RURAL/METRO CORP /DE/ - FORM 10-Q

Attached files

file	filename
EX-31.1 - PRESIDENT AND CEO CERTIFICATION - RURAL/METRO CORP /DE/	dex311.htm
EX-31.2 - SR VP AND CFO CERTIFICATION - RURAL/METRO CORP /DE/	dex312.htm
EX-32.1 - CERTIFICATION PURSUANT TO 18 USC SEC 1350 -- PRESIDENT AND CEO - RURAL/METRO CORP /DE/	dex321.htm
EX-32.2 - CERTIFICATION PURSUANT TO 18 USC SEC 1350 -- SR. VP AND CFO - RURAL/METRO CORP /DE/	dex322.htm

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 March 31, 2010

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

For the transition period from to

Commission file number 0-22056

Rural/Metro Corporation

(Exact Name of Registrant as Specified in Its Charter)

Delaware

86-0746929

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

9221 East Via de Ventura, Scottsdale, Arizona 85258

(Address of Principal Executive Offices) (Zip Code)

Registrant’s telephone number, including area code: (480) 606-3886

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 ¨ No ¨

Indicate by check mark whether 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.

Large accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company x

(Do not check if smaller

reporting company)

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

There were 25,254,400 shares of the registrant’s Common Stock outstanding on May 4, 2010.

RURAL/METRO CORPORATION

INDEX TO QUARTERLY REPORT

ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED

March 31, 2010


		Page
Part I. Financial Information
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Changes in Stockholders’ Deficit	5
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	42
Item 4.	Controls and Procedures	43
Part II. Other Information
Item 1.	Legal Proceedings	43
Item 6.	Exhibits	44
Signatures		45

Part I. Financial Information

Item 1.

Financial Statements

RURAL/METRO CORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited)

(in thousands, except share data)


	March 31, 2010			June 30, 2009
ASSETS
Current assets:
Cash and cash equivalents	$	33,137		$	37,108
Accounts receivable, net		59,788			64,355
Inventories		7,802			8,535
Deferred income taxes		24,407			25,032
Prepaid expenses and other		4,945			19,895

Total current assets		130,079			154,925
Property and equipment, net		48,487			49,096
Goodwill		37,700			37,700
Restricted cash		17,842			—
Deferred income taxes		41,669			41,678
Other assets		10,465			11,556

Total assets	$	286,242		$	294,955

LIABILITIES AND DEFICIT
Current liabilities:
Accounts payable	$	16,027		$	14,883
Accrued liabilities		51,322			57,588
Deferred revenue		21,323			21,585
Current portion of long-term debt		2,675			199

Total current liabilities		91,347			94,255
Long-term debt, net of current portion		266,373			277,110
Other long-term liabilities		29,436			28,497

Total liabilities		387,156			399,862

Commitments and contingencies (Note 12)
Rural/Metro stockholders’ deficit:
Common stock, $0.01 par value, 40,000,000 shares authorized, 25,248,400 and 24,852,726 shares issued and outstanding at March 31, 2010 and June 30, 2009, respectively		252			248
Additional paid-in capital		156,533			155,187
Treasury stock, 96,246 shares at both March 31, 2010 and June 30, 2009		(1,239	)		(1,239	)
Accumulated other comprehensive loss		(2,592	)		(2,597	)
Accumulated deficit		(256,423	)		(258,331	)

Total Rural/Metro stockholders’ deficit		(103,469	)		(106,732	)
Noncontrolling interest		2,555			1,825

Total deficit		(100,914	)		(104,907	)

Total liabilities and deficit	$	286,242		$	294,955

See accompanying notes

RURAL/METRO CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)


	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
Net revenue	$	133,137		$	123,865		$	396,909		$	364,911

Operating expenses:
Payroll and employee benefits		79,951			75,980			241,830			225,113
Depreciation and amortization		3,814			3,605			11,445			10,514
Other operating expenses		31,449			28,033			90,068			84,618
General/auto liability insurance expense		3,396			4,856			11,981			10,618
Gain on sale of assets		(113	)		(165	)		(515	)		(404	)

Total operating expenses		118,497			112,309			354,809			330,459

Operating income		14,640			11,556			42,100			34,452
Interest expense		(7,116	)		(7,749	)		(21,761	)		(23,325	)
Interest income		38			107			169			255
Loss on debt extinguishment		(312	)		—			(14,154	)		—

Income from continuing operations before income taxes		7,250			3,914			6,354			11,382
Income tax provision		(2,664	)		(2,090	)		(2,315	)		(6,385	)

Income from continuing operations		4,586			1,824			4,039			4,997
Loss from discontinued operations, net of income taxes		(232	)		(260	)		(501	)		(848	)

Net income		4,354			1,564			3,538			4,149
Net income attributable to noncontrolling interest		(595	)		(577	)		(1,630	)		(1,319	)

Net income attributable to Rural/Metro	$	3,759		$	987		$	1,908		$	2,830

Income (loss) per share:
Basic -
Income from continuing operations attributable to Rural/Metro	$	0.16		$	0.05		$	0.10		$	0.15
Loss from discontinued operations attributable to Rural/Metro		(0.01	)		(0.01	)		(0.02	)		(0.04	)

Net income attributable to Rural/Metro	$	0.15		$	0.04		$	0.08		$	0.11

Diluted -
Income from continuing operations attributable to Rural/Metro	$	0.16		$	0.05		$	0.10		$	0.15
Loss from discontinued operations attributable to Rural/Metro		(0.01	)		(0.01	)		(0.02	)		(0.04	)

Net income attributable to Rural/Metro	$	0.15		$	0.04		$	0.08		$	0.11

Average number of common shares outstanding - Basic		25,247			24,843			25,057			24,830

Average number of common shares outstanding - Diluted		25,450			24,897			25,325			24,907

See accompanying notes

RURAL/METRO CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

AND COMPREHENSIVE INCOME

(unaudited)

(in thousands, except share amounts)


	Rural/Metro Stockholders’ Deficit
	Number of Shares	Common Stock		Additional Paid-in Capital		Treasury Stock			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Rural/Metro Stockholders’ Deficit			Noncontrolling Interest			Total
Balance at June 30, 2009	24,852,726	$	248	$	155,187	$	(1,239	)	$	(258,331	)	$	(2,597	)	$	(106,732	)	$	1,825		$	(104,907	)
Share-based compensation expense	—		—		391		—			—			—			391			—			391
Net common stock issued under share-based compensation plans	395,674		4		426		—			—			—			430			—			430
Tax benefit from share-based compensation	—		—		529		—			—			—			529			—			529
Distributions to noncontrolling shareholders	—		—		—		—			—			—			—			(900	)		(900	)
Comprehensive income, net of tax:
Net income	—		—		—		—			1,908			—			1,908			1,630			3,538
Other comprehensive income, net of tax	—		—		—		—			—			5			5			—			5

Comprehensive income																1,913			1,630			3,543

Balance at March 31, 2010	25,248,400	$	252	$	156,533	$	(1,239	)	$	(256,423	)	$	(2,592	)	$	(103,469	)	$	2,555		$	(100,914	)

See accompanying notes

RURAL/METRO CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT

AND COMPREHENSIVE INCOME

(unaudited)

(in thousands, except share amounts)


	Rural/Metro Stockholders’ Deficit
	Number of Shares	Common Stock		Additional Paid-in Capital		Treasury Stock			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Rural/Metro Stockholders’ Deficit			Noncontrolling Interest			Total
Balance at June 30, 2008	24,822,726	$	248	$	154,918	$	(1,239	)	$	(263,357	)	$	(439	)	$	(109,869	)	$	1,966		$	(107,903	)
Share-based compensation expense	—		—		185		—			—			—			185			—			185
Net common stock issued under share-based compensation plans	20,000		—		2		—			—			—			2			—			2
Distributions to noncontrolling shareholders	—		—		—		—			—			—			—			(500	)		(500	)
Comprehensive income, net of tax:
Net income	—		—		—		—			2,830			—			2,830			1,319			4,149
Other comprehensive income, net of tax	—		—		—		—			—			29			29			—			29

Comprehensive income																2,859			1,319			4,178

Balance at March 31, 2009	24,842,726	$	248	$	155,105	$	(1,239	)	$	(260,527	)	$	(410	)	$	(106,823	)	$	2,785		$	(104,038	)

See accompanying notes

RURAL/METRO CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)


	Nine Months Ended March 31,
	2010			2009
Cash flows from operating activities:
Net income	$	3,538		$	4,149
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation and amortization		11,566			10,871
Non-cash adjustments to insurance claims reserves		2,149			129
Accretion of 12.75% Senior Discount Notes		7,769			7,334
Accretion of Term Loan due 2014		325			—
Deferred income taxes		1,160			3,790
Excess tax benefits from share-based compensation		(529	)		—
Amortization of debt issuance costs		1,280			1,632
Non-cash loss on debt extinguishment		2,345			—
Loss on disposal of property and equipment		48			58
Gain on property insurance settlement		(119	)		—
Share-based compensation expense		391			185
Change in assets and liabilities -
Accounts receivable		4,567			6,713
Inventories		733			(417	)
Prepaid expenses and other		1,876			3,240
Other assets		(4,053	)		724
Accounts payable		(197	)		(1,921	)
Accrued liabilities		6,346			1,769
Deferred revenue		(262	)		(380	)
Other liabilities		(596	)		(589	)

Net cash provided by operating activities		38,337			37,287

Cash flows from investing activities:
Capital expenditures		(9,391	)		(12,485	)
Proceeds on property insurance settlement		119			—
Proceeds from the sale/disposal of property and equipment		8			—
Increase in restricted cash		(17,842	)		—

Net cash used in investing activities		(27,106	)		(12,485	)

Cash flows from financing activities:
Payments on Term Loan B		(66,000	)		(12,000	)
Payments on Senior Subordinated Notes		(125,000	)		—
Payments on Term Loan due 2014		(450	)		—
Payments on other debt and capital leases		(174	)		(399	)
Borrowings under Term Loan due 2014		178,200			—
Debt issuance costs		(1,837	)		—
Excess tax benefits from share-based compensation		529			—
Net proceeds from issuance of common stock under share-based compensation plans		430			2
Distributions to noncontrolling interest		(900	)		(500	)

Net cash used in financing activities		(15,202	)		(12,897	)

Increase (decrease) in cash and cash equivalents		(3,971	)		11,905
Cash and cash equivalents, beginning of period		37,108			15,907

Cash and cash equivalents, end of period	$	33,137		$	27,812

Supplemental disclosure of non-cash operating activities:
Increase (decrease) in current assets and accrued liabilities for general liability insurance claim	$	(13,073	)	$	1,334

Supplemental disclosure of non-cash investing and financing activities:
Property and equipment funded by liabilities	$	1,907		$	1,656

Supplemental cash flow information:
Cash paid for interest	$	14,181		$	17,503

Cash paid for income taxes, net	$	1,538		$	806

See accompanying notes

RURAL/METRO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Organization and Basis of Presentation

Description of Business

Rural/Metro Corporation, a Delaware corporation, along with its subsidiaries (collectively, the “Company” or “Rural/Metro”) is a leading provider of both emergency and non-emergency ambulance services. These services are provided under contracts with governmental entities, hospitals, nursing homes and other healthcare facilities and organizations. The Company also provides fire protection and related services on a subscription fee basis to residential and commercial property owners and under long-term contracts with fire districts, industrial sites and airports. These services consist primarily of fire suppression, fire prevention and first responder medical care.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s consolidated financial position and results of operations. The results of operations for the three and nine months ended March 31, 2010 are not necessarily indicative of the results of operations for the full fiscal year.

The notes to the accompanying unaudited consolidated financial statements are presented to enhance the understanding of the financial statements and do not necessarily represent complete disclosures required by GAAP. As such, these consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the fiscal year ended June 30, 2009, which are included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on September 9, 2009.

Reclassifications of Financial Information

The accompanying consolidated financial statements for the three and nine months ended March 31, 2010 and 2009 reflect certain reclassifications for the adoption of the new accounting guidance related to noncontrolling interests as described below in Note 2 and discontinued operations as described in Note 12. These reclassifications have no effect on previously reported net income (loss).

New Accounting Policies

Restricted Cash

The Company classifies cash and cash equivalents which are restricted for use by contractual obligations or the Company’s intentions as restricted cash. The restricted cash is classified as current or noncurrent on the Company’s Consolidated Balance Sheets based on the expected timing of the expiration or termination of the contractual restriction or in the case of the Company’s intent, the expected timing of the use of the restricted cash. The Company classifies changes in restricted cash on its Consolidated Statements of Cash Flows as an investing activity due to the restricted cash placement in interest-bearing accounts. Refer to Note 6 for a further discussion of restricted cash transactions.

