UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

Commission file number 001-34435

EMDEON INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		20-5799664
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
3055 Lebanon Pike, Suite 1000
Nashville, TN		37214
(Address of Principal Executive Offices)		(Zip Code)

(615) 932-3000
(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 þ No o

     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 o No o

     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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

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

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Outstanding as of November 11, 2009
Class A common stock, $0.00001 par value		90,238,103
Class B common stock, $0.00001 par value		24,752,955

 

 

Emdeon Inc.

Table of Contents

		Page
Part I. Financial Information
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 3. Quantitative and Qualitative Disclosures About Market Risk			50
Item 4. Controls and Procedures			51
Part II. Other Information
Item 1. Legal Proceedings			52
Item 1A. Risk Factors			52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 3. Defaults Upon Senior Securities			53
Item 4. Submission of Matters to a Vote of Security Holders			53
Item 5. Other Information			53
Item 6. Exhibits			53
Signatures			54
Exhibit Index			55
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Emdeon Inc.

Condensed Consolidated Balance Sheets
(unaudited and amounts in thousands, except share and per share amounts)

		December 31,				September 30,
		2008				2009
Assets
Current assets:
Cash and cash equivalents		$	71,478			$	194,989
Accounts receivable, net of allowance for doubtful accounts of $4,576 and $4,499 at December 31, 2008 and September 30, 2009, respectively			144,149				152,460
Deferred income tax assets			2,285				6,233
Prepaid expenses and other current assets			21,137				17,272
Total current assets			239,049				370,954
Property and equipment, net			136,038				144,324
Goodwill			646,851				703,008
Intangible assets, net			971,001				963,010
Other assets, net			7,340				1,526
Total assets		$	2,000,279			$	2,182,822
Liabilities and equity
Current liabilities:
Accounts payable		$	805			$	5,623
Accrued expenses			79,513				77,808
Deferred revenues			12,056				12,795
Current portion of long-term debt			17,244				5,139
Total current liabilities			109,618				101,365
Long-term debt, excluding current portion			807,986				796,768
Deferred income tax liabilities			159,811				151,869
Tax receivable agreement obligation to related parties			—				141,745
Other long-term liabilities			44,711				29,334
Commitments and contingencies
Equity:
Preferred stock (par value, $0.00001), 25,000,000 shares authorized and 0 shares issued and outstanding			—				—
Class A common stock (par value, $0.00001), 400,000,000 shares authorized and 77,413,610 and 90,238,893 shares outstanding at December 31, 2008 and September 30, 2009, respectively			1				1
Class B exchangable common stock (par value, $0.00001), 52,000,000 shares authorized and 22,586,390 and 24,752,955 shares outstanding at December 31, 2008 and September 30, 2009, respectively			—				—
Additional paid-in capital			670,702				732,836
Accumulated other comprehensive loss			(23,195	)			(15,511	)
Retained earnings			24,123				30,563
Emdeon Inc. stockholders’ equity			671,631				747,889
Noncontrolling interest			206,522				213,852
Total equity			878,153				961,741
Total liabilities and equity		$	2,000,279			$	2,182,822

See accompanying notes to the unaudited condensed consolidated financial statements.

Emdeon Inc.

Condensed Consolidated Statements of Operations
(unaudited and amounts in thousands, except share and per share amounts)

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2008				2009				2008				2009
Revenue		$	212,808			$	235,462			$	635,666			$	679,888
Costs and expenses:
Cost of operations (exclusive of depreciation and amortization below)			134,451				146,471				405,423				418,079
Development and engineering			7,312				10,045				21,029				24,425
Sales, marketing, general and administrative			22,220				33,823				69,309				85,146
Depreciation and amortization			25,710				26,667				71,979				77,051
Loss on abandonment of leased properties			—				482				—				742
Operating income			23,115				17,974				67,926				74,445
Interest income			(328	)			(27	)			(931	)			(81	)
Interest expense			20,410				17,219				49,899				52,330
Income before income tax provision			3,033				782				18,958				22,196
Income tax provision			3,512				9,245				11,202				12,885
Net income (loss)			(479	)			(8,463	)			7,756				9,311
Net income (loss) attributable to noncontrolling interest			766				(1,246	)			2,620				2,871
Net income (loss) attributable to Emdeon Inc.		$	(1,245	)		$	(7,217	)		$	5,136			$	6,440
Net income (loss) per share Class A common stock:
Basic		$	(0.02	)		$	(0.09	)		$	0.07			$	0.08
Diluted		$	(0.02	)		$	(0.09	)		$	0.07			$	0.08
Weighted average common shares outstanding:
Basic			77,413,610				84,522,085				73,889,095				79,809,140
Diluted			77,413,610				84,522,085				73,889,095				79,856,588

See accompanying notes to the unaudited condensed consolidated financial statements.

Emdeon Inc.

Condensed Consolidated Statements of Equity
(unaudited and amounts in thousands, except share and per share amounts)

		Class A								Class B								Additional								Other				Non-
		Common Stock								Common Stock								Paid-in				Retained				Comprehensive				Controlling				Total
		Shares				Amount				Shares				Amount				Capital				Earnings				Income (Loss)				Interest				Equity
Balance at January 1, 2008			52,000,000			$	1				48,000,000			$	—			$	300,550			$	14,892			$	(14,474	)		$	—			$	300,969
Capital contribution from affiliates of General Atlantic LLC and Hellman & Friedman LLC for the purchase of HLTH Corporation’s 48% interest in EBS Master LLC on February 8, 2008			25,413,610				—				—				—				578,409				—				—								578,409
Establish non-controlling interest on February 8, 2008			—				—				22,586,390				—				(210,585	)			—				5,435				205,150				—
Eliminate HLTH Corporation’s 48% noncontrolling interest on February 8, 2008			—				—				(48,000,000	)			—				1,345				—				—				—				1,345
Capital contribution from stockholders			—				—				—				—				1,300				—				—				—				1,300
Distribution to stockholders			—				—				—				—				(317	)			—				—				—				(317	)
Comprehensive income:
Net income			—				—				—				—				—				5,136				—				2,620				7,756
Change in the fair value of interest rate swap, net of taxes			—				—				—				—				—				—				(9,594	)			—				(9,594	)
Foreign currency translation adjustment			—				—				—				—				—				—				(3	)			—				(3	)
Other comprehensive income amortization, net of taxes			—				—				—				—				—				—				4,743				1,383				6,126
Total comprehensive income			—				—				—				—																				4,285
Balance at September 30, 2008			77,413,610			$	1				22,586,390			$	—			$	670,702			$	20,028			$	(13,893	)		$	209,153			$	885,991
Balance at January 1, 2009			77,413,610			$	1				22,586,390			$	—			$	670,702			$	24,123			$	(23,195	)		$	206,522			$	878,153
Capital contribution from stockholders			—				—				—				—				203				—				—				—				203
Distribution to stockholders			—				—				—				—				(434	)			—				—				—				(434	)
Reclassification of liability awards to equity awards			—				—				—				—				20,548				—				—				6,183				26,731
Equity based compensation expense			—				—				—				—				3,022				—				—				832				3,854
Purchase of eRx Network L.L.C.			—				—				1,850,000				—				3,530				—				318				19,707				23,555
Issuance of units of EBS Master to members of management, net of taxes			—				—				2,537,325				—				(11,979	)			—				394				18,245				6,660
Issuance of Class A common stock to employees and directors, net of taxes			349,166				—				—				—				559				—				(18	)			(851	)			(310	)
Conversion of EBS Master units held by eRx to shares of Class A common stock, net of taxes			1,850,000				—				(1,850,000	)			—				21,919				—				(376	)			(17,443	)			4,100
Issuance of Class A shares in connection with initial public offering (includes costs paid in 2008)			10,725,000				—				—				—				145,211				—				—				—				145,211
Issuance of units of EBS Master to Emdeon Inc., net of taxes			—				—				—				—				13,799								(448	)			(21,025	)			(7,674	)
Repurchase of Class A shares (to satisfy tax withholding obligation)			(101,515	)			—				—				—				(1,573	)			—				—				—				(1,573	)
Repurchase of units of EBS Master issued to members of management, net of taxes			—				—				(370,760	)			—				(1,115	)			—				(74	)			(3,500	)			(4,689	)
Tax receivable agreement with related parties, net of taxes			—				—				—				—				(131,556	)			—				—				—				(131,556	)
Issuance of Class A common stock upon vesting of Restricted Stock Units			2,632				—				—				—				—				—				—				—				—
Comprehensive income:
Net income			—				—				—				—				—				6,440				—				2,871				9,311
Changes in the fair value of interest rate swap, net of taxes			—				—				—				—				—				—				3,806				1,112				4,918
Foreign currency translation adjustment			—				—				—				—				—				—				10				6				16
Other comprehensive income amortization, net of taxes			—				—				—				—				—				—				4,072				1,193				5,265
Total comprehensive income																																			19,510
Balance at September 30, 2009			90,238,893			$	1				24,752,955			$	—			$	732,836			$	30,563			$	(15,511	)		$	213,852			$	961,741

