012			2011			% Change			2012			2011			% Change
Provision for income taxes		($5,515	)		($11,506	)		(52.1	%)		($9,223	)		($15,841	)		(41.8	%)
Effective tax rate		40.9	%		42.0	%					40.1	%		35.7	%

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

The effective tax rate for the three months ended June 30, 2012 is lower compared to the prior year comparable period primarily due to the prior year recognition of the impact of state tax legislation that partially offset the tax benefit previously recognized as a result of the refinement of state apportionment factors, and subsequent revaluation of deferred tax liabilities related to intangible assets acquired in connection with the Eclipsys Merger. Also contributing to the decrease is lower state tax expense, which is expected to recur, compared to the prior year.

Segment Operations

Overview of Segment Results


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollar amounts in thousands)	2012			2011			% Change			2012			2011			% Change
Revenue:
Software Delivery	$	90,491		$	103,409			(12.5	%)	$	173,861		$	196,112			(11.3	%)
Services Delivery		64,783			57,991			11.7	%		135,207			113,725			18.9	%
Client Support		114,156			105,641			8.1	%		229,042			210,279			8.9	%
Pathway Solutions		44,048			40,646			8.4	%		87,321			83,005			5.2	%
IT Outsourcing		40,210			36,499			10.2	%		78,001			67,122			16.2	%
All Other
Remote Hosting		18,017			17,158			5.0	%		34,936			34,084			2.5	%
Unallocated Amounts		(1,749	)		(4,513	)		(61.2	%)		(3,700	)		(12,188	)		(69.6	%)

Total All Other		16,268			12,645			28.7	%		31,236			21,896			42.7	%

Total revenue	$	369,956		$	356,831			3.7	%	$	734,668		$	692,139			6.1	%

Income from operations:
Software Delivery	$	20,276		$	29,735			(31.8	%)	$	31,390		$	50,985			(38.4	%)
Services Delivery		8,566			8,226			4.1	%		17,643			17,587			0.3	%
Client Support		77,456			70,146			10.4	%		155,368			140,905			10.3	%
Pathway Solutions		27,346			25,489			7.3	%		53,601			53,761			(0.3	%)
IT Outsourcing		8,488			7,445			14.0	%		16,320			13,494			20.9	%
All Other
Remote Hosting		120			1,442			(91.7	%)		478			2,759			(82.7	%)
Unallocated Amounts		(124,548	)		(110,406	)		12.8	%		(244,113	)		(222,943	)		9.5	%

Total All Other		(124,428	)		(108,964	)		14.2	%		(243,635	)		(220,184	)		10.7	%

Total income from operations	$	17,704		$	32,077			(44.8	%)	$	30,687		$	56,548			(45.7	%)

Software Delivery


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollar amounts in thousands)	2012			2011			% Change			2012			2011			% Change
Revenue	$	90,491		$	103,409			(12.5	%)	$	173,861		$	196,112			(11.3	%)
Income from operations	$	20,276		$	29,735			(31.8	%)	$	31,390		$	50,985			(38.4	%)
Operating margin %		22.4	%		28.8	%					18.1	%		26.0	%

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

Software delivery revenue decreased during the three and six months ended June 30, 2012 due to a decrease in system sales which consists of a $12 million and $19 million decrease in software revenue, respectively, and a $4 million and $11 million decrease in hardware revenue, respectively, as we experienced a decline in orders as a number of our clients and prospects delayed purchase decisions as we continue our efforts to improve product performance and delivery execution. Additionally, we continue to experience a shift in sales to smaller physician practices which typically require less robust hardware solutions. Partially offsetting these decreases was an increase in SaaS revenues during the three and six months ended June 30, 2012 as we expanded our customer base.

Software delivery operating margins declined in the three and six months ended June 30, 2012 due to a higher mix of third-party systems sales which carry higher costs, an increase in amortization of software development costs and an increase in SaaS operations and infrastructure costs in response to increased demand for our SaaS solutions compared to the same periods in 2011.

Services Delivery

Services delivery derives its revenue through implementation, training and other professional services provided to clients and includes the related expenses incurred to provide these services.