Derivatives and Hedging

The Company may utilize derivative financial instruments to reduce its exposure to certain market risks such as interest rate risk and fuel price risk. All derivative instruments are recognized on the Company’s Consolidated Balance Sheet at fair value. The Company formally documents all derivative instruments designated as hedging instruments. The effective portion of the gain or loss on derivative instruments designated as cash flow hedges is recorded in other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Other gains or losses on derivative instruments are recognized in current earnings. Refer to Note 5 for a detailed discussion of derivative instruments.

(2) Recent Accounting Pronouncements

In February 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-09, Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”). ASU 2010-09 reiterates that an SEC filer is required to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. The updated guidance was effective upon issuance. The Company adopted the ASU in the third quarter of fiscal 2010. The adoption did not have a material effect on the Company’s consolidated financial statements and related disclosures.

In January 2010, the FASB issued ASU 2010-06, Improving Disclosures About Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The ASU is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures for Level 3 activity which are effective for interim reporting periods for fiscal years beginning after December 15, 2010. Accordingly, the Company adopted the ASU in the third quarter of fiscal 2010, except for the disclosures for Level 3 activity which are not yet required. The adoption of the ASU did not have a material impact on the Company’s consolidated financial statements and related disclosures. The Company does not expect that the adoption of the Level 3 activity disclosures will have a material impact on its consolidated financial statements and related disclosures. See Note 3 for a discussion of the fair value of the Company’s assets and liabilities.

In December 2009, the FASB issued ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). ASU 2009-17 amends ASC 810, Consolidation to include the new guidance issued in August 2009 that changes the accounting and disclosure requirements for the consolidation of variable interest entities (“VIE”). The ASU changes the approach to determining the primary beneficiary of a VIE and requires entities to more frequently assess whether they must consolidate VIEs. The ASU is effective for annual periods beginning after November 15, 2009. Accordingly, the Company will adopt the ASU in fiscal 2011. The Company is currently evaluating the impact of the ASU on its consolidated financial statements and related disclosures.

In September 2009, the FASB issued ASU 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) (“ASU 2009-12”). ASU 2009-12 permits the use of net asset value per share as a practical expedient for measuring fair value of certain investments. The ASU also requires disclosures by major category of these investments. ASU 2009-12 is effective for interim and annual reporting periods ending after December 15, 2009, with early adoption permitted. The Company adopted the ASU in the second quarter of fiscal 2010 and the adoption did not have a material effect on its consolidated financial statements and related disclosures.

In August 2009, the FASB issued ASU 2009-05, Measuring Liabilities at Fair Value (“ASU 2009-05”). ASU 2009-05 clarifies how the fair value of liabilities should be measured and establishes a hierarchy for using different valuation methods. This ASU is effective for the first interim reporting period beginning after August 26, 2009. The Company adopted the ASU in the second quarter of fiscal 2010 and the adoption did not have a material effect on its consolidated financial statements and related disclosures.

In December 2008, the FASB issued a staff position that provides additional guidance regarding annual disclosures about plan assets of defined benefit pension or other postretirement plans. The additional guidance is codified under ASC 715-20-65. This additional guidance is effective for financial statements issued for fiscal years ending after December 15, 2009. Accordingly, the Company has adopted the additional guidance for fiscal year 2010 and will comply with the disclosure requirements for its annual consolidated financial statements. The Company is currently evaluating the disclosure impact of adopting this guidance on its annual consolidated financial statements and related disclosures.

In December 2007, the FASB issued new guidance on business combinations. The new guidance is codified under ASC 805, Business Combinations. The new guidance establishes accounting standards for all transactions or other events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree) including mergers and combinations achieved without the transfer of consideration. The new guidance requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Goodwill is measured as the excess of consideration transferred plus the fair value of any noncontrolling interest in the acquiree over the fair value of the identifiable net assets acquired. In the event that the fair value of the identifiable net assets acquired exceeds the fair value of the consideration transferred plus any noncontrolling interest (referred to as a “bargain purchase”). The new guidance requires the acquirer to recognize that excess in earnings as a gain attributable to the acquirer. In addition, the new guidance requires costs incurred to effect a business combination to be recognized separately from the business combination and requires the recognition of assets or liabilities arising from noncontractual contingencies as of the acquisition date only if it is more likely than not that they meet the definition of an asset or liability in FASB Concepts Statement No. 6, Elements of Financial Statements. The new guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which for the Company is fiscal year 2010. The Company’s adoption of the new guidance did not have a material effect on its consolidated financial statements and related disclosures.

In December 2007, the FASB issued new guidance that establishes accounting and reporting standards for the noncontrolling interest (previously referred to as minority interest) in a subsidiary and for the deconsolidation of a subsidiary. The new guidance is codified under ASC 810-10-65. Specifically, the new guidance establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation by requiring that ownership transactions not resulting in deconsolidation be accounted for as equity with no gain or loss recognition in the income statement. The new guidance also requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated, which is the date the parent ceases to have a controlling

financial interest in the subsidiary. The new guidance, which was effective for the Company on July 1, 2009, was applied prospectively upon adoption except for the presentation and disclosure provisions, which require retrospective application for all periods presented. The presentation provisions require that (1) the noncontrolling interest be reclassified to equity, (2) consolidated net income be adjusted to include the net income attributed to the noncontrolling interest and (3) consolidated comprehensive income be adjusted to include the comprehensive income attributed to the noncontrolling interest. The accompanying unaudited consolidated financial statements reflect the required changes in presentation as described in the preceding sentence.

In September 2006, the FASB issued new guidance that defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. The new guidance is codified under ASC 820, Fair Value Measurements and Disclosures. The new guidance applies to other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, the new guidance does not require any new fair value measurements; however, for some entities, the application of the new guidance will change current practice. The new guidance was effective for the Company on July 1, 2008; however, in February 2008, the FASB issued additional guidance, codified under ASC 820-10, which delayed the effective date of the new guidance for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, for one year. The adoption of the new guidance on July 1, 2008 with respect to the Company’s financial assets and liabilities did not have a material impact on its consolidated financial statements. The adoption of the provisions of the new guidance with respect to its non-financial assets and non-financial liabilities on July 1, 2009 pursuant to the requirements of the additional guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

(3) Fair Value Measurements

Fair value measurements are classified under the following hierarchy:

•

Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets.

•

Level 2: Observable inputs other than quoted prices substantiated by market data and observable, either directly or indirectly, for the asset or liability. This includes quoted prices for similar assets or liabilities in active markets.

•

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate the related fair values due to the short-term maturities of these assets and liabilities.

The Company’s derivative instruments are recorded at fair value. The fair value of the Company’s interest rate cap was calculated based on the quoted prices (Level 2) for the three month caplets which the contract is comprised of. Refer to Note 5 for a detailed discussion of derivative instruments.

The fair value of the Term Loan due 2014 as of March 31, 2010 was based on the quoted market ask price for the loan (Level 2). The fair value of the Senior Discount Notes was determined by reported market transaction prices closest to March 31, 2010 and June 30, 2009 (Level 2). The fair value of the Term Loan B as of June 30, 2009 was based on the quoted market ask price for the loan (Level 2). The fair value of the Senior Subordinated Notes at June 30, 2009 was determined by reported market transaction prices closest to June 30, 2009 (Level 2).

The following is a comparison of the fair value and recorded value of the Company’s long-term debt (in thousands):


	As of
	March 31, 2010				June 30, 2009
	Fair Value		Recorded Value		Fair Value		Recorded Value
Term Loan due December 2014	$	181,800	$	175,079	$	—	$	—
12.75% Senior Discount Notes due March 2016		99,811		93,500		67,320		85,731
Term Loan B due March 2011		—		—		64,680		66,000
9.875% Senior Subordinated Notes due March 2015		—		—		111,250		125,000

(4) General/Auto Liability and Workers’ Compensation Insurance Plans

The Company carries a broad range of insurance policies, including workers’ compensation, general/auto liability, property, professional and other lines of coverage in order to minimize the risk of loss due to accident, injury, automobile and professional liability claims resulting from our operations, and to comply with certain legal and contractual requirements.

The Company retains certain levels of exposure in its general/auto liability and workers’ compensation programs and purchases coverage from third-party insurers for exposures in excess of those levels. In addition to expensing premiums and other costs relating to excess coverage, the Company establishes reserves for claims, both reported and incurred but not reported, on a gross basis. A receivable is recognized for amounts expected to be recovered from insurers in excess of the retention limits. The Company regularly evaluates the financial capacity of its insurers to assess the recoverability of the receivable.

The Company engages third-party administrators (“TPAs”) to manage general/auto liability and workers’ compensation claims. The TPAs estimate a loss reserve at the time a claim is reported and then monitor the development of the claim over time to confirm that such estimates continue to be appropriate. Management periodically reviews its insurance claim reserves and engages its independent actuaries semi-annually, or in interim periods if events or changes in circumstances indicate additional evaluation is necessary, to assist with estimating its claim reserves based on loss reserve estimates provided by the TPAs. The Company adjusts its claim reserves with an associated increase or decrease to expense as new information on the underlying claims is obtained.

Additionally, the Company’s general/auto liability and workers’ compensation insurers require the Company to post collateral to support future expected claim payments. The Company has provided letters of credit as collateral to support retention limits. These letters of credit, issued under the Company’s 2009 Revolving Credit Facility and Cash Collateralized Letter of Credit Facility as discussed in Note 6, totaled $42.2 million at March 31, 2010. Letters of credit outstanding at June 30, 2009, which were issued under the 2005 Revolving Credit Facility, totaled $42.2 million.

General/Auto Liability

The classification of general/auto liability related amounts in the consolidated balance sheets as of March 31, 2010 and June 30, 2009 is as follows (in thousands):


	March 31, 2010		June 30, 2009
Receivables from insurers included in prepaid expenses and other	$	—	$	13,074
Receivables from insurers included in other assets		2,586		2,183

Total general/auto liability related assets		2,586		15,257

Claims reserves included in accrued liabilities		6,027		17,596
Claims reserves included in other liabilities		12,424		11,659

Total general/auto liability related liabilities		18,451		29,255

Net general/auto liability related liabilities	$	15,865	$	13,998

In 2004, an individual filed suit against the Company in the Superior Court of New Jersey for injuries that were allegedly sustained as a result of negligence on the part of the Company. In April 2007, a jury awarded the plaintiff compensatory damages totaling $12.1 million, which included prejudgment interest of $0.5 million. The Company filed a motion to appeal. Interest continued to accrue while on appeal. The Company maintains excess insurance with coverage limits in excess of the award, for the related policy year, under which the excess carrier is liable for the remainder of the claim. In December 2009, the appeal was denied and the claim was paid by the Company’s insurance carriers. The Company had recorded a liability and an offsetting receivable representing the amount due from the insurer of $13.1 million at June 30, 2009. This amount represented the difference between the award plus accrued interest and the self-insured deductible. The liability was classified as a component of accrued liabilities and the receivable was classified as a component of prepaid expenses and other on the consolidated balance sheet as of June 30, 2009. The accrual, including accrued interest, was reversed in the second quarter of fiscal 2010 due to the settlement described above and therefore there are no amounts recorded at March 31, 2010 related to this case.

Workers’ Compensation

The classification of workers’ compensation related amounts in the consolidated balance sheets as of March 31, 2010 and June 30, 2009 is as follows (in thousands):


	March 31, 2010		June 30, 2009
Insurance deposits included in prepaid expenses and other	$	239	$	339
Insurance deposits included in other assets		486		—
Receivables from insurers included in other assets		658		1,291

Total workers’ compensation related assets		1,383		1,630

Claims reserves and premium liabilities included in accrued liabilities		6,207		5,460
Claims reserves included in other liabilities		7,984		7,443

Total workers’ compensation related liabilities		14,191		12,903

Net workers’ compensation related liabilities	$	12,808	$	11,273

(5) Derivative Instruments and Hedging Activities

To reduce its exposure to interest rate risk related to its variable-rate debt, the Company entered into a three-year interest rate cap contract during the third quarter of fiscal 2010. The interest rate cap covers a notional amount of $60.0 million of the 2009 Term Loan (see Note 6). The interest rate cap qualifies for hedge accounting and has been formally designated as a cash flow hedging instrument. The fair value of the instrument is reported on the Company’s Consolidated Balance Sheet. The effective portion of the gain or loss on the instrument is reported as a component of other comprehensive income and reclassified into earnings as interest income/expense in the same periods during which the hedged forecasted transactions affect earnings.

The fair value of the instrument at March 31, 2010 was $0.6 million and is reported in other assets on the Consolidated Balance Sheet. The fair value of the components of the contract that mature within twelve months is reported as prepaid expenses and other and is not significant. For the three and nine months ended March 31, 2010, a decrease in the fair value of the instrument of $0.2 million was recognized in other comprehensive income and no amounts of accumulated other comprehensive income were reclassified into earnings. The Company expects to reclassify $16,000 of existing losses reported in accumulated other comprehensive income to interest expense within the next twelve months. There was no cash flow hedge ineffectiveness for the three and nine months ended March 31, 2010.