See accompanying notes to the unaudited condensed consolidated financial statements.

Emdeon Inc.

Consolidated Statements of Cash Flows
(unaudited and amounts in thousands)

		For the Nine Months
		Ended September 30,
		2008				2009
Operating activities
Net income		$	7,756			$	9,311
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			71,979				77,051
Equity compensation expense			5,813				21,499
Deferred income tax expense (benefit)			4,925				(1,360	)
Amortization of debt issuance costs			141				143
Amortization of debt discount			7,066				8,699
Amortization of discontinued cash flow hedge from other comprehensive income			7,011				5,968
Change in fair value of interest rate swap			(12,714	)			—
Loss on abandonment of leased properties			—				742
Loss on disposal of fixed assets			72				56
Changes in operating assets and liabilities:
Accounts receivable			(16,968	)			(3,990	)
Prepaid expenses and other			(9,760	)			4,911
Accounts payable			(3,392	)			3,515
Accrued expenses and other liabilities			(2,507	)			(6,199	)
Deferred revenues			2,879				737
Net cash provided by operating activities			62,301				121,083
Investing activities
Purchases of property and equipment			(13,942	)			(30,563	)
Payments for acquisitions, net of cash acquired			(19,090	)			(75,871	)
Purchase of EBS Master LLC			(306,260	)			—
Net cash used in investing activities			(339,292	)			(106,434	)
Financing activities
Proceeds from initial public offering			—				148,261
Repurchase of Class A common stock			—				(1,573	)
Repurchase of Units of EBS Master LLC			—				(5,372	)
Debt principal payments			(5,662	)			(21,663	)
Payments on revolver			—				(10,201	)
Payment of loan costs			—				(359	)
Capital contributions from stockholders			307,451				203
Distribution to shareholders			(317	)			(434	)
Net cash provided by financing activities			301,472				108,862
Net increase in cash and cash equivalents			24,481				123,511
Cash and cash equivalents at beginning of period			33,687				71,478
Cash and cash equivalents at end of period		$	58,168			$	194,989

See accompanying notes to the unaudited condensed consolidated financial statements.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

1. Nature of Business and Organization

     Nature of Business

     Emdeon Inc. (the “Company”) is a leading provider of revenue and payment cycle management solutions, connecting payers, providers and patients of the U.S. healthcare system. The Company’s product and service offerings integrate and automate key business and administrative functions for healthcare payers and healthcare providers throughout the patient encounter, including pre-care patient eligibility and benefits verification, claims management and adjudication, payment integrity, payment distribution, payment posting and denial management and patient billing and payment collection.

     Organization

     Prior to November 2006, the group of companies that comprised Emdeon Business Services (“EBS”) was owned by HLTH Corporation (“HLTH”). EBS Master LLC (“EBS Master”) was formed by HLTH to act as a holding company for EBS. EBS Master, through its 100% owned subsidiary, Emdeon Business Services LLC (“EBS LLC”), owns EBS.

     In September 2006, EBS Acquisition LLC (“EBS Acquisition”) was formed as a Delaware limited liability company by affiliates of General Atlantic LLC (“General Atlantic”). On November 16, 2006, pursuant to the terms of an Amended and Restated Agreement and Plan of Merger, dated as of November 15, 2006, among HLTH and certain of its subsidiaries (including EBS Master) and EBS Acquisition and two of its subsidiaries, a subsidiary of EBS Acquisition merged into a subsidiary of HLTH. As a result of the merger, EBS Acquisition acquired a 52% interest in EBS Master, and HLTH received approximately $1,200,000 in cash and retained a 48% interest in EBS Master. The transactions through which EBS Acquisition acquired a 52% interest in EBS Master are referred to herein as the “2006 Transaction.” The 2006 Transaction was financed with $925,000 in bank debt and an equity investment of approximately $320,000 by EBS Acquisition. As the 2006 Transaction was deemed to be a highly leveraged transaction, the 2006 Transaction was accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No. 88-16, Basis in Leveraged Buyout Transactions, and 52% of the net assets of EBS Master were stepped up to fair market value.

     On February 8, 2008, HLTH sold its 48% noncontrolling interest in EBS Master to affiliates of General Atlantic and Hellman & Friedman LLC (“H&F”) for $575,000 in cash (the “2008 Transaction”). As a result, following the 2008 Transaction, EBS Master was owned 65.77% by affiliates of General Atlantic (including EBS Acquisition) and 34.23% by affiliates of H&F. See Note 4 for further information related to the 2008 Transaction.

     In September 2008, EBS Acquisition was converted into a Delaware corporation, and the Company’s name was changed to Emdeon Inc.

     Reorganization

     On August 5, 2009, the Company completed a restructuring (collectively, the “reorganization transactions”) in anticipation of completing an initial public offering.

     Prior to the reorganization transactions, the Company owned a 52% interest in EBS Master and affiliates of General Atlantic and H&F owned the remaining 48% interest in EBS Master. The Company did not engage in any business or other activities except in connection with its investment in EBS Master and the reorganization transactions and had nominal assets other than its interest in EBS Master. In the reorganization transactions, the Company became the sole managing member of EBS Master and acquired additional interests in EBS Master.