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollar amounts in thousands)	2012			2011			% Change			2012			2011			% Change
Revenue	$	64,783		$	57,991			11.7	%	$	135,207		$	113,725			18.9	%
Income from operations	$	8,566		$	8,226			4.1	%	$	17,643		$	17,587			0.3	%
Operating margin %		13.2	%		14.2	%					13.0	%		15.5	%

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

The increase in services delivery revenue during the three and six months ended June 30, 2012 is attributable to an increase in professional services headcount and an increase in the use of third party resources which increased our capacity to provide more billable services in response to increases in implementation and consulting services including the implementation of third-party solutions.

Services delivery expenses increased compared to the prior year comparable periods due to the increase in professional services headcount and the increase in the use of third party resources discussed above.

Services delivery operating margin declined in the six months ended June 30, 2012 primarily due to the incremental costs incurred as we increased headcount and utilized more third-party resources to meet demand which offset the increase in revenue.

Client Support

Client support derives its revenue through software and hardware maintenance contracts and includes the related expenses incurred to provide support to our customers.


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollar amounts in thousands)	2012			2011			% Change			2012			2011			% Change
Revenue	$	114,156		$	105,641			8.1	%	$	229,042		$	210,279			8.9	%
Income from operations	$	77,456		$	70,146			10.4	%	$	155,368		$	140,905			10.3	%
Operating margin %		67.9	%		66.4	%					67.8	%		67.0	%

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

Client support revenue increased during the three and six months ended June 30, 2012 due to increases in our client base and customer activations compared to the prior year comparable periods.

Client support expenses increased compared to the prior year comparable periods due to an increase in headcount.

Client support operating margin for the three and six months ended June 30, 2012 increased primarily due to an increase in maintenance revenue while our costs increased at a lower rate.

Pathway Solutions

Pathway solutions includes revenue and the related expenses for financial, administrative, and clinical offerings, including medical claims processing and other Revenue Cycle Solutions, ePrescribe and Patient Portal.


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollar amounts in thousands)	2012			2011			% Change			2012			2011			% Change
Revenue	$	44,048		$	40,646			8.4	%	$	87,321		$	83,005			5.2	%
Income from operations	$	27,346		$	25,489			7.3	%	$	53,601		$	53,761			(0.3	%)
Operating margin %		62.1	%		62.7	%					61.4	%		64.8	%

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

Pathway solutions revenue increased during the three and six months ended June 30, 2012 primarily due to an increase in demand for our solutions.

Pathway solutions operating margin decreased in the three and six months ended June 30, 2012 as we incurred increased costs in response to demand for our solutions.

IT Outsourcing

IT outsourcing includes revenue from our information technology outsourcing solutions and includes the related expenses incurred to deliver these solutions to our clients.


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollar amounts in thousands)	2012			2011			% Change			2012			2011			% Change
Revenue	$	40,210		$	36,499			10.2	%	$	78,001		$	67,122			16.2	%
Income from operations	$	8,488		$	7,445			14.0	%	$	16,320		$	13,494			20.9	%
Operating margin %		21.1	%		20.4	%					20.9	%		20.1	%

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

IT outsourcing revenue increased during the three and six months ended June 30, 2012 primarily due to expanded service solutions to existing customers while also expanding our customer base.

IT outsourcing operating margin increased during the three and six months ended June 30, 2012 as increases in revenue were partially offset by increases in headcount-related costs as we responded to the increased demand for our IT outsourcing solutions.

All Other

Corporate general and administrative expenses are centrally managed and solutions research and development expenses, including amortization of capitalized software development costs, are not attributed to an operating segment. As a result, these expenses are not allocated to our reportable segments because they are not part of the segment profitability results reviewed by management.

In determining revenue and income from operations for our segments, we do not include the amortization of acquisition-related deferred revenue adjustments in revenue and we exclude amortization of intangible assets and stock-based compensation expense from the operating expense segment data provided to our chief operating decision maker. Accordingly, these amounts are not included in our reportable segment results and are included in the unallocated amounts within All Other.