(6) Long-term Debt

The following is a summary of the Company’s outstanding long-term debt (in thousands):


	March 31, 2010			June 30, 2009
Term Loan due December 2014	$	175,079		$	—
12.75% Senior Discount Notes due March 2016		93,500			85,731
Term Loan B due March 2011		—			66,000
9.875% Senior Subordinated Notes due March 2015		—			125,000
Other obligations, at varying rates from 5.90% to 14.64%, due through 2013		469			578

Total long-term debt		269,048			277,309
Less: Current maturities		(2,675	)		(199	)

Long-term debt, net of current maturities	$	266,373		$	277,110

2009 Credit Facility

Effective December 9, 2009, the Company, through its wholly-owned subsidiary Rural/Metro Operating Company, LLC (“Rural/Metro LLC”) entered into a transaction whereby the 2005 Credit Facility was terminated. In connection with this transaction a tender offer was also made for the Senior Subordinated Notes. In order to terminate the existing debt Rural/Metro LLC entered into a new five-year $180.0 million term loan and a four-year $40.0 million revolving credit facility with a $25.0 million letter of credit sub-line (“2009 Credit Facility”). The Company and its domestic subsidiaries are guarantors of Rural/Metro LLC’s obligations under the 2009 Credit Facility. Additionally, the Company entered into a cash collateralized letter of credit facility agreement that provides $17.6 million in letters of credit secured by $17.8 million deposited in a restricted account. The Company elected to use the gross method to account for the debt refinancing. As a result of the refinancing, the Company recognized a $13.8 million loss on debt extinguishment in the Consolidated Statement of Operations. The loss on extinguishment of debt was comprised of the write-off of unamortized debt issuance costs related to the Company’s 2005 Credit Facility and the expensing of certain third-party and lender fees, offset by the capitalization of debt issuance costs on the 2009 Credit Facility. The Company called the remaining $4.0 million of Senior Subordinated Notes during the third quarter of fiscal 2010 and recognized additional loss on debt extinguishment of $0.3 million. See Senior Subordinated Notes below.

The loss on debt extinguishment and changes in unamortized debt issuance costs at the date of the transaction (in thousands) are summarized as follows:


	Senior Subordinated Notes			Term Loan B			2005 Revolving Credit Facility			2005 Letter of Credit Facility			2009 Term Loan		2009 Revolving Credit Facility		Cash Collateralized Letter of Credit Facility		Total
Unamortized Debt Issuance Costs	$	2,775		$	547		$	51		$	425		$	—	$	—	$	—	$	3,798
Lender Fees		8,971			—			—			—			1,800		800		—		11,571
Third Party Fees		1,313			95			326			733			4,505		658		21		7,651
Fees Allocated to 2009 Credit Facility		(3,894	)		(494	)		(34	)		(23	)		4,388		57		—		—

Total Debt Refinancing Costs	$	9,165		$	148		$	343		$	1,135		$	10,693	$	1,515	$	21	$	23,020

Loss on Debt Extinguishment		9,076			148			343			1,135			3,140		—		—		13,842
Unamortized Debt Issuance Costs Balance at Transaction Date		89			—			—			—			2,756		1,515		21		4,381
Fees Recorded as Discount		—			—			—			—			4,797		—		—		4,797

2009 Term Loan

The 2009 Credit Facility includes a $180.0 million Term Loan due in December 2014 (“2009 Term Loan”). The 2009 Term Loan bears interest at the LIBOR plus an applicable margin of 5% subject to a LIBOR floor of 2%, or at Rural/Metro LLC’s option, the Alternate Base Rate (“ABR”) as defined in the credit agreement plus an applicable margin of 4% subject to an ABR floor of 3%. In the case of the LIBOR option, whereby the contract periods may be equal to one, two, three or six months from the date of initial borrowing, interest is payable on the last day of each contract period, subject to a maximum payment term of three months. Interest is payable at the end of each quarter in the case of the ABR option. The 2009 Term Loan requires quarterly principal payments totaling 1% of the original Term Loan principal balance in the first year, 5% of the original Term Loan principal balance in the second through fourth years and 10% of the original Term Loan principal balance in the fifth year of the agreement. Additionally, annual principal payments equal to 50% of fiscal year-end excess cash flow, as defined in the credit agreement, are required. The required excess cash flow payments may decrease to 25% or 0% based on the total leverage ratio, as defined in the credit agreement. The 2009 Term Loan may be prepaid without penalty (other than payment of certain losses and expenses incurred by the lender as a result of such prepayment) at any time at the option of Rural/Metro LLC. Based on the required principal payment terms, $2.6 million of the 2009 Term Loan has been classified as current on the Consolidated Balance Sheet as of March 31, 2010. The Company has purchased an interest rate cap as a hedge for $60.0 million of the 2009 Term Loan as discussed in Note 5 above.

The Company capitalized $2.8 million of debt issuance costs related to the 2009 Term Loan which includes the transfer of $1.4 million of unamortized debt issuance costs from the 2005 Credit Facility and $1.4 million of fees incurred with third parties. The Company is amortizing those costs as interest expense over the term of the loan. Additionally, the 2009 Term Loan was issued at a discount of $1.8 million and $3.0 million of lender fees were also recorded as a discount, both of which are being accreted to interest expense over the term of the loan.

At March 31, 2010, all of the outstanding 2009 Term Loan balance was accruing interest at 7.00% per annum under three-month LIBOR contracts.

2009 Revolving Credit Facility

The 2009 Credit Facility includes a $40.0 million revolving credit facility, which matures in December 2013 (“2009 Revolving Credit Facility”). The 2009 Revolving Credit Facility includes a letter of credit sub-line whereby $25.0 million of the facility can be utilized to issue letters of credit. Letters of credit issued under the facility reduce the borrowing capacity on the total facility. Borrowings on the Revolving Credit Facility bear interest at LIBOR plus an applicable margin of 5% subject to a LIBOR floor of 2% or, at Rural/Metro LLC’s option, the ABR as defined in the credit agreement plus an applicable margin of 4% subject to an ABR floor of 3%. In the case of the LIBOR option, whereby the contract periods may be equal to one, two, three or six months from the date of initial borrowing, interest is payable on the last day of each contract period, subject to a maximum payment term of three months. Interest is payable at the end of each quarter in the case of the ABR option. Additionally, Rural/Metro LLC will pay a commitment fee to the Revolving Credit Facility lenders equal to 0.75% on the undrawn revolving commitment, payable quarterly. An administrative fee of $125,000 per year is required to be paid in quarterly installments with the first installment due on the closing date.

Amounts related to outstanding letters of credit issued under the 2009 Revolving Credit Facility bear a participation fee of 5.0% and a fronting fee of 0.25%, payable quarterly.

The Company capitalized $1.5 million of debt issuance costs related to the 2009 Revolving Credit Facility which includes $0.8 million paid to the lenders in the facility and $0.7 million of fees incurred with third parties. The Company is amortizing those costs as interest expense over the term of the facility.

As of March 31, 2010, letters of credit totaling $24.7 million were outstanding under the 2009 Revolving Credit Facility. These letters of credit primarily support the Company’s insurance deductible programs. Aside from the letters of credit issued under the facility, no other amounts were outstanding under the 2009 Revolving Credit Facility at March 31, 2010.

Cash Collateralized Letter of Credit Facility

In addition to the $25.0 million letter of credit sub-line available under the 2009 Revolving Credit Facility, the Company entered into an additional letter of credit agreement (“Cash Collateralized LC Facility”). The initial commitment under the Cash Collateralized LC Facility was $17.6 million and matures on December 9, 2011 (the “Maturity Date”). Letters of credit issued under the agreement expire on the earlier of one year after the date of issuance, renewal or extension up to one year after the Maturity Date (subject to renewal in certain cases). These letters of credit primarily support the Company’s insurance deductible programs.

The Company executed a collateral pledge agreement as a condition to the Cash Collateralized LC Facility. The collateral pledge agreement requires the Company to maintain on deposit an amount equal to the amount of the commitments under the Cash Collateralized LC Facility plus 1.375% for fees and cash reserves. The deposit is maintained in certificate of deposit accounts and will be used as security in the event any of the lenders are required to make a letter of credit disbursement. As of March 31, 2010, the Company had $17.6 million in letters of credit outstanding under the Cash Collateralized LC Facility and $17.8 million in restricted cash on deposit to guarantee those letters of credit. The restricted cash related to the Cash Collateralized LC Facility has been classified as a noncurrent asset on the Consolidated Balance Sheets due to the Company’s intent for the letters of credit to remain outstanding for a period greater than 12 months.

The Company must pay a participation fee of 1.25% of the face amount of the letters of credit, quarterly in arrears, to the administrative agent. The Company also must pay a 0.125% fronting fee to any new lenders if additional lenders enter the agreement.

The Company capitalized $28,000 of debt issuance costs related to the Cash Collateralized LC Facility. The Company is amortizing those costs as interest expense over the term of the facility.

2005 Credit Facility

The Company’s 2005 Credit Facility included a Term Loan B Facility maturing in 2011, a $45.0 million Letter of Credit Facility maturing in 2011 and a $20.0 million Revolving Credit Facility maturing in March 2010, each of which was terminated in conjunction with the Company entering into the 2009 Credit Facility, as discussed above. The Term Loan B Facility, the Letter of Credit Facility and the Revolving Credit Facility are described below.

Term Loan B Facility

During the nine months ended March 31, 2010, the Company made a $10.0 million principal repayment on its Term Loan B and repaid the balance of $56.0 million in connection with its December 2009 refinancing transaction. There were no prepayment penalties or fees associated with the principal repayments under the Term Loan B (other than our reimbursement of certain losses and expenses incurred by the lender as a result of such repayment). In connection with the $10.0 million principal repayment the Company wrote-off $0.1 million of debt issuance costs. In connection with its December 2009 refinancing transaction the Company incurred third-party fees and wrote off the remaining $0.5 million of unamortized debt issuance costs, a portion of which was transferred to the 2009 Term Loan and a portion of which was expensed as extinguishment of debt.

The Term Loan B bore interest at LIBOR plus 3.50% per annum, based on contractual periods from one to six months in length at the option of the Company. Through December 9, 2009, when the entire balance was repaid, all of the outstanding Term Loan B balance was under LIBOR option one-month contracts accruing interest at 3.74% per annum based on the interest rate contracts in effect at that time. At June 30, 2009, all of the outstanding Term Loan B balance was under a LIBOR one-month contract accruing interest at 3.8175% per annum.

Letter of Credit Facility

In connection with its December 2009 refinancing transaction the Company terminated the Letter of Credit Facility. In connection with the termination of the facility, the Company incurred third-party fees and wrote-off the remaining $0.4 million of unamortized debt issuance costs, a portion of which was transferred to the 2009 Credit Facility and a portion of which was expensed as the loss on debt extinguishment. In connection with its December 2009 refinancing transaction the Company transferred its letters of credit under the 2005 Credit Facility to its letter of credit facility sub-line under its 2009 Revolving Credit Facility and its Cash Collateralized Letter of Credit Facility.

The Letter of Credit Facility was available primarily to support and/or replace existing and future insurance deductible arrangements of the Company, Rural/Metro LLC and the Guarantors. The Letter of Credit Facility required the Company to pay a participation fee of 3.50% plus an administrative fee of 0.15% for a total of 3.65% per annum on the total facility payable quarterly. In addition, Rural/Metro LLC was required to pay a fronting fee of 0.125% per annum on issued letters of credit payable quarterly.

Revolving Credit Facility

In connection with its December 2009 refinancing transaction the Company terminated its Revolving Credit Facility under the 2005 Credit Facility. In connection with the termination of the facility, the Company incurred third-party fees and wrote-off the remaining $51,000 of unamortized debt issuance costs, a portion of which was transferred to the 2009 Credit Facility and a portion of which was expensed as the loss on debt extinguishment. The Company’s $20.0 million Revolving Credit Facility included a letter of credit sub-line in the amount of $10.0 million and any letters of credit issued under the sub-line reduced the amount of drawings available under the Revolving Credit Facility by the amount of such letters of credit. A commitment fee of 0.50% was payable on the total undrawn revolving commitment, plus a fronting fee of 0.25% on any letter of credit issued under the sub-line, payable at the end of each quarter.