     Prior to the reorganization transactions, the Company was authorized to issue a single class of common stock. In connection with the reorganization transactions, the Company amended and restated its certificate of incorporation and is currently authorized to issue two classes of common stock: Class A common stock and Class B common stock.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

     As part of the reorganization transactions:

	•		The Company amended and restated its certificate of incorporation and reclassified its outstanding common stock into an aggregate of 56,000,000 shares of its Class A common stock;
	•		The Company redeemed 4,000,000 shares of Class A common stock from its existing stockholders in exchange for the rights by its existing stockholders to receive payments under a tax receivable agreement;

•

Another member of EBS Master, EBS Acquisition II, LLC (“EBS Acquisition II”), an affiliate of General Atlantic, was merged with a newly-formed subsidiary of the Company with the newly formed subsidiary being the surviving entity in the merger; EBS Acquisition II’s members, all of whom are investment funds organized and controlled by General Atlantic, received an aggregate of 13,773,913 shares of the Company’s Class A common stock, and the Company acquired, indirectly, an additional 13.52% interest in EBS Master;

•

One of the members of EBS Master, H&F Harrington AIV I, L.P. (“H&F Harrington”), an entity whose partners consist of investment funds organized and controlled by H&F, dissolved and distributed 1.06% of its interests in EBS Master to Hellman & Friedman Investors VI, L.P., its general partner (“H&F GP”), and 98.94% to H&F Harrington, Inc.; H&F Harrington, Inc. then merged with a newly-formed subsidiary of the Company with the newly formed subsidiary being the surviving entity in the merger; H&F Harrington, Inc.’s sole shareholder, H&F Harrington AIV II, L.P. (“H&F AIV”), an investment fund organized and controlled by H&F, received an aggregate of 11,639,697 shares of the Company’s Class A common stock, and the Company acquired, indirectly, an additional 11.43% interest in EBS Master; and

•

Affiliates of H&F (or their successors) (the “H&F Continuing LLC Members”) continue to hold an aggregate of 22,586,390 units in EBS Master (“EBS Units”) (or 22.18% of the outstanding EBS Units) and were issued an aggregate of 22,586,390 shares of the Company’s Class B common stock.

     The Company accounted for the reorganization transactions using a carryover basis as the reorganization transactions are identical ownership exchanges among entities under common control. This is consistent with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Business Combinations Topic. The economic interests that the affiliates of General Atlantic and H&F held in EBS Master before the reorganization transactions did not change as a result of the reorganization transactions.

     The reorganization was accounted for similar to a transaction between entities under common control. As EBS Acquisition II, H&F Harrington, and the H&F Continuing LLC Members did not purchase their interests in EBS Master until the 2008 Transaction, this reorganization did not materially impact the Company’s financial statements through December 31, 2007. The financial statements for the three month and nine month periods ended September 30, 2008 and 2009, respectively are presented as if the H&F Continuing LLC Members represented the noncontrolling interest for the periods subsequent to February 9, 2008.

     This reorganization and the changes to the capital structure are reflected in all periods presented.

     Effective August 11, 2009, the Company priced its initial public offering of Class A common stock (the “IPO”) as more fully described in Note 10 to the unaudited condensed consolidated financial statements.

2. Basis of Presentation and Summary of Significant New Accounting Policies

     Principles of Consolidation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of results

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

for the unaudited interim periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. The results of operations for the interim period are not necessarily indicative of the results to be obtained for the full fiscal year. All material intercompany accounts and transactions have been eliminated in the unaudited condensed consolidated financial statements.

     Reclassifications

     Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation.

     Recent Accounting Pronouncements

     On January 1, 2009, the Company adopted the FASB ASC Business Combinations Topic. This topic expands the definition of a business and a business combination and generally requires the acquiring entity to recognize all of the assets and liabilities of the acquired business, regardless of the percentage ownership acquired, at their fair values. This topic also requires that contingent consideration and certain acquired contingencies be recorded at fair value on the acquisition date and that acquisition costs generally be expensed as incurred. The Company recorded approximately $391 of acquisition related expenses in the nine months ended September 30, 2009 that, absent the adoption of this topic, would have been capitalized. These costs are included in the accompanying unaudited condensed consolidated statement of operations within sales, marketing, general and administrative expenses. As a result, net income for the nine months ended September 30, 2009 was reduced by approximately $232 ($0.00 per diluted Class A share).

     On January 1, 2009, the Company adopted the provisions of the FASB ASC Fair Value Measurements and Disclosures Topic that relate to nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. Examples of such circumstances include fair value measurements associated with the initial recognition of assets and liabilities in a business combination and measurements of impairment following a goodwill impairment test or an impairment of a long-lived asset other than goodwill. The adoption of this topic had no material impact on the Company’s unaudited condensed consolidated financial statements for the nine months ended September 30, 2009.

     On January 1, 2009, the Company adopted the FASB ASC Consolidation Topic as it relates to noncontrolling interests in consolidated financial statements. The topic clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Additionally, the topic changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. The presentation and disclosure requirements of the topic have been given retroactive effect for all periods presented.

     On January 1, 2009, the Company adopted additional disclosure provisions of the FASB ASC Derivatives and Hedging Topic. The additional provisions amended and expanded the disclosure requirements for derivative instruments and hedging activities with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The topic requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The required disclosures are presented within Note 7 to the unaudited condensed consolidated financial statements.

     On April 1, 2009, the Company adopted provisions of the FASB ASC Fair Value Measurements and Disclosures Topic (formerly outlined in FASB Staff Position 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly). Provisions of this topic provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased and re-emphasize that a fair value measurement is an exit price concept as defined in the topic. Assets and liabilities measured under Level 1 inputs are excluded from the scope of these provisions. The adoption of these provisions had no material impact on the unaudited condensed consolidated financial statements for the nine months ended September 30, 2009.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

     On April 1, 2009, the Company adopted provisions of FASB ASC Fair Value Measurements and Disclosures Topic (formerly outlined in FASB Staff Position No. 107-1 and Accounting Principles Board Opinion 28-1, Interim Disclosures about Fair Value of Financial Instruments), to provide disclosures on the fair value of financial instruments in interim financial statements. The disclosures required by the topic are presented within Note 8 to the unaudited condensed consolidated financial statements.

     On April 1, 2009, the Company adopted the FASB ASC Subsequent Events Topic. The topic establishes general standards of accounting for and disclosure of events that occur after a company’s balance sheet date but before financial statements of the company are issued or are available to be issued. In particular, this topic sets forth: (i) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. Additionally, the topic requires companies to disclose the date through which subsequent events have been evaluated as well as the date the financial statements were issued or were available to be issued. The adoption of the topic had no material impact on the Company’s consolidated financial statements for the nine months ended September 30, 2009. The disclosures required by the topic are presented within Note 18 to the unaudited condensed consolidated financial statements.

     In August 2009, the FASB issued Accounting Standards Update 2009-05, an update to FASB ASC Fair Value Measurements and Disclosures Topic. This update clarifies the valuation techniques to be used by an entity to measure the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. The update further clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The guidance provided in this update is effective beginning October 1, 2009 and is not expected to have a material impact on the unaudited condensed consolidated financial statements of the Company.

3. Concentration of Credit Risk

     The Company’s revenue is generated in the United States. Changes in economic conditions, government regulations, or demographic trends, among other matters in the United States could adversely affect the Company’s revenue and results of operations.

     The Company maintains its cash and cash equivalent balances in either insured depository accounts or a money market fund. The money market fund is subject to the limitations and regulations of Rule 2a-7 of the Investment Company Act of 1940. As such, by law, the money market mutual fund is limited to investments in low-risk securities such as U.S. or government agency obligations, or repurchase agreements secured by such securities.