	Three Months Ended June 30,									Six Months Ended June 30,
(Dollar amounts in thousands)	2012			2011			% Change			2012			2011			% Change
Revenue:
Remote Hosting	$	18,017		$	17,158			5.0	%	$	34,936		$	34,084			2.5	%
Unallocated Amounts		(1,749	)		(4,513	)		(61.2	%)		(3,700	)		(12,188	)		(69.6	%)

Total revenue	$	16,268		$	12,645			28.7	%	$	31,236		$	21,896			42.7	%

Income from operations:
Remote Hosting	$	120		$	1,442			(91.7	%)	$	478		$	2,759			(82.7	%)
Unallocated Amounts		(124,548	)		(110,406	)		12.8	%		(244,113	)		(222,943	)		9.5	%

Total income from operations	($	124,428	)	($	108,964	)		14.2	%	($	243,635	)	($	220,184	)		10.7	%

Three and Six Months Ended June 30, 2012 Compared to the Three and Six Months Ended June 30, 2011

The financial information above includes revenue primarily from our Remote Hosting operating segment and similar amounts of operating expenses related to this segment are included in income from operations for all periods presented. Operating income has decreased due to increased infrastructure costs incurred to accommodate software upgrades.

Expenses increased during the three and six months ended June 30, 2012 primarily due to an increase in research and development headcount. Also contributing to the increase are higher legal expenses in connection with general legal matters, including expenses related to addressing claims involving the Company, and a $3 million and $6 million increase, respectively, in amortization of software development costs compared to the prior year. These increases were partially offset by a decrease in expenses incurred relating to the Eclipsys Merger and other integration-related costs.

Contract Backlog

Contract backlog represents the value of bookings and maintenance contracts that have not yet been recognized as revenue. A summary of contract backlog by revenue category is as follows:


	As of		As of		As of		% Change from June 30, 2012
	June 30,		December 31,		June 30,		December 31,			June 30,
(Dollar amounts in millions)	2012		2011		2011		2011			2011
Contract backlog:
System sales	$	122	$	136	$	127		(10.3	%)		(3.9	%)
Professional services		381		393		341		(3.1	%)		11.7	%
Maintenance		849		833		780		1.9	%		8.8	%
Transaction processing and other		1,485		1,492		1,483		(0.5	%)		0.1	%

Total contract backlog	$	2,837	$	2,854	$	2,731		(0.6	%)		3.9	%

Total contract backlog as of June 30, 2012 remained flat compared to December 31, 2011 as an increase in maintenance revenue backlog was offset by decreases in the other backlog categories. Maintenance revenue backlog increased as a result of new client go-lives as well as maintenance renewals in our installed base. System sales and professional services backlog declined as we experienced a decline in orders during the six months ended June 30, 2012 as a number of our clients and prospects delayed purchase decisions as we continue our efforts to improve product performance and delivery execution.

Total contract backlog increased during the six months ended June 30, 2012 compared to the prior year comparable period primarily due to an increase in professional services backlog which was driven by an increase in orders and an increase in maintenance revenue backlog as a result of new client go-lives as well as maintenance renewals in our installed base.

Bookings

Bookings reflect the value of executed contracts for software, hardware, services, remote hosting, outsourcing and SaaS. Bookings were as follows:


	Three Months Ended June 30,							Six Months Ended June 30,
(Dollar amounts in millions)	2012		2011		% Change			2012		2011		% Change
Bookings	$	194	$	245		(20.8	%)	$	389	$	457		(14.9	%)

We experienced a shortfall in bookings during the three and six months ended June 30, 2012 compared to the prior year comparable periods as a number of our clients and prospects delayed purchase decisions as we continue our efforts to improve product performance and delivery execution.

Liquidity and Capital Resources

As of June 30, 2012 and 2011, our principal sources of liquidity consisted of cash, cash equivalents and marketable securities of $122 million and $117 million, respectively, and our revolving credit facility described below. The change in our cash balance is reflective of the following:

Operating Cash Flow Activities


	Six Months Ended June 30,
(In thousands)	2012		2011			$ Change
Net income	$	13,794	$	28,489		($	14,695	)
Non-cash adjustments to net income		98,622		92,900			5,722
Cash impact of changes in operating assets and liabilities		21,024		(2,242	)		23,266

Net cash provided by operating activities	$	133,440	$	119,147		$	14,293

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

Net cash provided by operating activities increased in the six months ended June 30, 2012 as cash received from customers increased at a faster rate than operating disbursements compared to the same period in 2011.