Senior Subordinated Notes

In the second quarter of fiscal 2010, the Company announced the launch of a tender offer and consent solicitation for its outstanding 9.875% Senior Subordinated Notes. The purchase price per $1,000 principal amount of Senior Subordinated Notes to be paid for each validly tendered Senior Subordinated Note was (1) the redemption price of the Senior Subordinated Notes plus scheduled interest to March 15, 2010, discounted based on a yield to March 15, 2010 that is equal to the sum of (i) the yield on the 4.00% US Treasury note due March 15, 2010, and (ii) a fixed spread of 50 basis points, less (2) an amount equal to the consent payment. Those Senior Subordinated Note holders who tendered on or before the consent date of November 20, 2009 were paid a consent fee of $20 per $1,000 of principal amount of Senior Subordinated Notes. This equated to a payment of $1,074.14 for each $1,000 of principal amount of Senior Subordinated Notes for those tendered on or before the consent date and $1,054.14 for each $1,000 of principal amount of Senior Subordinated Notes tendered subsequent to the consent date. A total of $121.0 million of principal amount of Senior Subordinated Notes were tendered on or before the consent date. None of the remaining Senior Subordinated Notes were tendered after the consent date but prior to the expiration date of December 8, 2009.

In connection with its December 2009 refinancing transaction the Company paid lenders $9.0 million of tender and consent fees, incurred third-party fees and wrote-off $2.8 million of unamortized debt issuance costs, a portion of which was transferred to the 2009 Credit Facility and a portion of which was expensed as debt extinguishment.

The Company used $4.2 million of restricted cash to call the remaining $4.0 million of Senior Subordinated Notes during the third quarter of fiscal 2010. The Company remitted to lenders the $4.0 million outstanding principal plus a call premium of $0.2 million which was equal to 4.938% of the principal balance as required by the terms of the agreement governing such Senior Subordinated Notes. The Company recognized a loss on debt extinguishment of $0.3 million which includes the call premium and the write-off of $0.1 million of unamortized debt issuance costs.

Debt Covenants

The 2009 Credit Facility and the Senior Discount Notes include various financial and non-financial covenants applicable to Rural/Metro LLC as well as quarterly and annual financial reporting obligations.

Specifically, the 2009 Credit Facility requires Rural/Metro LLC and its subsidiaries to meet certain financial tests, including an interest expense coverage ratio, a total leverage ratio, and a senior secured leverage ratio. The 2009 Credit Facility also contains covenants which, among other things, limit the incurrence of additional indebtedness, dividends, transactions with affiliates, asset sales, acquisitions, mergers, prepayments of other indebtedness, liens and encumbrances, capital expenditures, business activities by the Company as a holding company, and other matters customarily restricted in such agreements. The financial covenants related to the Senior Discount Notes are similar to or less restrictive than those under the 2009 Credit Facility. The Company was in compliance with all of the applicable covenants under the 2009 Credit Facility and under the Senior Discount Notes as of March 31, 2010.

(7) Income Taxes

The following table shows the components of the income tax (provision) benefit (in thousands):


	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
Current income tax provision	$	(976	)	$	(369	)	$	(816	)	$	(2,066	)
Deferred income tax provision		(1,623	)		(1,668	)		(1,160	)		(3,795	)

Total income tax provision	$	(2,599	)	$	(2,037	)	$	(1,976	)	$	(5,861	)

Continuing operations provision	$	(2,664	)	$	(2,090	)	$	(2,315	)	$	(6,385	)
Discontinued operations benefit		65			53			339			524

Total income tax provision	$	(2,599	)	$	(2,037	)	$	(1,976	)	$	(5,861	)

The effective tax rates for the three and nine months ended March 31, 2010 for continuing operations were 36.7% and 36.4%, respectively, which differ from the federal statutory rate of 35.0% primarily as a result of the portion of non-cash interest expense related to the Senior Discount Notes which is not deductible for income tax purposes and state income taxes. Additionally, the tax provision for the three and nine months ended March 31, 2010 reflects a $0.6 million benefit related to executive compensation recorded as expense and not deductible in fiscal 2009 that will be deductible in fiscal 2010.

The effective tax rates for the three and nine months ended March 31, 2009 for continuing operations were 53.4% and 56.1%, respectively, which differ from the federal statutory rate of 35.0% primarily as a result of the portion of non-cash interest expense related to the Senior Discount Notes which is not deductible for income tax purposes, non-deductible executive compensation and state income taxes.

Pursuant to Internal Revenue Code Section 382, if the Company underwent an ownership change, the federal net operating loss (“NOL”) carryforward limitations would impose an annual limit on the amount of the taxable income that may be offset by its NOL generated prior to the ownership change. If an ownership change were to occur, the Company may be unable to use a significant portion of its NOL to offset taxable income.

(8) Share-Based Compensation

The Company measures share-based compensation cost at the grant date based on the fair value of the award and recognizes this cost as an expense over the grant recipients’ requisite service periods. The share-based compensation expense that the Company recognized in its Consolidated Statements of Operations by type of award for the three and nine months ended March 31, 2010 and 2009 was as follows (in thousands):


	Three Months Ended March 31,				Nine Months Ended March 31,
	2010		2009		2010		2009
RSU compensation expense	$	66	$	55	$	285	$	151
SAR compensation expense		21		13		106		34

Total share-based compensation expense	$	87	$	68	$	391	$	185

The share-based compensation expense that the Company recognized in its Consolidated Statements of Operations by category for the three and nine months ended March 31, 2010 and 2009 was as follows (in thousands):


	Three Months Ended March 31,				Nine Months Ended March 31,
	2010		2009		2010		2009
Payroll and employee benefits	$	53	$	54	$	325	$	147
Other operating expenses		34		14		66		38

Total share-based compensation expense	$	87	$	68	$	391	$	185

The increase in share-based compensation expense was the result of new awards issued to employees and non-employee directors during fiscal 2010.

As of March 31, 2010, the total unrecognized share-based compensation expense, excluding any forfeiture estimate, was $1.1 million. The remaining unrecognized share-based compensation expense will be recognized over a weighted average period of 2.0 years.

The Company withholds shares to satisfy minimum statutory federal, state and local tax withholding obligations arising from the vesting of RSUs and the exercise of SARs.

(9) Defined Benefit Plan

The Company provides a defined benefit pension plan (the “Plan”) covering eligible employees of one of its subsidiaries, primarily those covered by a collective bargaining arrangement. Eligibility is achieved upon the completion of one year of service, with full vesting achieved after the completion of five years of service.

The following table presents the components of net periodic benefit cost for the three and nine months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
Service cost	$	408		$	270		$	1,224		$	809
Interest cost		124			90			372			269
Expected return on plan assets		(155	)		(147	)		(465	)		(442	)
Net prior service cost amortization (1)		16			16			48			48
Net loss amortization (2)		63			—			189			—

Net periodic benefit cost	$	456		$	229		$	1,368		$	684

(1)

In Note 11, the amortization of prior service cost from accumulated other comprehensive income (loss) is net of an income tax provision of $6,000 for both the three months ended March 31, 2010 and 2009 and net of an income tax provision of $18,000 and $19,000 for the nine months ended March 31, 2010 and 2009, respectively.

(2)	In Note 11, the amortization of net loss from accumulated other comprehensive income (loss) is net of an income tax provision of $23,000 and $71,000 for the three and nine months ended March 31, 2010, respectively.

The following table presents the assumptions used in the determination of net periodic benefit cost:


	2010		2009
Discount rate	6.17	%	6.86	%
Rate of increase in compensation levels	4.00	%	4.00	%
Expected long-term rate of return on assets	7.50	%	7.50	%

The Company contributed $0.6 million and $1.5 million during each of the three and nine months ended March 31, 2010, respectively and $0.5 million and $1.7 million during each of the three and nine months ended March 31, 2009, respectively. The Company’s fiscal 2010 contributions are anticipated to approximate $2.0 million.

(10) Earnings Per Share

Income from continuing operations per share attributable to Rural/Metro is computed by dividing income from continuing operations attributable to Rural/Metro by the weighted-average number of shares outstanding. Income from continuing operations per share attributable to Rural/Metro assuming dilution is computed based on the weighted-average number of shares outstanding after consideration of the dilutive effect of stock options, RSUs and SARs.

A reconciliation of the weighted average number of shares outstanding utilized in the basic and diluted income from continuing operations per share attributable to Rural/Metro computations for the three and nine months ended March 31, 2010 and 2009 is as follows (in thousands, except per share amounts):


	Three Months Ended March 31,				Nine Months Ended March 31,
	2010		2009		2010		2009
Income from continuing operations	$	4,586	$	1,824	$	4,039	$	4,997
Less: Net income attributable to noncontrolling interest		595		577		1,630		1,319

Income from continuing operations attributable to Rural/Metro		3,991		1,247		2,409		3,678
Average number of shares outstanding - Basic		25,247		24,843		25,057		24,830
Add: Incremental shares for dilutive effect of stock options, RSUs and SARs		203		54		268		77

Average number of shares outstanding - Diluted		25,450		24,897		25,325		24,907

Income from continuing operations per share attributable to Rural/Metro - Basic	$	0.16	$	0.05	$	0.10	$	0.15

Income from continuing operations per share attributable to Rural/Metro - Diluted	$	0.16	$	0.05	$	0.10	$	0.15

For the three and nine months ended March 31, 2009, certain option shares and SARs have been excluded from the calculation of diluted income from continuing operations per share attributable to Rural/Metro because the inclusion of those option shares and SARs would have been antidilutive for those periods. Such options and SARs totaled 0.8 million shares for both the three and nine months ended March 31, 2009. There were no such options or SARs for the three and nine months ended March 31, 2010.

(11) Comprehensive Income

The components of comprehensive income for the three and nine months ended March 31, 2010 and 2009 are as follows (in thousands):


	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
Net income	$	4,354		$	1,564		$	3,538		$	4,149
Components of other comprehensive income:
Change in fair value of interest rate hedge, net of tax		(143	)		—			(143	)		—
Defined benefit pension plan:
Amortization of prior service cost, net of tax		10			10			30			29
Amortization of net loss, net of tax		40			—			118			—

Total other comprehensive (loss) income		(93	)		10			5			29

Comprehensive income		4,261			1,574			3,543			4,178
Comprehensive income attributable to noncontrolling interest		(595	)		(577	)		(1,630	)		(1,319	)

Comprehensive income attributable to Rural/Metro	$	3,666		$	997		$	1,913		$	2,859

For the three and nine months ended March 31, 2010 and 2009, there was no other comprehensive income attributable to noncontrolling interest.

(12) Commitments and Contingencies

Legal Proceedings

From time to time, the Company is a party to, or otherwise involved in, lawsuits, claims, proceedings, investigations and other legal matters that have arisen in the ordinary course of conducting its business. The Company cannot predict with certainty the ultimate outcome of any of these lawsuits, claims, proceedings, investigations and other legal matters which it is a party to, or otherwise involved in, due to, among other things, the inherent uncertainties of litigation, government investigations and proceedings and legal matters in general. The Company is also subject to requests and subpoenas for information in independent investigations. An unfavorable outcome in any of the lawsuits pending against the Company or in a government investigation or proceeding could result in substantial potential liabilities and have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows. Further, these proceedings and investigations, and the Company’s actions in response to them, could result in substantial potential liabilities, additional defense and other costs, increase the Company’s indemnification obligations, divert management’s attention, and/or adversely affect the Company’s ability to execute its business and financial strategies.

Regulatory Compliance

The Company is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not limited to, matters such as licensure, accreditation, government healthcare program participation requirements, reimbursement for patient services and Medicare and Medicaid fraud and abuse. Within the healthcare industry, government investigations and allegations concerning possible violations of fraud and abuse statutes and regulations by healthcare providers is ongoing. From time to time, the Company is subject to investigations relating to Medicare and Medicaid laws pertaining to its industry. The Company cooperates fully with the government agencies that conduct these investigations. Violations of these laws and regulations could result in exclusion from government healthcare programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Under the Company’s existing compliance program, the Company initiates its own investigations and conducts audits to examine compliance with various policies and regulations,

including periodic reviews of the levels of service and corresponding rates the Company bills to various payers. Internal investigations or audits may result in significant repayment obligations for patient services previously billed or the modification of estimates relating to reimbursements. For example, in the quarter ended March 31, 2010, following a review of certain claims in the Company’s Mid-Atlantic segment, a reserve was established in the amount of $1.5 million for a change in estimate relating to levels of service on claims for which the Company was previously reimbursed. The Company believes that it is substantially in compliance with fraud and abuse statutes and their applicable governmental interpretation.

The Company is cooperating with an investigation by the U.S. government regarding the Company’s operations in the State of Ohio in connection with allegations of certain billing inaccuracies. Specifically, the government alleges that certain services performed between 1997 and 2001 did not meet Medicare medical necessity and reimbursement requirements. The government has examined sample records for each of the years stated above. The Company disagrees with the allegations and believes that there are errors in the sampling methodology performed by the government. Although the Company continues to disagree with the government’s allegations, the Company is engaged in settlement negotiations with the government and has made a counteroffer of $2.4 million in exchange for a full release relating to the government’s allegations. For the nine months ended March 31, 2009, the Company recorded charges of $0.8 million to continuing operations and $0.4 million to discontinued operations, as a portion of this matter relates to the Company’s discontinued operation in Marion, Ohio. Although there can be no assurances that a settlement agreement will be reached, any such settlement agreement would likely require the Company to make a substantial payment to the government and may require the Company to enter into a Corporate Integrity Agreement or similar arrangement. If a settlement is not reached, the government has indicated that it will pursue further civil action. At this time, it is not possible to predict the ultimate conclusion of this investigation.