4. Business Combinations

     Related to the 2008 Transaction, affiliates of General Atlantic and H&F were deemed to be a collaborative group under FASB ASC 805-50-S99-2, and the 48% step up in the basis of the net assets of EBS Master recorded at the General Atlantic and H&F acquirer level was pushed down to the Company’s financial statements in accordance with the FASB ASC Business Combinations Topic and replaced the historical basis held by HLTH. The total purchase price of the transaction was $578,409 and transaction costs of $3,409 were incurred. The effect of the 2008 Transaction on the results of operations is included in the consolidated financial statements of the Company from February 8, 2008 forward.

     On September 26, 2008, the Company acquired the assets comprising the patient statement business operated by GE Healthcare IITS USA Corp. The Company paid $16,677 in cash at closing and incurred $391 of additional transaction-related costs. The results of operations of this business are included in the consolidated financial statements of the Company from September 26, 2008 forward.

     On June 5, 2009, the Company acquired substantially all of the assets of The Sentinel Group from Optimal Business Services, Inc., a subsidiary of Trustmark Mutual Holding Company, for $3,067 in cash (which was funded with cash on hand). The Sentinel Group is a provider of payment integrity solutions.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

     On July 2, 2009, the Company acquired all of the voting equity interests of eRx Network, L.L.C. (“eRx”). eRx is a provider of electronic pharmacy healthcare solutions. The Company has preliminarily valued the total consideration transferred for the eRx acquisition at approximately $100,695, which consisted of approximately $74,575 in cash (funded with cash on hand), 1,850,000 EBS Units issued to certain members of eRx, valued at $13.92 per unit or approximately $25,754 in the aggregate, and contingent consideration of approximately $366.

          The total consideration transferred in connection with the eRx acquisition was allocated as follows:

Cash		$	2,889
Accounts receivable			4,065
Other current assets			750
Property and equipment			7,017
Other assets			41
Identifiable intangible assets:
Customer contracts (20-year weighted average useful life)			28,130
Tradename (20-year weighted average useful life)			9,660
Non-compete agreements (5-year weighted average useful life)			320
Goodwill (Provisional)			53,634
Accounts payable			(1,304	)
Accrued expenses			(4,294	)
Current maturities of long-term debt			(200	)
Net assets acquired			100,708
Noncontrolling interest			(13	)
Total consideration transferred		$	100,695

     The contingent consideration consists of a required working capital settlement whereby the Company generally agreed to pay (receive) additional consideration to the extent that the value of the acquired working capital exceeds (is less than) the estimated amount contemplated at the time the merger consideration was negotiated. As of September 30, 2009, the Company estimated that it will be required to pay additional consideration of approximately $366 upon final resolution of this working capital settlement.

     As of the acquisition date, eRx had gross contractual accounts receivable of $4,096, of which, approximately $31 is not expected to be collected.

     All of the goodwill recorded in the eRx acquisition was assigned to the Company’s pharmacy segment. The goodwill recognized is attributable to expected synergies and the assembled workforce of eRx. All of the goodwill recorded is expected to be deductible for income tax purposes. As of September 30, 2009, there were no changes in the recognized amounts of goodwill resulting from the acquisition of eRx.

     The Company recognized $206 of acquisition related costs that were expensed in the nine months ended September 30, 2009. These costs are included in the accompanying unaudited condensed consolidated statement of operations within sales, marketing, general and administrative expenses.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

     The Company has not separately disclosed revenue and net income recognized in its accompanying unaudited condensed consolidated statement of operations related to the eRx acquisition as the operations, business and services of eRx are in the process of being integrated with the Company’s existing pharmacy segment. The following represents the pro forma consolidated revenue and net income as if eRx had been included in the consolidated results of the Company from the beginning of the following respective periods:

		Three months ended								Nine months ended
		September 30,				September 30,				September 30,				September 30,
		2008				2009				2008				2009
Revenue		$	219,790			$	235,462			$	655,136			$	696,585
Net income (loss)		$	369			$	(8,463	)		$	9,757			$	11,256

5. Goodwill and Intangible Assets

     Goodwill activity during the nine months ended September 30, 2009 was as follows:

		Payer				Provider				Pharmacy				Total
Balance at December 31, 2008		$	300,909			$	315,865			$	30,077			$	646,851
Acquisitions			2,691				—				53,634				56,325
Other			50				(218	)			—				(168	)
Balance at September 30, 2009		$	303,650			$	315,647			$	83,711			$	703,008

     Intangible assets subject to amortization as of September 30, 2009, consist of the following:

						Gross
		Weighted Average				Carrying				Accumulated
		Remaining Life				Amount				Amortization				Net
Customer relationships			16.2			$	965,523			$	(109,043	)		$	856,480
Trade names			18.5				117,548				(13,156	)			104,392
Non-compete agreements			0.5				11,496				(9,358	)			2,138
Total						$	1,094,567			$	(131,557	)		$	963,010

     Amortization expense was $41,784 and $46,101 for the nine months ended September 30, 2008 and 2009, respectively. Aggregate future amortization expense for intangible assets is estimated to be:

2009 (remainder)		$	15,694
2010			59,064
2011			58,613
2012			58,609
2013			58,507
Thereafter			712,523
		$	963,010

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

6. Long-Term Debt

     Long-term debt consists of the following:

		December 31,				September 30,
		2008				2009
$50 million Revolving line of credit facility, expiring on November 16, 2012 and bearing interest payable quarterly at a variable base rate plus a spread rate (total rate of 2.38% at December 31, 2008)		$	10,000			$	—
$755 million First Lien Term Loan facility, expiring on November 16, 2013, bearing interest payable quarterly at a variable base rate (LIBOR) plus a spread rate (total rate 3.46% and 2.29%) and net of unamortized discount of $46,833 and $40,437 at December 31, 2008 and September 30, 2009, respectively (combined effective interest rate of 4.05% at September 30, 2009)			663,067				647,801
$170 million Second Lien Term Loan facility, expiring on May 16, 2014, bearing interest at a variable base rate (LIBOR) plus a spread rate (total rate 6.46% and 5.29%) and net of unamortized discount of $17,837 and $15,894 at December 31, 2008 and September 30, 2009, respectively (combined effective interest rate of 7.88% at September 30, 2009)			152,163				154,106
Less current portion			(17,244	)			(5,139	)
Long-term debt		$	807,986			$	796,768

     On November 16, 2006, EBS LLC entered into two credit agreements with several lenders that provided a $755,000 term loan (“First Lien Term Loan”), a $50,000 revolving credit agreement (“Revolver”) and a $170,000 term loan (“Second Lien Term Loan”). In connection with these credit agreements, EBS LLC paid fees of approximately $17,900 to the lenders of which the unamortized portion is classified as a reduction of the carrying value of the credit agreements in each period. Additionally, in connection with the 2008 Transaction, 48% of the carrying value of these credit agreements was adjusted to fair value which resulted in a discount of $66,395, the unamortized portion of which has similarly been classified as a reduction of the carrying value of the credit agreements.

     Effective July 7, 2009, the credit agreements were amended to modify the definition of a “change in control” and to provide EBS LLC with the right to fund certain tax obligations, as well as accounting, legal, and other costs of the Company (subject to an annual limit of $5,000 of these other costs). In connection with this amendment, the Company paid fees of approximately $359 to the lenders of which the unamortized portion is classified as a reduction of the carrying value of the credit agreements. Additionally, the Company incurred approximately $512 of fees paid to third parties in connection with this amendment that were expensed in the quarter ended September 30, 2009.