Investing Cash Flow Activities


	Six Months Ended June 30,
(In thousands)	2012			2011			$ Change
Capital expenditures	($	38,732	)	($	21,178	)	($	17,554	)
Capitalized software		(26,936	)		(30,323	)		3,387
Net (purchases) sales and maturities of marketable securities and other investments		41			(12,868	)		12,909
Proceeds received from sale of fixed assets		0			20,000			(20,000	)
Change in restricted cash		0			2,225			(2,225	)

Net cash used in investing activities	($	65,627	)	($	42,144	)	($	23,483	)

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

Net cash used in investing activities increased during the six months ended June 30, 2012 due to an increase in capital expenditures which was partially offset by a decrease in capitalized software development costs. Also, the prior year includes the acquisition of cost method investments, the release of restricted cash, and proceeds from the sale of certain hosting equipment and infrastructure that did not recur in the current period. The increase in capital expenditures is related to the acquisition of computer equipment and software to improve our information systems infrastructure and to accommodate data management and hosting related to our SaaS and hosting solutions. The capitalization of software development costs decreased as certain quality and efficiency development efforts were not eligible for capitalization.

Financing Cash Flow Activities


	Six Months Ended June 30,
(In thousands)	2012			2011			$ Change
Proceeds from issuance of common stock	$	3,862		$	19,977		($	16,115	)
Excess tax benefits from stock-based compensation		101			7,051			(6,950	)
Taxes paid related to net share settlement of equity awards		(3,621	)		0			(3,621	)
Net payments on debt instruments		(204,476	)		(115,723	)		(88,753	)
Credit facility borrowings, net of issuance costs		324,185			47,362			276,823
Repurchase of common stock		(225,961	)		(50,051	)		(175,910	)

Net cash used in financing activities	($	105,910	)	($	91,384	)	($	14,526	)

Six Months Ended June 30, 2012 Compared to the Six Months Ended June 30, 2011

Net cash used in financing activities increased during the six months ended June 30, 2012 due primarily to the increased level of activity under our stock repurchase program. This increase was partially offset by net borrowings under our credit facility which were used to finance stock repurchases during the current period. Proceeds from stock-based compensation activities were lower compared to the same period in 2011 and excess tax benefits from stock-based compensation declined as the fair value of equity awards vesting during the current period was more aligned with the fair value of the awards on the date of grant. Also, the current period includes net-share settlements of vested equity awards such that we withheld shares with value equivalent to the employees’ minimum statutory obligation for the applicable income and other employment taxes and remitted the cash to the appropriate taxing authorities.

Free Cash Flow

To supplement our statements of cash flows presented on a GAAP basis, we use a non-GAAP measure of free cash flow which we believe is also useful as one of the bases for evaluating our performance. We believe free cash flow is an important liquidity metric, as it measures the amount of cash generated that is available to repay our current debt obligations, make investments, fund acquisitions, repurchase our common stock and for certain other activities. The presentation of non-GAAP free cash flow is not meant to be considered in isolation and should not be considered a substitute for income from operations, net income, net cash provided by operating activities or any other measure determined in accordance with GAAP. Operating asset and liability balances can fluctuate significantly from period to period and there can be no assurance that free cash flow will not be negatively impacted by material changes in operating assets and liabilities in future periods, since these changes depend upon, among other things, management’s timing of payments and cash receipts. In addition to fluctuations resulting from changes in operating assets and liabilities, free cash flow can vary significantly from period to period depending upon, among other things, operating efficiencies, increases or decreases in capital expenditures and capitalized software, and other factors.

We calculate free cash flow as follows:


	Six Months Ended June 30,
(In thousands)	2012			2011			$ Change
Net cash provided by operating activities	$	133,440		$	119,147		$	14,293
Capital expenditures		(38,732	)		(21,178	)		(17,554	)
Capitalized software		(26,936	)		(30,323	)		3,387

Free cash flow	$	67,772		$	67,646		$	126

Amounts for each element of the table above are as reported in our consolidated statements of cash flows presented in accordance with GAAP.