(13) Segment Reporting

The Company has four regional reporting segments that correspond with the manner in which the associated operations are managed and evaluated by its chief operating decision maker. Although some of the Company’s operations do not align with the segments’ geographic designation, all operations have been structured to capitalize on management’s strengths. These segments comprise operations within the following areas:


Segment		States
Mid-Atlantic		New York, Northern Ohio

South		Alabama, Florida (fire), Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, New Jersey, North Dakota, Oregon (fire), Southern Ohio, Tennessee

Southwest		Arizona

West		California, Central Florida (ambulance), Colorado, Nebraska, Oregon (ambulance), South Dakota, Washington

Each reporting segment provides ambulance services while the Company’s fire and other services are primarily in the South and Southwest segments.

The accounting policies used in the preparation of the Company’s consolidated financial statements have also been followed in the preparation of the accompanying financial information for each reporting segment. For management purposes, the Company’s measure of segment profitability is defined as income from continuing operations before depreciation and amortization, interest, income taxes and loss on extinguishment of debt. Additionally, corporate overhead allocations have been included within segment profits. Segment results presented below reflect continuing operations only. Segment asset information is not used by the Company’s chief operating decision maker in assessing segment performance.

The following table summarizes segment information for the three and nine months ended March 31, 2010 and 2009 (in thousands):


	Mid-Atlantic		South		Southwest		West		Total
Three months ended March 31, 2010
Net revenues from external customers:
Ambulance services	$	21,477	$	28,943	$	37,939	$	26,851	$	115,210
Other services (1)		912		7,227		9,683		105		17,927

Total net revenue	$	22,389	$	36,170	$	47,622	$	26,956	$	133,137

Segment profit from continuing operations	$	4,513	$	2,718	$	8,879	$	2,344	$	18,454


	Mid-Atlantic		South		Southwest		West		Total
Three months ended March 31, 2009
Net revenues from external customers:
Ambulance services	$	20,647	$	26,011	$	33,755	$	25,270	$	105,683
Other services (1)		954		6,858		10,104		266		18,182

Total net revenue	$	21,601	$	32,869	$	43,859	$	25,536	$	123,865

Segment profit from continuing operations	$	4,492	$	2,581	$	6,711	$	1,377	$	15,161
Nine months ended March 31, 2010
Net revenues from external customers:
Ambulance services	$	67,314	$	84,770	$	109,229	$	80,361	$	341,674
Other services (1)		3,072		21,907		29,858		398		55,235

Total net revenue	$	70,386	$	106,677	$	139,087	$	80,759	$	396,909

Segment profit from continuing operations	$	16,077	$	8,068	$	22,446	$	6,954	$	53,545
Nine months ended March 31, 2009
Net revenues from external customers:
Ambulance services	$	61,368	$	75,487	$	97,304	$	75,590	$	309,749
Other services (1)		2,915		20,602		30,653		992		55,162

Total net revenue	$	64,283	$	96,089	$	127,957	$	76,582	$	364,911

Segment profit from continuing operations	$	14,459	$	8,590	$	17,742	$	4,175	$	44,966

(1)	Other services consists of revenue generated from fire protection services; including master fire contracts and subscription fire services, airport fire and rescue; home health care services; and other miscellaneous forms of revenue.

The following is a reconciliation of segment profit to income from continuing operations before income taxes (in thousands):


	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
Segment profit	$	18,454		$	15,161		$	53,545		$	44,966
Depreciation and amortization		(3,814	)		(3,605	)		(11,445	)		(10,514	)
Interest expense		(7,116	)		(7,749	)		(21,761	)		(23,325	)
Interest income		38			107			169			255
Loss on debt extinguishment		(312	)		—			(14,154	)		—

Income from continuing operations before income taxes	$	7,250		$	3,914		$	6,354		$	11,382

(14) Discontinued Operations

During fiscal 2010, the Company made the decision to exit fire protection contracts in Florida and Wisconsin and ambulance services contracts in Salt Lake City, Utah and Jefferson County, Georgia. Because these operations are considered separate components of the Company, the results of these operations, as well as operations discontinued in previous periods, are reported within (loss) income from discontinued operations in the Consolidated Statements of Operations for the three and nine months ended March 31, 2010 and 2009. Although these markets were exited in fiscal 2010, the consolidated statements of operations for the three and nine months ended March 31, 2009 have been recast to reflect these operations as discontinued.

(Loss) income from discontinued operations excludes the allocation of certain shared services costs such as human resources, financial services, risk management and legal services, among others which are expected to continue. These ongoing services and related costs will be redirected to support new markets or for the expansion of existing service areas. Net revenue and (loss) income from discontinued operations, net of income taxes, is shown by segment in the tables below (in thousands):


	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
Net revenue:
Mid-Atlantic	$	33		$	487		$	138		$	1,542
South		55			699			1,123			2,104
Southwest		1			67			38			185
West		(159	)		876			1,644			2,738

Net revenue from discontinued operations	$	(70	)	$	2,129		$	2,943		$	6,569


	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
(Loss) income:
Mid-Atlantic	$	23		$	(88	)	$	35		$	(475	)
South		8			10			(41	)		(11	)
Southwest		(79	)		(30	)		(105	)		(99	)
West		(184	)		(152	)		(390	)		(263	)

Loss from discontinued operations, net of income taxes	$	(232	)	$	(260	)	$	(501	)	$	(848	)

Loss from discontinued operations is presented net of an income tax benefit of $0.1 million for both the three months ended March 31, 2010 and 2009, respectively. Loss from discontinued operations is presented net of income tax benefit of $0.3 million and $0.5 million for the nine months ended March 31, 2010 and 2009, respectively. The loss from discontinued operations for the three and nine months ended March 31, 2010 is primarily related to the results of those operations discontinued in the current fiscal year. The loss from discontinued operations before the income tax benefit for the nine months ended March 31, 2009 was primarily due to $0.4 million recorded as a result of increasing the Company’s Medicare reserve contingency related to the Ohio compliance matter described above in Note 12, a portion of which relates to our former Marion, Ohio operation. There was no net revenue or (loss) income from discontinued operations attributable to noncontrolling interest for the three and nine months ended March 31, 2010 and 2009.

(15) Variable Interest Entity

GAAP requires a company to consolidate in its financial statements the assets, liabilities and activities of a VIE. GAAP provides guidance as to the definition of a VIE and requires that such VIEs be consolidated if the interest in the entity has certain characteristics including: voting rights not proportional to ownership and the right to receive the majority of expected residual returns or the requirement to absorb a majority of the expected losses. Additionally, the party exposed to the majority of the risks and rewards is the entity’s primary beneficiary, and the primary beneficiary must consolidate the entity.

The Company determined that its investment in San Diego Medical Services Enterprise, LLC (“SDMSE”), the entity formed with respect to our public/private alliance with the City of San Diego, meets the definition of a VIE and that the Company is the primary beneficiary of the entity and therefore must consolidate its activities. The determination was made based on the following:

•

The Company is entitled to a 50% interest in the profits and losses of SDMSE based on ownership percentage, but is only entitled to a 40% interest in voting;

•

SDMSE operates as the emergency services provider to the City of San Diego and certain surrounding areas. The Company provides emergency services personnel as well as administrative functions such as billing, purchasing and accounting to SDMSE. Therefore substantially all of SDMSE’s activities involve the Company; and

•

If cumulative losses exceed a determined threshold, the Company must absorb 100% of losses above that threshold.

The Company believes, based on the historical financial performance of SDMSE, that the probability is remote that SDMSE’s losses will exceed the cumulative threshold and require the Company to absorb 100% of the additional losses.

The following is a summary of SDMSE’s assets and liabilities (in thousands):


	March 31, 2010		June 30, 2009
Current assets	$	10,519	$	8,913
Noncurrent assets		200		200

Total assets	$	10,719	$	9,113

Current liabilities	$	5,611	$	5,465
Noncurrent liabilities		—		—

Total liabilities	$	5,611	$	5,465

The assets held by SDMSE are generally not available for use by the Company. SDMSE’s operations are financed from cash flows from operations.

Under GAAP, the Company must reassess the VIE status if there are changes in the entity’s capital structure and/or in its activities or assets. The Company has not changed its determination of SDMSE’s status as a VIE since its original analysis in fiscal 2003.

(16) Subsequent Events

On April 8, 2010, the Company consummated the purchase of medical transportation services provider TransCare of Kentucky, Inc. (“Transcare”). The Company purchased substantially all of the assets of Transcare for $1.4 million. The Company will account for the purchase as a business combination in the fourth quarter of fiscal 2010.

Item 2.

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

Forward-Looking Statements

The statements, estimates, projections, guidance or outlook contained in this Quarterly Report on Form 10-Q including but not limited to this section containing Management’s Discussion and Analysis of Financial Condition and Results of Operation, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our references to words or phrases such as “believes”, “anticipates”, “expects”, “plans”, “intends”, “may”, “should”, “will likely result”, “continue”, “estimates”, “projects” or similar expressions identify such forward-looking statements. We may also make forward looking statements in our earnings releases, earnings calls and other investor communications and reports we file with the SEC. We caution readers that such forward-looking statements, including those relating to our future business prospects, uncompensated care, working capital, accounts receivable collection, liquidity, cash flow, EBITDA, capital expenditures, insurance coverage and claim reserves, capital needs, future operating results and future compliance with covenants in our debt facilities or instruments, wherever they appear in this Quarterly Report or in other statements attributable to us, are necessarily estimates reflecting the best judgment of our senior management about future results or events and, as such, involve a number of risks and uncertainties that could cause actual results or events to differ materially from those suggested by our forward-looking statements, including the risks set forth in full in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2009, filed September 9, 2009 with the SEC, and in Item 1A of Part II and elsewhere in this Quarterly Report.

Any or all forward-looking statements made in this Quarterly Report (and in any other public filings or statements we might make) may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. By their nature, forward-looking statements are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Accordingly, except to the extent required by applicable law, we undertake no duty to update the forward-looking statements made in this Quarterly Report.

Rural/Metro Corporation is strictly a holding company. All services, operations and management functions are provided through its subsidiaries and affiliated entities. All references to “we,” “our,” “us,” or “Rural/Metro” refer to Rural/Metro Corporation and, as relevant, its predecessors, operating divisions, direct and indirect subsidiaries and affiliates. The website for Rural/Metro Corporation is located at www.ruralmetro.com. Information contained on the website, including any external information which is referenced or “linked” on our website, is not a part of this Quarterly Report.

This Quarterly Report should be read in conjunction with our audited consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K filed with the SEC on September 9, 2009.

Management’s Overview

During fiscal 2010, our focus remains on implementing the Company’s strategic and operating activities including operational excellence in patient care delivery, revenue cycle management, new emergency revenue generation and continued expansion of the non-emergency business within existing markets. We intend to achieve these through continued focus on billing initiatives aimed at reducing uncompensated care and increasing average patient charge (“APC”), responsiveness to customer needs and investments in technology designed to maximize billing performance. Our continued focus on these items has contributed to a 8.8% growth in year to date revenue and 19.3% growth in year-to-date adjusted EBITDA, in fiscal 2010 as compared to the same period in the prior year.

We continue to focus on expanding our profit margin by increasing our gains in non-emergency market share and increasing transports through hospital-outsourced opportunities and partnerships with public systems. We believe this strategy will continue to demonstrate our ability to operate in this challenging economy.

2009 Debt Refinancing

In December 2009, we effected a refinancing of our 2005 Credit Facility by terminating and extinguishing our Term Loan B, Revolving Credit Facility and substantially all of our Senior Subordinated Notes. These instruments were replaced by the 2009 Credit Facility and a cash collateralized letter of credit facility. We called the remaining Senior Subordinated Notes in March 2010. The refinancing resulted in a loss on the debt extinguishment of $14.2 million. The new facility provides for extended maturities as well as increased flexibility with the respect to the principal reduction on our other debt instruments. We expect that cash paid for interest will decrease approximately $2.0 million annually under the new credit facility.

Average Patient Charge (APC)

Net medical transport APC increased $20 to $394 for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009. We have seen significant growth in year over year net medical transport APC primarily related to increased collections driven by our billing initiatives and rate increases. The ambulance industry has recently experienced some changes in the Medicare reimbursement environment. These changes include the lack of an annual CPI adjustment for calendar year 2010 and the final phase-in of the national Medicare fee schedule on December 31, 2009 which primarily affects our West and Mid-Atlantic operating segments. Additionally, we have experienced reductions in the Medicaid reimbursement in Arizona with the potential for further decreases based on ongoing legislative actions. We believe that these changes in the reimbursement environment may adversely affect the growth rate on our net medical transport APC. The 2% urban and 3% rural adjustment which expired December 31, 2009 was reinstated and extended to December 31, 2010 through recent federal healthcare legislation.