     The Revolver expires November 2012 and provides for revolving loans not to exceed $50,000, of which $12,000 may be used for letters of credit in support of payment obligations of the Company. As of September 30, 2009, the Company had no borrowings outstanding, undrawn letters of credit totaling $5,750, and $44,250 available for future borrowings under the Revolver. The Company pays a quarterly commitment fee on the unused portion of the Revolver that fluctuates, based upon certain leverage ratios, between 0.375% and 0.5% per annum.

     The First Lien Term Loan is payable in quarterly principal installments of approximately $1,800, plus accrued interest, beginning in March 2007 through September 2013, with a balloon payment of the remaining principal amount outstanding due upon maturity in November 2013. These installment payments are subject to adjustment based upon optional and mandatory prepayment activity. Mandatory prepayments of principal related to excess cash flow, as defined, and other circumstances are also required.

     The Second Lien Term Loan is subordinate to the First Lien Term Loan and matures in May 2014.

     The credit agreements require EBS LLC to maintain certain financial covenants, including a maximum total leverage ratio and minimum interest coverage ratio. The credit agreements also impose restrictions related to capital expenditures, investments, additional debt or liens, asset sales, transactions with affiliates and equity interests, among other items. Additionally, the credit agreements include restrictions on the payment of dividends or distributions (other than to fund income tax liabilities) to or advances or loans to parties that are not party to the credit agreements. In the case of dividends, the credit agreements generally limit payments to non-loan parties (including the Company) with such limitations increasing based on achievement of certain leverage ratios. Transactions with affiliates are limited to those which are approved by a majority of the non-interested members of the EBS LLC

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

board of directors and whose terms are no less favorable than those available to an unrelated person. Substantially all of the Company’s net assets are subject to the restrictions of these credit agreements. EBS LLC believes it was in compliance with all debt covenants at September 30, 2009. This debt is secured by substantially all of the assets of EBS LLC and is guaranteed by EBS Master.

7. Interest Rate Swap

     Derivative financial instruments are used to manage the Company’s interest rate exposure. The Company does not enter into financial instruments for speculative purposes. Derivative financial instruments are accounted for in accordance with FASB ASC Derivatives and Hedging Topic and are measured at fair value and recorded on the balance sheet. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction in the same period or periods during which the hedged transaction affects earnings (for example, in “interest expense” when the hedged transactions are interest cash flows associated with floating-rate debt). The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in interest expense in current earnings during the period of change.

     The following table summarizes the fair value of the Company’s derivative instrument at December 31, 2008 and September 30, 2009:

		Fair Values of Derivative Instruments
		Asset (Liability) Derivatives
				December 31,				September 30,
		Balance Sheet Location		2008				2009
Derivatives designated as hedging instruments:
Interest rate swap		Other long-term liabilities		$	(31,244	)		$	(25,648	)

     Cash Flow Hedging Relationships

     Effective December 29, 2006, the Company entered into an interest rate swap agreement, which matures in December 2011, to reduce the variability of interest payments associated with its total long-term debt. The notional amount of the swap was $482,220 and $478,823 as of December 31, 2008 and September 30, 2009, respectively. Changes in the cash flows of the interest rate swap are intended to offset the changes in cash flows attributable to fluctuations in the three month variable base rates underlying the Company’s long-term debt obligations. As of September 30, 2009, $17,108 of net losses associated with the existing cash flow hedge, which have been recorded within accumulated other comprehensive income, are expected to be reclassified to interest expense within the next twelve months.

     The 2008 Transaction represented a redesignation event. As the Company’s interest rate swap did not meet all the criteria for hedge accounting at that time, changes in the fair value subsequent to the 2008 Transaction but prior to its redesignation as a cash flow hedge on September 30, 2008, were recorded within interest expense during the period from February 8, 2008 to September 30, 2008. Additionally, the amortization of the amounts reflected in other comprehensive income at the date of the 2008 Transaction related to the discontinued cash flow hedge are and continue to be reflected within interest expense in the unaudited condensed consolidated statement of operations. Amortization of amounts included in other comprehensive income related to the discontinued original hedge is expected to total approximately $6,400 over the next twelve months.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

     The effect of the derivative instrument on the unaudited condensed consolidated statements of operations for the three month and nine month periods ended September 30, 2008 and 2009 is summarized in the following tables:

										Location of				Amount of
										Gain/(Loss)				Gain/(Loss)
										Reclassified				Reclassified
Derivatives in		Amount of								from				from								Location of
Cash		Gain/(Loss)								Accumulated				Accumulated								Gain/(Loss)				Gain/(Loss) Recognized
Flow Hedging		Recognized in OCI								OCI into				OCI into								Recognized in Income				in Income on
Relationships		on Derivative								Income				Income								on Derivative				Derivative
		(Effective								(Effective				(Effective								(Ineffective Portion and Amount
		Portion)								Portion)				Portion)								Excluded from Effectiveness Testing)
For the three months ended September 30
		2008				2009								2008				2009								2008				2009
Interest rate swap			—			$	1,113			Interest expense				$	(6,329	)		$	(7,338	)		Interest expense					—				—
For the nine months ended September 30
		2008				2009								2008				2009								2008				2009
Interest rate swap		$	(10,980	)		$	5,596			Interest expense				$	(14,521	)		$	(20,030	)		Interest expense					—				—

Amount of

Gain/(Loss)

Location of Gain/(Loss)

Recognized in

Derivatives Not

Recognized in Income on

Income on

Designated as

Derivative

Derivative

Hedging Instruments

Three months ended September 30

2008

2009

Interest rate swap

Interest expense

$

920

—

Nine months ended September 30

Derivative

2008

2009

Interest rate swap

Interest expense

$

12,714

—

8. Fair Value Measurements

     Assets and Liabilities Measured at Fair Value on a Recurring Basis

     The Company’s financial assets and liabilities that are measured at fair value on a recurring basis consist principally of the Company’s derivative financial instrument. The valuation of the Company’s derivative financial instrument is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash payments (or receipts) and the discounted expected variable cash receipts (or payments). The variable cash receipts (or payments) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

     To comply with the provisions of FASB ASC Fair Value Measurements and Disclosures Topic, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

     The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2009, aggregated by the level in the fair value hierarchy within which those measurements fall.

Fair Value Measurements at Reporting Date Using:

														Significant
										Significant Other				Unobservable
		Balance at				Quoted in Markets				Observable Inputs				Inputs
Description		September 30, 2009				Identical (Level 1)				(Level 2)				(Level 3)
Interest Rate Swap		$	25,648				—			$	25,648				—
Total		$	25,648				—			$	25,648				—

     Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and by its counterparties. However, as of September 30, 2009, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Assets and Liabilities Measured at Fair Value upon Initial Recognition

     The carrying amount and the estimated fair value of financial instruments held by the Company as of September 30, 2009 were:

		Carrying
		Amount				Fair Value
Cash and cash equivalents		$	194,989			$	194,989
Accounts receivable			152,460				152,460
Long-term debt			801,907				825,649

     The carrying amounts of cash equivalents and accounts receivable approximate fair value because of their short-term maturities. The fair value of long-term debt is based upon market trades by investors in partial interests of these instruments.