Future Capital Requirements

The aggregate principal amount of the incremental term loan of $150 million is payable in quarterly installments commencing on September 30, 2012 as follows (in thousands):


Quarterly Periods Ending	Quarterly Principal Amount
September 30, 2012 to June 30, 2013	$	3,750
September 30, 2013 to June 30, 2014		5,625
September 30, 2014 to June 30, 2015		7,500
September 30, 2015 to March 31, 2016		11,250
June 11, 2016		Remaining balance

The following table summarizes our future payments under the senior secured credit facilities including the incremental term loan as of June 30, 2012:


(Dollar amounts in thousands)	Principal Payments		Interest Payments		Total Payments
Remaining payments due in 2012	$	31,309	$	5,973	$	37,282
Payments due in 2013		80,647		10,416		91,063
Payments due in 2014		107,192		7,930		115,122
Payments due in 2015		209,148		4,465		213,613
Payments due in 2016		60,000		542		60,542
Thereafter		0		0		0

	$	488,296	$	29,326	$	517,622

As of June 30, 2012, $483 million in term loans, $5 million under the revolving credit facility, and $2 million in letters of credit were outstanding under the Credit Agreement. As of June 30, 2012, the interest rate on the senior secured credit facilities was LIBOR plus 1.75%, which totaled 2.00%. Refer to Note 8, “Derivative Financial Instruments,” of the Notes to Consolidated Financial Statements in Part I, Item 1 of this report for a discussion of our interest rate swap agreement. There was no default under the Credit Agreement as of June 30, 2012.

On March 31, 2011, we entered into a ten year agreement with Affiliated Computer Services, Inc. (“ACS”) to provide services to support our remote hosting services for our Sunrise acute care clients. We will maintain all customer relationships and domain expertise with respect to the hosted applications. The agreement encompasses our payment to ACS for current Allscripts’ employees to be retained by ACS from our hosting staff, new remote hosting staff and technology infrastructure, as well as other data center and hosting services, in the amount of approximately $50 million per year.

We currently plan to invest over $190 million in research and development efforts during 2012 to improve performance and accelerate product integration and innovation. Our total spending consists of research and development costs directly recorded to expense and also includes capitalized software development costs as follows:


(Dollar amounts in thousands)	Six Months Ended June 30, 2012
Research and development costs directly recorded to expense	$	74,362
Capitalized software development costs		26,936

Total expense	$	101,298

Total revenue	$	734,668
Total expense as a % of total revenue		14	%

We believe that our cash, cash equivalents and marketable securities of $122 million as of June 30, 2012, our future cash flows, and our borrowing capacity under our Amended and Restated Credit Agreement, taken together, provide adequate resources to fund ongoing cash requirements for the next twelve months. We cannot provide assurance that our actual cash requirements will not be greater than we expect as of the date of this report. We will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services and technologies, and the purchase of our common stock under our stock repurchase program which might impact our liquidity requirements or cause us to issue additional equity or debt securities.

If sources of liquidity are not available or if we cannot generate sufficient cash flow from operations during the next twelve months, we might be required to obtain additional sources of funds through additional operating improvements, capital market transactions, asset sales or financing from third parties, a combination thereof or otherwise. We cannot provide assurance that these additional sources of funds will be available or, if available, would have reasonable terms.

Contractual Obligations, Commitments and Off Balance Sheet Arrangements

We have various contractual obligations, which are recorded as liabilities in our consolidated financial statements. Other items, such as operating lease contract obligations, are not recognized as liabilities in our consolidated financial statements but are required to be disclosed.

With the exception of the additional amounts borrowed under our existing Credit Agreement described above under Future Capital Requirements, there were no material changes, outside of the ordinary course of business, to our contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.

Recent Accounting Pronouncements

For information with respect to recent accounting pronouncements and the impact of these pronouncements on our consolidated financial statements, see Note 1 of the Notes to Consolidated Financial Statements in Part I, Item 1 of this report.