Executive Summary

We provide ambulance services, which consist primarily of emergency and non-emergency medical services, to approximately 400 communities in 20 states within the United States. We provide these services under contracts with governmental entities, hospitals, nursing homes, and other healthcare facilities and organizations. For the nine months ended March 31, 2010 and 2009, respectively, 43.6% and 44.4% of our transports were generated from emergency ambulance services. Non-emergency ambulance services, including critical care transfers and other interfacility transports, comprised 56.4% and 55.6% of our transports for the same periods. All ambulance related services generated 86.1% and 84.9% of net revenue for the nine months ended March 31, 2010 and 2009, respectively. The remainder of our net revenue was generated from private fire protection services, airport fire and rescue, home healthcare services, and other services.

Key Factors and Metrics We Use to Evaluate Our Operations

The key factors we use to evaluate our operations focus on the number of ambulance transports we take, the amount we expect to collect per transport and the cost we incur to provide these services.

The following is a summary of certain key operating statistics we use to evaluate our operations (Adjusted EBITDA from continuing operations in thousands):


	Three Months Ended March 31,				Nine Months Ended March 31,
	2010		2009		2010		2009
Net Medical Transport APC (1)	$	394	$	374	$	393	$	367
DSO (2)		44		55		44		55
Adjusted EBITDA from continuing operations (3)	$	17,946	$	14,652	$	52,306	$	43,832
Medical Transports (4)		277,276		265,376		817,427		788,775

(1)	Net Medical Transport APC is defined as gross medical ambulance transport revenue less provisions for contractual allowances applicable to Medicare, Medicaid and other third-party payers and uncompensated care divided by medical transports from continuing operations.

(2)	Days Sales Outstanding is calculated using the average accounts receivable balance on a rolling 13-month basis and net revenue on a rolling 12-month basis and has not been adjusted to eliminate discontinued operations.

(3)	See the discussion below of Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization including goodwill impairment (“Adjusted EBITDA”).

(4)	Defined as emergency and non-emergency medical patient transports from continuing operations.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)

EBITDA from continuing operations attributable to Rural/Metro (“EBITDA”) is defined by us as income (loss) from continuing operations before Interest Expense (Income), Taxes, Income Attributable to Noncontrolling Interest and Depreciation and Amortization, including Goodwill Impairment. Adjusted EBITDA from continuing operations attributable to Rural/Metro (“Adjusted EBITDA”) excludes share-based compensation expense and loss on debt extinguishment. Adjusted EBITDA is commonly used by management and investors as a measure of leverage capacity, debt service ability and liquidity. Adjusted EBITDA is not considered a measure of financial performance under GAAP, and the items excluded from Adjusted EBITDA are significant components in understanding and assessing our financial performance. Adjusted EBITDA should not be considered in isolation or as an alternative to such GAAP measures as net income, cash flows provided by or used in operating, investing or financing activities or other financial statement data presented in our financial statements as an indicator of financial performance or liquidity. Since Adjusted EBITDA is not a measure determined in accordance with GAAP and is susceptible to varying calculations, Adjusted EBITDA, as presented, may not be comparable to other similarly titled measures of other companies.

The following table sets forth our EBITDA and adjusted EBITDA for the three and nine months ended March 31, 2010 and 2009, as well as a reconciliation to (loss) income from continuing and discontinued operations, the most directly comparable financial measure under GAAP (in thousands):


	Three Months Ended March 31,						Nine Months Ended March 31,
	2010			2009			2010			2009
Income from continuing operations	$	4,586		$	1,824		$	4,039		$	4,997
Add (deduct):
Depreciation and amortization		3,814			3,605			11,445			10,514
Interest expense		7,116			7,749			21,761			23,325
Interest income		(38	)		(107	)		(169	)		(255	)
Income tax provision		2,664			2,090			2,315			6,385
Income attributable to noncontrolling interest		(595	)		(577	)		(1,630	)		(1,319	)

EBITDA from continuing operations attributable to Rural/Metro		17,547			14,584			37,761			43,647

Add (deduct):
Share-based compensation expense		87			68			391			185
Loss on debt extinguishment		312			—			14,154			—

Adjusted EBITDA from continuing operations attributable to Rural/Metro		17,946			14,652			52,306			43,832

Loss from discontinued operations		(232	)		(260	)		(501	)		(848	)
Add (deduct):
Depreciation and amortization		—			85			121			358
Income tax provision (benefit)		(65	)		(53	)		(339	)		(524	)

EBITDA from discontinued operations attributable to Rural/Metro		(297	)		(228	)		(719	)		(1,014	)

Total adjusted EBITDA attributable to Rural/Metro	$	17,649		$	14,424		$	51,587		$	42,818

Factors Affecting Operating Results

Net Change in Contracts

Our operating results are affected directly by the number of net new contracts we have in a period, reflecting the effects of both new contracts and contract expirations. We regularly bid for new contracts, frequently in a formal competitive bidding process that often requires written responses to a Request for Proposal, or RFP, and in any fiscal period, certain of our contracts will expire. We may elect not to seek extension or renewal of a contract, if we determine that we cannot do so on favorable terms. With respect to expiring contracts we would like to renew, we may be required to seek renewal through an RFP, and we may not be successful in retaining any such contracts, or retaining them on terms that are as favorable as present contract terms.

Ability to Effect Rate Increases

Our operating results are affected directly by the number of self-pay ambulance transport services we provide and associated lower collection rates experienced within this payer group. To offset higher costs of uncompensated care we may experience with the self-pay payers, we submit requests to increase commercial insurance rates to the state or local government agencies that regulate ambulance service rates. Our ability to negotiate rate increases on a timely basis to offset increases in uncompensated care may impact our operating performance.

Uncompensated Care

When we contract with municipal, county or other governing authorities as an exclusive provider of emergency ambulance services, we are required to provide services to their citizens regardless of the ability or willingness of patients to pay. While we make every attempt to negotiate subsidies to support the level of medical service we provide to compensate for uncompensated care, not all authorities will agree to provide such subsidies. As a result, we incur write-offs for uncompensated care in the normal course of providing ambulance services.

Uncompensated care write-offs fall into four categories: (1) denials for uncovered services by commercial insurers; (2) unpaid co-pays and deductibles under Medicare and commercial insurance programs; (3) denials for medical necessity by Medicare and Medicaid; and (4) write-offs related to patients who are uninsured or otherwise have no ability to pay.

In terms of transport volume, the self-pay patients we transport who are uninsured or otherwise have no ability to pay for our services have decreased as a percent of our transport mix in the first nine months of fiscal 2010 to 9.0% as compared to 9.8% in the first nine months of fiscal 2009. Although we are not seeing an impact at this time and believe we have measures in place to promptly identify negative payer mix trends, we do recognize a weakened economy may shift our current transport mix to a higher volume of uninsured and underinsured claims. If this occurs, we may see higher uncompensated care write-offs as a result of a reduction in collections based on historical collections trends for this payer mix; which would in turn impact our cash flows from operations and overall liquidity.

Other factors that may, positively or negatively, impact the overall dollars associated with uncompensated care include: (1) rate increases and (2) changes in transport volumes among the payer groups.

On a periodic basis, we evaluate our cost structure within each area we serve and, as appropriate, request rate increases. Ambulance rate increases generate additional revenue only from certain commercial insurance programs and self-pay patients, due to the fixed rates, co-pay amounts and deductibles of payers such as Medicare, Medicaid and certain commercial insurance. Rate increases applied to patients who are self-pay patients can compound an already challenging collection process. Increasing the dollars per transport on this payer group may in turn result in an increase in the uncompensated care.

From quarter to quarter the number of patients we transport within each payer group can vary. A shift in payer mix may increase or decrease the levels of uncompensated care. For instance, if we experience a shift from the Medicare payer group to the commercial insurance payer group we might expect to see a decrease in our uncompensated care write-offs due to a higher historical collection pattern associated with the commercial insurance payers.

Work Force Management

Our business strategy focuses on optimizing the deployment of our work force in order to meet contracted response times and otherwise maintain high levels of quality care and customer service. A key measure is our ability to efficiently and effectively manage labor resources and enhance operating results. Several factors may influence our labor management efforts, including our ability to maximize our mix of emergency and non-emergency ambulance business, significant wait times associated with emergency rooms that delay redeployment and market-specific shortages of qualified paramedics and emergency medical technicians that affect temporary wages. We also may experience increases in overtime and training wages due to growth in transport volume related to new contracts, expansion in existing markets and seasonal transport demand patterns.

Results of Operations

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

RURAL/METRO CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

For The Three Months Ended March 31, 2010 and 2009

(unaudited)

(in thousands, except per share amounts)


	2010			% of Net Revenue		2009			% of Net Revenue		$ Change			% Change
Net revenue	$	133,137		100.0	%	$	123,865		100.0	%	$	9,272		7.5	%

Operating expenses:
Payroll and employee benefits		79,951		60.1	%		75,980		61.3	%		3,971		5.2	%
Depreciation and amortization		3,814		2.9	%		3,605		2.9	%		209		5.8	%
Other operating expenses		31,449		23.6	%		28,033		22.6	%		3,416		12.2	%
General/auto liability insurance expense		3,396		2.6	%		4,856		3.9	%		(1,460	)	(30.1	)%
Gain on sale of assets		(113	)	(0.1	)%		(165	)	(0.1	)%		52		31.5	%

Total operating expenses		118,497		89.0	%		112,309		90.7	%		6,188		5.5	%

Operating income		14,640		11.0	%		11,556		9.3	%		3,084		26.7	%
Interest expense		(7,116	)	(5.3	)%		(7,749	)	(6.3	)%		633		8.2	%
Interest income		38		0.0	%		107		0.1	%		(69	)	(64.5	)%
Loss on debt extinguishment		(312	)	(0.2	)%		—		—			(312	)	#

Income from continuing operations before income taxes		7,250		5.4	%		3,914		3.2	%		3,336		85.2	%
Income tax provision		(2,664	)	(2.0	)%		(2,090	)	(1.7	)%		(574	)	(27.5	)%

Income from continuing operations		4,586		3.4	%		1,824		1.5	%		2,762		#
Loss from discontinued operations, net of income taxes		(232	)	(0.2	)%		(260	)	(0.2	)%		28		10.8	%

Net income		4,354		3.3	%		1,564		1.3	%		2,790		#
Net income attributable to noncontrolling interest		(595	)	(0.4	)%		(577	)	(0.5	)%		(18	)	(3.1	)%

Net income attributable to Rural/Metro	$	3,759		2.8	%	$	987		0.8	%	$	2,772		#

Income per share:
Basic -
Income from continuing operations attributable to Rural/Metro	$	0.16				$	0.05				$	0.11
Loss from discontinued operations attributable to Rural/Metro		(0.01	)				(0.01	)				—

Net income attributable to Rural/Metro	$	0.15				$	0.04				$	0.11

Diluted-
Income from continuing operations attributable to Rural/Metro	$	0.16				$	0.05				$	0.11
Loss from discontinued operations attributable to Rural/Metro		(0.01	)				(0.01	)				—

Net income attributable to Rural/Metro	$	0.15				$	0.04				$	0.11

Average number of common shares outstanding - Basic		25,247					24,843					404

Average number of common shares outstanding - Diluted		25,450					24,897					553

# - Variances over 100% not displayed.

Net Revenue

The following table shows a comparison of consolidated net revenue by business (in thousands):


	Three Months Ended March 31,
	2010		2009		$ Change			% Change
Ambulance services	$	115,210	$	105,683	$	9,527		9.0	%
Other services		17,927		18,182		(255	)	(1.4	)%

Total net revenue	$	133,137	$	123,865	$	9,272		7.5	%

Ambulance Services

The increase in ambulance services revenue is primarily due to a $9.3 million increase in same service area revenue. The increase in same service area revenue included $5.5 million related to net medical transport APC and $4.2 million related to increases in medical transport volume. The increase related to net medical transport APC is inclusive of a $1.5 million decrease for a reserve established for a change in estimate related to an internal review of levels of service on claims that were previously reimbursed and a $0.9 million increase related to a supplemental payment received from the New York Medicaid program. Below we provide two tables with quarterly comparative transport data. The first table summarizes medical transport volume separated into same service area and new contracts, while the second table summarizes total transport volume separated into emergency and non-emergency.