9. Legal Proceedings

     In the normal course of business, the Company is subject to claims, lawsuits and legal proceedings. While it is not possible to ascertain the ultimate outcome of such matters, in management’s opinion, the liabilities, if any, in excess of amounts provided or covered by insurance, are not expected to have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

10. Capital Stock

Common Stock

     Under the Company’s amended and restated certificate of incorporation, the Company is authorized to issue 400,000,000 shares of Class A common stock and 52,000,000 shares of Class B common stock, each with a par value of $0.00001. The Class A and Class B common stock each provide holders with one vote on all matters submitted to a vote of stockholders; however, the holders of Class B common stock do not have any of the economic rights (including rights to dividends and distributions upon liquidation) provided to the holders of the Class A common stock. Shares of Class B common stock, together with the corresponding EBS Units, may be exchanged with the Company for shares of Class A common stock on a one-for-one basis. All shares of the Class A and Class B common stock generally vote together, as a single class, on all matters submitted to a vote of the stockholders.

Preferred Stock

     Under the Company’s amended and restated certificate of incorporation, the Company is authorized to issue 25,000,000 shares of preferred stock, with a par value of $0.00001 per share. As of September 30, 2009 and December 31, 2008, there was no preferred stock outstanding.

Initial Public Offering

     On August 11, 2009, the Company priced the IPO of its Class A common stock pursuant to a Registration Statement on Form S-1 (File No. 333-153451), as amended, and Registration Statement on Form S-1MEF (File No. 333-161270) (collectively, the “Registration Statements”) filed with the Securities and Exchange Commission. In the IPO, an aggregate of 27,255,000 shares of Class A common stock, consisting of 10,725,000 Class A shares registered on behalf of the Company and 16,530,000 Class A shares registered on behalf of selling stockholders (including 3,555,000 Class A shares representing an over-allotment option granted by the selling stockholders to the underwriters in the IPO) were offered and sold to the public at a price per share of $15.50. The IPO closed on August 17, 2009, and the Company raised a total of approximately $166,238 in gross proceeds from the IPO, or $145,211 in net proceeds after deducting underwriting commissions and other associated costs (including approximately $3,100 of offering expenses paid in 2008).

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

Noncontrolling Interests

     The Company has executed transactions that both increased and decreased its ownership interest in EBS Master. These changes are summarized in the following table:

		Nine months ended
		September 30,
		2008				2009
Net income attributable to Emdeon Inc.		$	5,136			$	6,440
Transfers (to) from the noncontrolling interest
Increase in Emdeon Inc. paid-in capital for issuance of 1,850,000 EBS Units in connection with the acquisition of eRx			—				3,530
Decrease in Emdeon Inc. paid-in capital for issuance of 2,537,325 EBS Units to management			—				(11,979	)
Increase in Emdeon Inc. paid-in capital for the issuance of 349,166 EBS Units			—				559
Increase in Emdeon Inc. paid-in capital related to exchange of EBS Units held by eRx selling stockholders for shares of Emdeon Inc. Class A common stock			—				21,919
Increase in Emdeon Inc. paid-in capital related to the issuance of 10,354,240 EBS Units			—				13,799
Decrease in Emdeon Inc. paid-in capital for purchase of 370,760 EBS Units from management			—				(1,115	)
Net transfers (to) from noncontrolling interest			—				26,713
Change from net income attributable to Emdeon Inc. and transfers (to) from noncontrolling interest		$	5,136			$	33,153

11. Equity-Based Compensation Plans

     Prior to the IPO, certain employees and directors of the Company participated in one of two equity-based compensation plans—the Amended and Restated EBS Executive Equity Incentive Plan (the “EBS Equity Plan”) and the Amended and Restated EBS Incentive Plan (the “EBS Phantom Plan”). In connection with the IPO, outstanding awards under the EBS Phantom Plan were converted into awards under the 2009 Equity Incentive Plan adopted by the Company’s stockholders in July 2009 (the “2009 Plan”) and outstanding awards under the EBS Equity Plan were converted into EBS Units that are governed by individual agreements with certain directors and members of executive management (“Management Awards”), as well as awards under the 2009 Plan.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

EBS Equity Plan

     The EBS Equity Plan consisted of a class of non-voting EBS Master equity units called Grant Units. The Grant Units represented profits interests in EBS Master. The Grant Units appreciated with increases in value of EBS Master. All Grant Units were issued by a separate legal entity, EBS Executive Incentive Plan LLC, which was created for this sole purpose and held no other assets. The Grant Units generally vested ratably over a four or five year period. For all awards granted prior to May 26, 2009, EBS Master had the right, but not the obligation, to repurchase any employee’s vested units on termination of employment. If EBS Master exercised this repurchase right, the employee would receive a cash payment based on a formula specified in the EBS Equity Plan.

     Awards under the EBS Equity Plan were historically accounted for as liabilities due to certain repurchase features and were recorded at fair value at the end of each reporting period in accordance with the vesting schedule. On June 26, 2009, the Company modified the terms of each of the awards to remove the Company’s ability to repurchase the Grant Units within six months of vesting and to require that any repurchases following this six-month period be at fair value. As a result of this modification, the Company reclassified all of the Grant Units from liability awards to equity awards. Because the modified terms had no impact on the fair value of the Grant Units and the awards were previously classified as liabilities, compensation expense was measured based on the fair value of the Grant Units at the date of modification. Based on this fair value of the Grant Units, the Company recognized equity compensation of $4,614 at that date which reduced net income for the nine months ended September 30, 2009. No incremental compensation expense was recognized specifically as a result of the modification.

     In connection with the reorganization transactions, the Grant Units converted into (i) vested and unvested EBS Units (together with corresponding shares of Class B common stock that have voting, but no economic rights), (ii) options to purchase shares of Class A common stock that vest over three years, and (iii) options to purchase shares of Class A common stock that vest over four years. The options were granted with an exercise price equal to the IPO price. The Company has accounted for this conversion as a modification of the original Grant Unit awards and recognized $1,784 of incremental measured compensation, which will be attributed over the service period of the replacement share-based payment awards.

Performance Awards

     Under the EBS Equity Plan, EBS Master issued 850,000 Grant Units to the Company’s executive chairman that were earned and vested based on both continued employment (ratably over four years) and the attainment of certain financial performance targets with respect to each of the Company’s fiscal years ending December 31, 2011 and 2012. Under the terms of the award, the number of Grant Units that were earned and vested varied based on which, if any, of six specified financial performance targets were satisfied for each of the Company’s fiscal years ending December 31, 2011 and 2012. A maximum of 425,000 Grant Units could have been earned and vested for each of the 2011 and 2012 financial performance targets. In the event the minimum financial performance target for either of 2011 or 2012 years were not achieved, none of the Grant Units would be earned or vest related to that year. The Company recorded no compensation expense related to these awards as no performance conditions had been met.

     In connection with the reorganization transactions, the Grant Units with performance conditions converted into (i) 206,578 unvested EBS Units (together with corresponding shares of Class B common stock that have voting, but no economic rights) and (ii) 643,422 options to purchase shares of Class A common stock with an exercise price equal to the IPO price that vest over three years. The Company has accounted for this conversion as a modification of the original Grant Unit award.