Safe Harbor for Forward-Looking Statements

This report contains forward-looking statements within the meaning of the federal securities laws that involve risks and uncertainties. We develop forward-looking statements by combining currently available information with our beliefs and assumptions. These statements relate to future events, including our future performance, and management’s expectations, beliefs, intentions, plans or projections relating to the future and some of these statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “anticipates,” “estimates,” “projects,” “intends,” “seeks,” “future,” “continue,” “contemplate,” “would,” “will,” “may,” “should,” and the negative or other variations of those terms or comparable terminology or by discussion of strategy, plans, opportunities or intentions. As a result, actual results, performance or achievements may vary materially from those anticipated by the forward-looking statements.

Among the factors that could cause actual results, performance or achievements to differ materially from those indicated by such forward-looking statements are:

•

the risk that we will not achieve the strategic benefits of the August 24, 2010 merger with Eclipsys Corporation (the “Eclipsys Merger”), or that the Allscripts and Eclipsys operations and products will not be integrated successfully;

•

the possibility that the expected synergies and cost savings of the Eclipsys Merger will not be realized, or will not be realized within the expected time period;

•

the impact of the realignment of our sales and services organization;

•

the possibility that our current initiatives focused on product delivery, client experience and financial performance may not be successful;

•

potential difficulties or delays in achieving platform and product integration and the connection and movement of data among hospitals, physicians, patients and others;

•

competition within the industries in which we operate, including the risk that existing clients will switch to products of competitors;

•

failure to achieve interoperability certification pursuant to the Health Information Technology for Economic and Clinical Health Act, with resulting increases in development and other costs for us and possibly putting us at a competitive disadvantage in the marketplace;

•

the volume and timing of systems sales and installations, the length of sales cycles and the installation process and the possibility that our products will not achieve or sustain market acceptance;

•

the timing, cost and success or failure of new product and service introductions, development and product upgrade releases;

•

competitive pressures including product offerings, pricing and promotional activities;

•

our ability to establish and maintain strategic relationships;

•

errors or similar problems in our software products or other product quality issues;

•

the outcome of any legal proceeding that has been or may be instituted against us and others;

•

compliance obligations under existing laws, regulations and industry initiatives, including increasing enforcement activity in respect of anti-bribery, fraud and abuse and similar laws, and future changes in laws or regulations in the healthcare industry, including possible regulation of our software by the U.S. Food and Drug Administration;

•

the possibility of product-related liabilities;

•

our ability to attract and retain qualified personnel;

•

the implementation and speed of acceptance of the electronic record provisions of the American Recovery and Reinvestment Act of 2009, as well as elements of the Patient Protection and Affordable Care Act (aka health reform) which pertains to healthcare IT adoption;

•

maintaining our intellectual property rights and litigation involving intellectual property rights;

•

legislative, regulatory and economic developments;

•

risks related to third-party suppliers and our ability to obtain, use or successfully integrate third-party licensed technology;

•

breach of data security by third parties and unauthorized access to patient health information by third parties; and

•

those factors discussed in “Risk Factors” in our periodic filings with the Securities and Exchange Commission (the “SEC”).

We make these statements under the protection afforded by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Because forward-looking statements are subject to assumptions and uncertainties, actual results, performance or achievements may differ materially from those expressed or implied by such forward-looking statements. Stockholders are cautioned not to place undue reliance on such statements, which speak only as of the date such statements are made. Except to the extent required by applicable law or regulation, Allscripts undertakes no obligation to revise or update any forward-looking statement, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

During the three and six months ended June 30, 2012, there were no significant changes to our quantitative and qualitative disclosures about market risk. Please refer to Part II, Item 7A. Quantitative and Qualitative Disclosures about Market Risk included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2011 for a more complete discussion of the market risks we encounter.

Item 4.

Controls and Procedures

Evaluation of disclosure controls and procedures

As of June 30, 2012, our management, including our Chief Executive Officer and Chief Financial Officer, have reviewed and evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based on their review and evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1.

Legal Proceedings

We hereby incorporate by reference Note 9, “Contingencies,” of the Notes to Consolidated Financial Statements in Part I, Item 1 of this report.

Item 2.

Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities

The following table summarizes the stock repurchase activity for the three months ended June 30, 2012 and the approximate dollar value of shares that may yet be purchased pursuant to our stock repurchase program:


(In thousands, except per share amounts)
					Total Number		Approximate
					Of Shares		Dollar Value
					Purchased		Of Shares
					As Part Of		That May Yet
	Total		Average		Publicly		Be Purchased
	Number		Price		Announced		Under The
	Of Shares		Paid Per		Plans Or		Plans Or
Period	Purchased		Share		Programs		Programs
04/01/12—04/30/12		0	$	0.00		0	$	348,044
05/01/12—05/31/12		15,177	$	10.91		15,177	$	182,523
06/01/12—06/30/12		5,514	$	10.79		5,514	$	123,044

		20,691	$	10.87		20,691

Item 6.

Exhibits

(a) Exhibits

See Index to Exhibits.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 9, 2012.


ALLSCRIPTS HEALTHCARE SOLUTIONS, INC.

By:		/s/ W. David Morgan
		W. David Morgan
		Interim Chief Financial Officer
		(Duly Authorized Officer and
		Principal Financial Officer)

Date: August 9, 2012

INDEX TO EXHIBITS

Incorporated by Reference

Exhibit
Number

Exhibit Description

Filed
Herewith

Form

Exhibit

Filing Date

Filed By

3.1

By-Laws of Allscripts Healthcare Solutions, Inc.

8-K

3.1

May 17, 2012

Allscripts Healthcare Solutions, Inc.

3.2

Certificate of Designation of Series A Junior Participating Preferred Stock

8-A

3.2

May 7, 2012

Allscripts Healthcare Solutions, Inc.

4.1

Rights Agreement, dated as of May 7, 2012, between Allscripts Healthcare Solutions, Inc. and Computershare Shareowner Services LLC, as rights agent, which includes the Form of Rights Certificate as Exhibit B thereto

8-A

4.1

May 7, 2012

Allscripts Healthcare Solutions, Inc.

10.1

Incremental Assumption Agreement by and among Allscripts Healthcare Solutions, Inc. and Allscripts Healthcare, LLC (individually and collectively as the borrower), J. P. Morgan Securities LLC, Mizuho Corporate Bank, LTD., SunTrust Robinson Humphrey, Inc., and other participating lenders as the lenders, and JPMorgan Chase Bank, N.A., as administrative agent, dated June 11, 2012

8-K

10.1

June 12, 2012

Allscripts Healthcare Solutions, Inc.

10.2

† First Amendment to Employment Agreement, dated as of June 5, 2012, by and between Allscripts Healthcare Solutions, Inc. and Glen E. Tullman

8-K

10.1

June 6, 2012

Allscripts Healthcare Solutions, Inc.

10.3

† Second Amendment to Employment Agreement, dated as of June 5, 2012, by and between Allscripts Healthcare Solutions, Inc. and Lee Shapiro

8-K

10.2

June 6, 2012

Allscripts Healthcare Solutions, Inc.

10.4

† First Amendment to Employment Agreement, dated as of June 5, 2012, by and between Allscripts Healthcare Solutions, Inc. and Diane Adams

8-K

10.3

June 6, 2012

Allscripts Healthcare Solutions, Inc.

10.5

† Second Amendment to Employment Agreement, dated as of June 5, 2012, by and between Allscripts Healthcare Solutions, Inc. and Laurie McGraw

8-K

10.4

June 6, 2012

Allscripts Healthcare Solutions, Inc.

10.6

Agreement, dated as of May 31, 2012, among Allscripts Healthcare Solutions, Inc., HealthCor Offshore Master Fund, L.P., HealthCor Hybrid Offshore Master Fund, L.P., HealthCor, L.P., HealthCor Long Offshore Master Fund, L.P. and HealthCor Management, L.P.

8-K

10.1

June 1, 2012

Allscripts Healthcare Solutions, Inc.

10.7

† Separation Agreement dated as of April 25, 2012 between the Company and Philip M. Pead

8-K

10.1

April 26, 2012

Allscripts Healthcare Solutions, Inc.

31.1

Rule 13a - 14(a) Certification of Chief Executive Officer

31.2

Rule 13a - 14(a) Certification of Chief Financial Officer

32.1

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer

101

Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements

†	Indicates management contract or compensatory plan.