	Three Months Ended March 31,
	2010	2009	Transport Change	% Change
Same service area medical transports	276,837	265,376	11,461	4.3	%
New contract medical transports	439	N/A	439	#

Medical transports from continuing operations	277,276	265,376	11,900	4.5	%

# - Variances over 100% not displayed


	Three Months Ended March 31,
	2010	% of Transports		2009	% of Transports		Transport Change	% Change
Emergency medical transports	119,405	43.1	%	116,990	44.1	%	2,415	2.1	%
Non-emergency medical transports	157,871	56.9	%	148,386	55.9	%	9,485	6.4	%

Medical transports from continuing operations	277,276	100.0	%	265,376	100.0	%	11,900	4.5	%

The growth in same service area transports relates to growth in our non-emergency transport business in Georgia, Kentucky and San Diego as well as increased emergency transports in our Arizona and Tennessee markets. New contract transport growth is related to our new emergency and non-emergency contracts in our Oregon market.

Contractual Allowances and Uncompensated Care

Contractual allowances applicable to Medicare, Medicaid and other third-party payers related to continuing operations, which are reflected as a reduction of gross ambulance services revenue, totaled $94.8 million and $82.0 million for the three months ended March 31, 2010 and 2009, respectively. The increase of $12.8 million is primarily a result of increased transports, rate increases, changes in payer mix, and changes in service level in certain markets. Uncompensated care as a percentage of gross ambulance services revenue was 12.9% and 13.7% for the three months ended March 31, 2010 and 2009, respectively. High levels of uninsured and underinsured patients coupled with denials for medical necessity, non-covered services, co-pays and deductibles have resulted in continued pressure on uncompensated care.

Both contractual allowances and uncompensated care are reflected as a reduction of gross ambulance services revenue. A reconciliation of gross ambulance services revenue to net ambulance services revenue is included in the table below (in thousands):


	Three Months Ended March 31,
	2010			% of Gross Revenue		2009			% of Gross Revenue		$ Change			% Change
Gross Revenue	$	241,001		100.0	%	$	217,470		100.0	%	$	23,531		10.8	%
Contractual Discounts		(94,781	)	(39.3	)%		(81,961	)	(37.7	)%		(12,820	)	(15.6	)%
Uncompensated care		(31,010	)	(12.9	)%		(29,826	)	(13.7	)%		(1,184	)	(4.0	)%

Net Medical Transportation Revenue	$	115,210		47.8	%	$	105,683		48.6	%	$	9,527		9.0	%

Ambulance Services Revenue by Payer Category

The table below presents the approximate percentages of our ambulance services net revenue from each of the following sources:


	Three Months Ended March 31,
	2010		2009
Medicare	44.4	%	41.9	%
Medicaid	15.5	%	13.8	%
Commercial insurance	34.6	%	37.7	%
Self-pay	0.9	%	1.4	%
Fees/subsidies	4.6	%	5.2	%

Total	100.0	%	100.0	%

Net Medical Transport APC

Net medical transport APC for the three months ended March 31, 2010 increased to $394 from $374 for the three months ended March 31, 2009. The $20 increase was primarily due to improvement in collections and rate increases. The net medical transport APC was negatively impacted by $5 for the $1.5 million reserve described above. This was offset by a $3 positive impact from the supplemental payment received from the New York Medicaid program.

Operating Expenses

Payroll and Employee Benefits

The increase in payroll and employee benefits expense reflects increased health insurance expense of $1.5 million. The remainder of the change in payroll and employee benefits expense is primarily related to increases in transports and unit hours as well as annual merit increases.

Depreciation and Amortization

The increase in depreciation and amortization is primarily due to additional capital expenditures subsequent to March 31, 2009.

Other Operating Expenses

The increase in other operating expenses included a $1.5 million increase related to legal and other professional service fees related to the Company’s review of various governance and operational items. The Company’s review of such items (which was overseen by the Audit Committee of the Board of Directors in accordance with the Company’s regular governance procedures), taken together with a review of organizational efficiencies, resulted in the identification of opportunities to enhance the Company’s organizational structure as well as certain of its policies, procedures and practices. Additionally, there was $1.2 million of increased vehicle and equipment expenses primarily related to increased transports, unit hours and fuel prices.

General/Auto Liability Insurance Expense

General/auto liability insurance expense decreased $1.5 million related to prior year actuarial claims adjustments of $1.5 million. No actuarial claims adjustments were recorded in the current quarter.

Interest Expense

The decrease in interest expense was related to the December 2009 restructuring of our debt.

Loss on Debt Extinguishment

A $0.3 million loss on debt extinguishment was recorded in connection with the redemption of the previously untendered Senior Subordinated Notes as described in Note 6 in the Notes to the Consolidated Financial Statements filed with this Quarterly Report on Form 10-Q. The loss consisted of the write-off of unamortized debt issuance costs and legal fees incurred to effect the refinancing.

Income Tax Provision

During the three months ended March 31, 2010 and 2009, our effective tax rate for continuing operations was 36.7% and 53.4%, respectively. This rate differs from the federal statutory rate of 35.0% primarily as a result of non-deductible non-cash interest expense related to our Senior Discount Notes and state income taxes. Additionally, our effective tax rate includes a reduction related to income included in pretax income that is attributable to the noncontrolling interest in our joint venture with the City of San Diego and executive compensation recorded as an expense and not deductible in fiscal 2009 that will be deductible in fiscal 2010.

We recorded a $0.1 million income tax benefit for discontinued operations during both the three months ended March 31, 2010 and 2009, respectively. The Company made income tax payments of $0.2 million and $0.3 million for the three months ended March 31, 2010 and 2009, respectively.

Net Income Attributable to Noncontrolling Interest

Net income attributable to noncontrolling interest relates to the City of San Diego’s portion (50%) of the San Diego Medical Services Enterprise, LLC fiscal year-to-date net income.

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009 — Segments

Overview

We have four regional reporting segments that correspond with the manner in which our operations are managed and evaluated by our Chief Executive Officer. Although some of our operations do not align with the segments’ geographic designation, all operations have been structured to capitalize on management’s strengths. These segments comprise operations within the following areas:


Segment		States
Mid-Atlantic		New York, Northern Ohio

South		Alabama, Florida (fire), Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, New Jersey, North Dakota, Oregon (fire), Southern Ohio, Tennessee

Southwest		Arizona

West		California, Central Florida (ambulance), Colorado, Nebraska, Oregon (ambulance), South Dakota, Washington

Each reporting segment provides ambulance services while our other services are provided predominantly in the South and Southwest segments.

The accounting policies used in the preparation of our consolidated financial statements have also been followed in the preparation of the accompanying financial information for each reporting segment. For management purposes, segment profitability is defined as income from continuing operations before depreciation and amortization, interest, income taxes and loss on debt extinguishment. Additionally, corporate overhead allocations have been included within segment profits. Segment results presented below reflect continuing operations only.

The key drivers that impact net ambulance services revenues include transport volume, rates charged for such services, mix of payers, the acuity of the patients we transport, the mix of activity between emergency and non-emergency medical ambulance services, our ability to negotiate government subsidies as well as other competitive and market factors. The main drivers of other services revenue are fire subscription rates, number of subscribers and master fire contracts. These drivers can vary significantly from market to market and can change over time.

Mid-Atlantic

The following table presents financial results and key operating statistics for the Mid-Atlantic operations (in thousands, except medical transports, net medical transport APC and DSO):


	Three Months Ended March 31,						$ Change			% Change
	2010			2009			$ Change			% Change
Net revenue
Ambulance services	$	21,477		$	20,647		$	830		4.0	%
Other services		912			954			(42	)	(4.4	)%

Total net revenue	$	22,389		$	21,601		$	788		3.6	%

Segment profit	$	4,513		$	4,492		$	21		0.5	%
Segment profit margin		20.2	%		20.8	%
Medical transports		55,917			56,064			(147	)	(0.3	)%
Net Medical Transport APC	$	376		$	359		$	17		4.7	%
DSO (1)		42			49			(7	)	(14.3	)%

(1)	Segment DSO statistics for the prior period have been modified to reflect an internal reallocation of accounts receivable reserves. DSO statistics were recalculated as if the reallocation had occurred at the beginning of the period presented.

Revenue

The increase in ambulance services revenue was due to $1.0 million of increases in net medical transport APC, which is inclusive of a $1.5 million decrease for a reserve established for a change in estimate related to an internal review of levels of service on claims that were previously reimbursed and a $0.9 million increase related to a supplemental payment received from the New York Medicaid program. The net medical transport APC increase was primarily due to improvement in collections and rate increases. Included in the change in net medical transport APC was a $27 negative impact from the $1.5 million reserve described above. This was offset by a $16 positive impact from the supplemental payment received from the New York Medicaid program.

Payroll and employee benefits

Payroll and employee benefits was $11.7 million, or 52.2% of net revenue for the three months ended March 31, 2010, compared to $11.4 million, or 52.8% of net revenue, for the same period in the prior year.

Operating expenses

Operating expenses, including general/auto liability expenses was $4.5 million for the three months ended March 31, 2010, or 20.1% of net revenue, compared to $4.4 million, or 20.4% of net revenue for the same period in the prior year.

South

The following table presents financial results and key operating statistics for the South operations (in thousands, except medical transports, net medical transport APC and DSO):


	Three Months Ended March 31,						$ Change		% Change
	2010			2009			$ Change		% Change
Net revenue
Ambulance services	$	28,943		$	26,011		$	2,932	11.3	%
Other services		7,227			6,858			369	5.4	%

Total net revenue	$	36,170		$	32,869		$	3,301	10.0	%

Segment profit	$	2,718		$	2,581		$	137	5.3	%
Segment profit margin		7.5	%		7.9	%
Medical transports		89,180			80,399			8,781	10.9	%
Net Medical Transport APC	$	301		$	296		$	5	1.7	%
DSO (1)		41			39			2	5.1	%

(1)	Segment DSO statistics for the prior period have been modified to reflect an internal reallocation of accounts receivable reserves. DSO statistics were recalculated as if the reallocation had occurred at the beginning of the period presented.

Revenue

The increase in ambulance services revenue was primarily due to a $2.6 million increase in medical transport volume and a $0.4 million increase in net medical APC. The increase in medical transports was due to growth in non-emergency transport volume in our Tennessee, Georgia, Alabama and Kentucky markets related to concentrated marketing efforts to expand our non-emergency business.

Other services revenue growth is primarily due to increases in master fire contract revenue related to additional services performed for an industrial fire protection customer.

Payroll and employee benefits

Payroll and employee benefits was $23.4 million, or 64.6% of net revenue for the three months ended March 31, 2010, compared to $20.9 million, or 63.6% of net revenue, for the same period in the prior year. The increase was primarily related to $0.6 million in increased health insurance expense and increased expenses related to increased transports, unit hours and annual merit increases.

Operating expenses

Operating expenses, including general/auto liability expenses, for the three months ended March 31, 2010 was $7.4 million, or 20.5% of net revenue compared to $7.3 million, or 22.2% of net revenue, for the same period in the prior year. Increased vehicle and equipment expenses, including a $0.4 million increase in fuel related to increased transports and fuel prices, were offset by reductions in general/auto liability insurance expense.

Southwest

The following table presents financial results and key operating statistics for the Southwest operations (in thousands, except medical transports, net medical transport APC and DSO):


	Three Months Ended March 31,						$ Change			% Change
	2010			2009			$ Change			% Change
Net revenue
Ambulance services	$	37,939		$	33,755		$	4,184		12.4	%
Other services		9,683			10,104			(421	)	(4.2	)%

Total net revenue	$	47,622		$	43,859		$	3,763		8.6	%

Segment profit	$	8,879		$	6,711		$	2,168		32.3	%
Segment profit margin		18.6	%		15.3	%
Medical transports		63,257			62,613			644		1.0	%
Net Medical Transport APC	$	594		$	531		$	63		11.9	%
DSO (1)		39			59			(20	)	(33.9	)%

(1)	Segment DSO statistics for the prior period have been modified to reflect an internal reallocation of accounts receivable reserves. DSO statistics were recalculated as if the reallocation had occurred at the beginning of the period presented.

Revenue

The increase in ambulance services revenue was due to $3.9 million of increases in net medical APC and a $0.3 million increase in medical transport volume. Medical transports increased primarily due to increases in emergency transport volume. The increase in net medical transport APC was due to collection rate increases as well as service level increases.

The decrease in other services revenue was related to decreased fire subscription revenue due to a decreasing subscriber base primarily in our southern Arizona market.

We were recently notified that we had not been selected as the continuing ambulance provider for the City of Peoria, Arizona effective upon the expiration of our current contract on August 31, 2010. This contract accounts for approximately 8,500 emergency transports and $4.6 million of net revenue annually. The Southwest segment will be affected by the reduction of revenue related to this contract beginning with the first quarter of fiscal 2011.

Payroll and employee benefits

Payroll and employee benefits was $24.9 million, or 52.3% of net revenue for the three months ended March 31, 2010, compared to $24.0 million, or 54.7% of net revenue, for the same period in the prior year. The increase was primarily due to $0.4 million of increased health insurance expense and increased expenses related to increased transports, unit hours and annual merit increases.