EBS Phantom Plan

     The EBS Phantom Plan was designed to allow individual employees to participate economically in the future growth and value creation of EBS LLC. Each participant received a specified number of units in the EBS Phantom Plan called Phantom Units. These Phantom Units appreciated with increases in value of EBS Master above amounts specified in the respective employee’s grant agreements. These Phantom Units did not give employees an ownership interest and had no voting rights.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

     The Phantom Units generally vested ratably over a four or five year vesting period following the date of grant. Upon a realization event, as defined in the EBS Phantom Plan, the holders of these Phantom Units would receive consideration based on the product of the number of Phantom Units earned at the time of the realization event and a formula as defined in the EBS Phantom Plan. EBS Master had the right, but not the obligation, to repurchase any employee’s vested Phantom Units on termination of employment. If EBS Master exercised this repurchase right, the employee received a cash payment as defined in the EBS Phantom Plan. The Company accounted for these awards as liabilities due to the existence of these repurchase features. As a result, compensation expense was remeasured at the end of each reporting period.

     In connection with the reorganization transactions, the Phantom Units converted, depending on vesting status, into (i) shares of Class A common stock, (ii) restricted Class A common stock units and (iii) options to purchase shares of Class A common stock with an exercise price equal to the IPO price that vest over three years. The Company has accounted for this conversion as a modification of the original Phantom Unit awards. In connection with this modification, the Company calculated the final measurement of the liability at the IPO date and recognized a change in estimate for the proportion of the Phantom Units for which the requisite service had been rendered as of the IPO date. This change in estimate resulted in an increase to stock compensation expense of $9,209 for the nine months ended September 30, 2009.

     A summary of the status of unvested Grant Units and Phantom Units under the EBS Equity Plan and EBS Phantom Plan, respectively, as of December 31, 2008, and changes during the nine months ended September 30, 2009, is presented below:

						Grant Units
						with
						performance				Phantom
		Grant Units				conditions				Units
Unvested at December 31, 2008:			2,834,355				—				1,284,133
Granted			621,663				850,000				662,500
Canceled			(3,342,645	)			(850,000	)			(1,899,833	)
Vested			(113,373	)			—				(46,800	)
Unvested at September 30, 2009			—				—				—

2009 Plan and Management Awards

     The Company reserved 17,300,000 shares of Class A common stock for issuance to employees, directors and consultants under the 2009 Plan adopted in July 2009. The equity granted pursuant to the 2009 Plan and Management Awards replaced outstanding awards under the EBS Equity Plan and EBS Phantom Plan. The Management Awards included 2,537,325 vested and unvested EBS Units (206,578 of these units are subject to performance conditions). The replacement awards issued under the 2009 Plan included (i) 349,166 shares of Class A common stock, (ii) 733,598 restricted Class A common stock units, (iii) options to purchase 4,213,260 shares of Class A common stock that vest over three years (including options to purchase 643,422 shares of Class A common stock subject to performance conditions), and (iv) options to purchase 448,300 shares of Class A common stock that vest over four years. As these awards were issued in connection with the conversion of the Grant Units and Phantom Units, the fair value was derived from the allocation of the remaining compensation expense previously associated with the Grant Units and Phantom Units to the respective share based payments received (i.e., EBS Units, restricted Class A common stock units, shares of Class A common stock, three year options and four year options) on a relative fair value basis.

     In addition to the awards issued in connection with the conversion of the Grant Units and Phantom Units, the Company issued options to purchase 652,000 shares of Class A common stock of the Company that vest over four years.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

EBS Units and RSUs

     The EBS Units (and corresponding shares of Class B common stock) and restricted Class A common stock units issued in connection with the conversion of the Grant Units and Phantom Units vest in accordance with the original vesting schedule of the applicable Grant Units and Phantom Units. Upon vesting, the EBS Units, together with the corresponding shares of Class B common stock, are exchangeable for Class A common stock on a one-for-one basis. Upon vesting, restricted Class A common stock units convert into Class A common stock.

     As of September 30, 2009, there was $22,771 of total unrecognized compensation expense related to unvested EBS Units and restricted Class A common stock units. This expense is expected to be recognized over a weighted average period of 2.6 years. The total fair value of the EBS Units and restricted Class A common stock units vested during the nine months ended September 30, 2009 was $14,576.

Options to Purchase Shares of Class A Common Stock

     Options to purchase shares of Class A common stock were granted under the 2009 Plan in connection with the IPO both in connection with the conversion of the Grant Units and Phantom Units, and as awards to certain employees and directors of the Company. Option awards are generally granted with an exercise price equal to the market price of the Class A common stock on the date of grant. The fair value of the options issued in connection with the conversion of the Grant Units and Phantom Units was derived by the allocation of the remaining compensation expense associated with the Grant Units and Phantom Units to the converted awards on a relative fair value basis. The Company calculated the fair value of the new options granted under the 2009 Plan in connection with the IPO using the Black-Scholes option pricing model.

     As of September 30, 2009, unrecognized compensation expense related to options granted under the 2009 Plan was $19,505. This expense is expected to be recognized over a weighted average period of 3.5 years.

Performance Awards

     The Company issued 206,578 unvested EBS Units and options to purchase 643,422 shares of Class A common stock that vest over three years in connection with the conversion of Grant Units with performance conditions held by the Company’s executive chairman. The replacement awards issued are subject to the same financial target performance condition as the Grant Units. The unvested EBS Units and options are earned and vest based upon continued employment and the attainment of certain financial performance objectives. The fair value of these awards was derived consistent with other converted awards by the allocation of the remaining compensation expense of the Grant Units with performance conditions based on relative fair value of the share based payments issued.

     The fair value of the unvested EBS Units that are subject to performance conditions issued during the nine-month period ended September 30, 2009 was $11.01 per unit. The Company has recorded no compensation expense related to these awards as no performance conditions have been met to date. As of September 30, 2009, there was $2,274 of total unrecognized compensation expense related to unvested EBS Units that are subject to performance conditions.

     The fair value of options granted during the nine-month period ended September 30, 2009 that are subject to performance conditions was $5.26 per option. The Company has recorded no compensation expense related to these awards as no performance conditions have been met to date. As of September 30, 2009, there was $3,387 of total unrecognized compensation expense related to options that are subject to performance conditions.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

Unvested EBS Units and Restricted Class A common stock Unit Activity

     A summary of the status of unvested EBS Units issued pursuant to the Management Awards and restricted Class A common stock units issued under the 2009 Plan as of December 31, 2008, and changes during the nine months ended September 30, 2009, is presented below:

						EBS Units				Restricted
						with				Class A
						performance				common
		EBS Units				conditions				stock units
Unvested at December 31, 2008:			—				—				—
Granted			1,527,354				206,578				733,598
Canceled			—				—				—
Vested			(12,139	)			—				(2,632	)
Unvested at September 30, 2009			1,515,215				206,578				730,966

Option Activity

     A summary of option activity under the 2009 Plan for the nine months ended September 30, 2009 is presented below:

																		Weighted Average
										Weighted Average								Remaining Contractual
		Options								Exercise Price								Term								Aggregate Intrinsic Value
		Service				Performance				Service				Performance				Service				Performance				Service				Performance
		Options				Options				Options				Options				Options				Options				Options				Options
Outstanding at January 1, 2009			—				—			$	—			$	—				—				—			$	—			$	—
Replacement of cancelled awards			4,018,138				643,422				15.50				15.50				9.9				9.9				2,813				450
Granted			652,000				—				15.50				—				9.9				—				456				—
Forfeited			—				—																				—				—
Outstanding at September 30, 2009			4,670,138				643,422			$	15.50			$	15.50				9.9				9.9			$	3,269			$	450
Vested at September 30, 2009			—				—			$	—			$	—				—				—			$	—			$	—
Exercisable at September 30, 2009			—				—			$	—			$	—				—				—			$	—			$	—

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

Black-Scholes Option Pricing Model Assumptions

     The following table summarizes the weighted average fair values of awards valued using the Black-Scholes option pricing model and the weighted average assumptions used to develop the fair value estimates under each of the valuation models for the nine months ended September 30, 2009 and 2008:

										EBS Equity Plan
										Grant Units
										with
										performance				2009 Equity
		EBS Equity Plan Grant Units								conditions				Plan Options
		Nine months				Nine months				Nine months				Nine months
		ended				ended				ended				ended
		September 30,				September 30,				September 30,				September 30,
		2008				2009				2009				2009
Weighted average fair value		$	7.09			$	8.51			$	6.66			$	7.55
Expected dividend yield			—				—				—				—
Expected volatility			56.00	%			47.00	%			47.00	%			47.00	%
Risk-free interest rate			1.54	%			2.50	%			2.30	%			2.53	%
Expected term (years)			0.47				5.6				6.4				6.25

     Expected dividend yield — This is an estimate of the expected dividend yield on the Class A common stock/EBS Units. The Company is subject to limitations on the payment of dividends under its credit facilities as further discussed in Note 6 to the unaudited condensed consolidated financial statements. An increase in the dividend yield will decrease compensation expense.

     Expected volatility — This is a measure of the amount by which the price of the Class A common stock/EBS Units has fluctuated or is expected to fluctuate. The expected volatilities are based upon the median historical volatility of a group of peer companies, as the Class A common stock/EBS Units has not been publicly traded for a period sufficient to estimate expected volatility. An increase in the expected volatility will increase compensation expense.

     Risk-free interest rate — This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the award. An increase in the risk-free interest rate will increase compensation expense.

     Expected term — This is the period of time over which the awards are expected to remain outstanding. The Company estimates the expected term as the mid-point between the vesting date and the contractual term. An increase in the expected term will increase compensation expense.

     During the three months and nine months ended September 30, 2008 and 2009, the Company recognized expense of $749, $12,554, $5,813 and $21,499, respectively, in the aggregate related to these equity-based compensation plans.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

12. Income Taxes

     Income taxes for the three month and nine month periods ended September 30, 2008 and 2009 amounted to an expense of $3,512, $9,245, $11,202 and $12,885, respectively. The Company’s effective tax rate was 58.1% for the nine months ended September 30, 2009 compared with 59.1% during the same period in 2008. The Company’s effective tax rate is affected by deferred tax expense resulting from differences between the book and income tax basis of its investment in EBS Master. During the nine months ended September 30, 2009, the Company reduced the amount of valuation allowance recorded against federal net operating losses by $11,835 due to a change in estimate of future utilization by management. Additionally, this benefit was partially offset by an increase in the state income tax valuation allowance related to a consolidated subsidiary in the amount of $3,712. The Company has recorded a valuation allowance against $227,082 of state net operating losses as of September 30, 2009.

     The Company recognized a $2,532 increase in its liability for uncertain tax positions during the nine months ended September 30, 2009 which was comprised of $1,372 related to state net operating losses (recorded as an adjustment to the valuation allowance) and $1,160, that if recognized, would affect the effective income tax rate.

     A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Unrecognized benefit January 1, 2009		$	2,321
Increase in nine month period ended September 30, 2009			2,532
Unrecognized benefit September 30, 2009		$	4,853

     The Company does not currently anticipate that the total amount of unrecognized tax positions will significantly increase or decrease in the next twelve months. The Company’s U.S. federal and state income tax returns for tax years 2006 and beyond remain subject to examination by the Internal Revenue Service.

     The Company’s policy is to record interest and penalties as a part of tax provision expense. Due to the existence of net operating losses, no interest or penalties have been recognized in the periods shown.

13. Tax Receivable Agreement Obligation to Related Parties

     In connection with the IPO, the Company entered into tax receivable agreements which obligate the Company to make payments to certain parties affiliated with General Atlantic and H&F and former Grant Unit holders generally equal to 85% of the applicable cash savings that the Company realizes as a result of tax attributes arising from the 2006 Transaction, the 2008 Transaction and exchanges of EBS Units for cash or shares of Class A common stock. The Company will retain the benefit of the remaining 15% of these tax savings.

     All future exchanges of EBS Units for cash or shares of Class A common stock related to the affiliates of H&F and the former Grant Unit holders who are parties to the tax receivable agreements are expected to result in an additional tax receivable obligation for the Company with a corresponding offset to the Company’s additional paid in capital account. Subsequent adjustments of the tax receivable obligations due to certain events (e.g. realization of net operating losses, tax rate changes or the timing of cash settlement obligations) are expected to result in a corresponding adjustment of the Company’s net income.

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

14. Net Income (Loss) Per Share

     The following table sets forth the computation of basic and diluted net income (loss) per share of Class A common stock:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2009				2008				2009
Basic net income (loss) per share:
Numerator:
Net income (loss) attributable to Emdeon Inc.		$	(1,245	)		$	(7,217	)		$	5,136			$	6,440
Denominator:
Weighted average common shares outstanding			77,413,610				84,522,085				73,889,095				79,809,140
Basic net income (loss) per share		$	(0.02	)		$	(0.09	)		$	0.07			$	0.08
Diluted net income (loss) per share:
Numerator:
Net income (loss) attributable to Emdeon Inc.		$	(1,245	)						$	5,136
Net loss excluding EBS Master			—			$	(3,346	)			—			$	(3,804	)
Weighted average effect of dilutive securities
Add:
Emdeon Inc. allocation of EBS Master net income (loss)			—				(4,011	)			—				10,169
Impact of exchange of Class B shares on income attributable to Emdeon Inc.			—				—				—				—
		$	(1,245	)		$	(7,357	)		$	5,136			$	6,365
Denominator:
Number of shares used in basic computation			77,413,610				84,522,085				73,889,095				79,809,140
Weighted average effect of dilutive securities
Add:
Restricted Class A common stock units			—				—				—				47,448
			77,413,610				84,522,085				73,889,095				79,856,588
Diluted net income (loss) per share		$	(0.02	)		$	(0.09	)		$	0.07			$	0.08

     Due to their antidilutive effect, the following securities have been excluded from diluted net income (loss) per share for the respective periods:

		Three Months				Three Months				Nine Months				Nine Months
		Ended				Ended				Ended				Ended
		September 30,				September 30,				September				September
		2008				2009				30, 2008				30, 2009
Class B common stock			22,586,390				23,658,441				26,110,905				22,947,667
Options to purchase Class A common stock			—				2,588,881				—				872,443
Restricted Class A common stock units			—				142,344				—				—

Emdeon Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited and amounts in thousands, except share and per share amounts)

15. Loss on Abandonment of Leased Properties

     In September 2009, the Company paid a fee of $241 for early termination of a lease in Jessup, Maryland. The Company expects to cease use of the property by the end of 2009. During December 2008, the Company ceased use of property subject to operating leases in Nashville, Tennessee and Scottsdale, Arizona.

     The following table summarizes the activity related to these contract termination costs:

Balance at December 31, 2008		$	3,203
Costs incurred			742
Costs paid or otherwise settled			(1,842	)
Balance at September 30, 2009		$	2,103