Operating expenses

Operating expenses, including general/auto liability expenses increased to $10.6 million for the three months ended March 31, 2010, or 22.3% of net revenue, compared to $10.5 million, or 23.9% of net revenue, for the same period in the prior year.

West

The following table presents financial results and key operating statistics for the West operations (in thousands, except medical transports, net medical transport APC and DSO):


	Three Months Ended March 31,						$ Change			% Change
	2010			2009			$ Change			% Change
Net revenue
Ambulance services	$	26,851		$	25,270		$	1,581		6.3	%
Other services		105			266			(161	)	(60.5	)%

Total net revenue	$	26,956		$	25,536		$	1,420		5.6	%

Segment profit	$	2,344		$	1,377		$	967		70.2	%
Segment profit margin		8.7	%		5.4	%
Medical transports		68,922			66,300			2,622		4.0	%
Net Medical Transport APC	$	343		$	332		$	11		3.3	%
DSO (1)		57			72			(15	)	(20.8	)%

(1)	Segment DSO statistics for the prior period have been modified to reflect an internal reallocation of accounts receivable reserves. DSO statistics were recalculated as if the reallocation had occurred at the beginning of the period presented.

Revenue

The increase in ambulance services revenue was primarily due to a $1.4 million increase in same service area revenue. Same service area revenue included a $0.8 million increase in net medical transport APC and a $0.7 million increase in medical transport volume. Medical transports increased due to increased non-emergency transport volume in San Diego and Florida. The increase in net medical transport APC is primarily due to rate increases.

Payroll and employee benefits

Payroll and employee benefits was $15.4 million, or 57.1% of net revenue for the three months ended March 31, 2010, compared to $14.8 million, or 58.0% of net revenue, for the same period in the prior year. The increase was primarily due to $0.3 million in increased health insurance expense and increased expenses related to increased transports and unit hours and annual merit increases.

Operating expenses

Operating expenses, including general/auto liability expenses, for the three months ended March 31, 2010 was $8.0 million, or 29.7% of net revenue, compared to $8.3 million, or 32.5% of net revenue, for the same period in the prior year. The decrease was primarily due to a $0.4 million decrease in general/auto liability insurance expense.

Nine Months Ended March 31, 2010 Compared to Nine Months Ended March 31, 2009

RURAL/METRO CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

For The Nine Months Ended March 31, 2010 and 2009

(unaudited)

(in thousands, except per share amounts)


	2010			% of Net Revenue		2009			% of Net Revenue		$ Change			% Change
Net revenue	$	396,909		100.0	%	$	364,911		100.0	%	$	31,998		8.8	%

Operating expenses:
Payroll and employee benefits		241,830		60.9	%		225,113		61.7	%		16,717		7.4	%
Depreciation and amortization		11,445		2.9	%		10,514		2.9	%		931		8.9	%
Other operating expenses		90,068		22.7	%		84,618		23.2	%		5,450		6.4	%
General/auto liability insurance expense		11,981		3.0	%		10,618		2.9	%		1,363		12.8	%
Gain on sale of assets		(515	)	(0.1	)%		(404	)	(0.1	)%		(111	)	(27.5	)%

Total operating expenses		354,809		89.4	%		330,459		90.6	%		24,350		7.4	%

Operating income		42,100		10.6	%		34,452		9.4	%		7,648		22.2	%
Interest expense		(21,761	)	(5.5	)%		(23,325	)	(6.4	)%		1,564		6.7	%
Interest income		169		0.0	%		255		0.1	%		(86	)	(33.7	)%
Loss on debt extinguishment		(14,154	)	(3.6	)%		—		—			(14,154	)	#

Income from continuing operations before income taxes		6,354		1.6	%		11,382		3.1	%		(5,028	)	(44.2	)%
Income tax provision		(2,315	)	(0.6	)%		(6,385	)	(1.7	)%		4,070		63.7	%

Income from continuing operations		4,039		1.0	%		4,997		1.4	%		(958	)	(19.2	)%
Loss from discontinued operations, net of income taxes		(501	)	(0.1	)%		(848	)	(0.2	)%		347		40.9	%

Net income		3,538		0.9	%		4,149		1.1	%		(611	)	(14.7	)%
Net income attributable to noncontrolling interest		(1,630	)	(0.4	)%		(1,319	)	(0.4	)%		(311	)	(23.6	)%

Net income attributable to Rural/Metro	$	1,908		0.5	%	$	2,830		0.8	%	$	(922	)	(32.6	)%

Income (loss) per share:
Basic -
Income from continuing operations attributable to Rural/Metro	$	0.10				$	0.15				$	(0.05	)
Loss from discontinued operations attributable to Rural/Metro		(0.02	)				(0.04	)				0.02

Net income attributable to Rural/Metro	$	0.08				$	0.11				$	(0.03	)

Diluted -
Income from continuing operations attributable to Rural/Metro	$	0.10				$	0.15				$	(0.05	)
Loss from discontinued operations attributable to Rural/Metro		(0.02	)				(0.04	)				0.02

Net income attributable to Rural/Metro	$	0.08				$	0.11				$	(0.03	)

Average number of common shares outstanding - Basic		25,057					24,830					227

Average number of common shares outstanding - Diluted		25,325					24,907					418

# - Variances over 100% not displayed.

Net Revenue

The following table shows a comparison of consolidated net revenue by business (in thousands):


	Nine Months Ended March 31,
	2010		2009		$ Change		% Change
Ambulance services	$	341,674	$	309,749	$	31,925	10.3	%
Other services		55,235		55,162		73	0.1	%

Total net revenue	$	396,909	$	364,911	$	31,998	8.8	%

Ambulance Services

The increase in ambulance services revenue is due to $30.3 million in same service area revenue and $1.6 million from new emergency and non-emergency contracts in our Tennessee and Oregon markets. The increase in same service area revenue included $21.1 million related to increases in net medical transport APC and $9.4 million related to increases in medical transport volume. The increase related to net medical transport APC is inclusive of a $1.5 million decrease for a reserve established for a change in estimate related to an internal review of levels of service on claims that were previously reimbursed and a $0.9 million increase related to a supplemental payment received from the New York Medicaid program.

Below we provide two tables with quarterly comparative transport data. The first table summarizes medical transport volume separated into same service area and new contracts, while the second table summarizes total transport volume separated into emergency and non-emergency.


	Nine Months Ended March 31,
	2010	2009	Transport Change	% Change
Same service area medical transports	813,289	788,775	24,514	3.1	%
New contract medical transports	4,138	N/A	4,138	#

Medical transports from continuing operations	817,427	788,775	28,652	3.6	%

# - Variances over 100% not displayed


	Nine Months Ended March 31,
	2010	% of Transports		2009	% of Transports		Transport Change	% Change
Emergency medical transports	356,277	43.6	%	350,596	44.4	%	5,681	1.6	%
Non-emergency medical transports	461,150	56.4	%	438,179	55.6	%	22,971	5.2	%

Medical transports from continuing operations	817,427	100.0	%	788,775	100.0	%	28,652	3.6	%

The change in our same service area transports includes a decrease of approximately 5,100 transports related to the discontinuation of service on an emergency contract in Orange County, Florida in the nine months ended March 31, 2009. Absent the discontinuation of this contract, same service area transport volume increased 33,757 transports or 4.3%. The growth in same service area transports relates to growth in our non-emergency transport business in the South segment and San Diego. New contract transport growth is related to our new emergency and non-emergency contracts in our Oregon and Tennessee markets.

Contractual Allowances and Uncompensated Care

Contractual allowances applicable to Medicare, Medicaid and other third-party payers related to continuing operations, which are reflected as a reduction of gross ambulance services revenue, totaled $273.0 million and $238.0 million for the nine months ended March 31, 2010 and 2009, respectively. The increase of $35.0 million is primarily a result of increased transports, rate increases, changes in payer mix, and changes in service level in certain markets. Uncompensated care as a percentage of gross ambulance services revenue was 13.2% and 13.8% for the nine months ended March 31, 2010 and 2009, respectively. High levels of uninsured and underinsured patients coupled with denials for medical necessity, non-covered services, co-pays and deductibles have resulted in continued pressure on uncompensated care.


	Nine Months Ended March 31,
	2010			% of Gross Revenue		2009			% of Gross Revenue		$ Change			% Change
Gross Revenue	$	708,190		100.0	%	$	635,700		100.0	%	$	72,490		11.4	%
Contractual Discounts		(272,976	)	(38.5	)%		(238,029	)	(37.4	)%		(34,947	)	(14.7	)%
Uncompensated Care		(93,540	)	(13.2	)%		(87,922	)	(13.8	)%		(5,618	)	(6.4	)%

Net Medical Transportation Revenue	$	341,674		48.2	%	$	309,749		48.7	%	$	31,925		10.3	%

Ambulance Services Revenue by Payer Category

The table below presents the approximate percentages of our ambulance services net revenue from each of the following sources:


	Nine Months Ended March 31,
	2010		2009
Medicare	43.2	%	40.3	%
Medicaid	15.7	%	14.0	%
Commercial insurance	34.9	%	38.4	%
Self-pay	1.0	%	1.6	%
Fees/subsidies	5.2	%	5.7	%

Total	100.0	%	100.0	%

Net Medical Transport APC

Net medical transports APC for the nine months ended March 31, 2010 increased to $393 from $367 for the nine months ended March 31, 2009. The $26 increase was primarily due to improvement in collections and rate increases. The net medical transport APC was negatively impacted by $2 for the $1.5 million reserve described above. This was offset by a $1 positive impact from the supplemental payment received from the New York Medicaid program.

Other Services

Other services revenue has remained consistent in comparison to the same period of the prior year.

Operating Expenses

Payroll and Employee Benefits

The increase in payroll and employee benefits expense was primarily due to a $5.7 million increase in health insurance expense. We have experienced a rise in employee health insurance expense with an increase in the frequency of claims in excess of $50,000. These claims expenses are driven by higher costs from specialized care including cancer treatment and neonatal care. In addition, the increase included a $3.2 million increase in workers compensation expense related to actuarial claims adjustments ($2.8 million of unfavorable actuarial claims adjustments in the current year compared to favorable actuarial claims adjustments of $0.4 million), $0.8 million of severance expense and $0.7 million of increased pension expense. The remainder of the change in payroll and employee benefits expense is primarily related to increases in transports and unit hours as well as annual merit increases.

Depreciation and Amortization

The increase in depreciation and amortization is primarily due to additional capital expenditures subsequent to March 31, 2009.

Other Operating Expenses

The increase in other operating expenses was due to increased operational expenses including non-capital equipment and operational supplies of $2.8 million, primarily related to increased transports and unit hours. Additionally, professional fees increased by $1.7 million primarily related to legal and other professional service fees related to the Company’s review of various governance and operational items. The Company’s review of such items (which was overseen by the Audit Committee of the Board of Directors in

accordance with the Company’s regular governance procedures), taken together with a review of organizational efficiencies, resulted in the identification of opportunities to enhance the Company’s organizational structure as well as certain of its policies, procedures and practices. These increases were offset by a $1.0 million decrease in fuel expense and a $0.8 million decrease related to amounts accrued in the prior year for a Medicare reserve contingency related to the Ohio compliance matter.

General/Auto Liability Insurance Expense

General/auto liability insurance expense increased $1.4 million related to increased current-year expenses of $1.1 million and actuarial adjustments of $0.3 million (current year unfavorable actuarial adjustments of $0.2 million compared to prior year unfavorable actuarial adjustments of $0.5 million). The increase in current year expenses is directly related to multiple high-dollar claims experienced during the year.

Interest Expense

The decrease in interest expense was related to the December 2009 restructuring of our debt.

Loss on Debt Extinguishment

A $14.2 million loss on debt extinguishment was recorded in connection with the December 2009 refinancing of the 2005 Credit Facility and Senior Subordinated Notes. The loss consisted of the write-off of unamortized debt issuance costs and a portion of the third-party and lender fees incurred to effect the refinancing. The refinancing is discussed in Note 6 in the Notes to the Consolidated Financial Statements filed with this Quarterly Report on Form 10-Q.

Income Tax Provision

During the nine months ended March 31, 2010 and 2009, our effective tax rate for continuing operations was 36.4% and 56.1%, respectively. This rate differs from the federal statutory rate of 35.0% primarily as a result of non-deductible non-cash interest expense related to our Senior Discount Notes and state income taxes. Additionally, our effective tax rate includes a reduction related to income included in pretax income that is attributable to the noncontrolling interest in our joint venture with the City of San Diego and executive compensation recorded as expense and not deductible in fiscal 2009 that will be deductible in fiscal 2010.

We recorded a $0.3 million and $0.5 million income tax benefit for discontinued operations during the nine months ended March 31, 2010 and 2009, respectively. The Company made income tax payments of $1.5 million and $0.8 million for the nine months ended March 31, 2010 and 2009, respectively.

Net Income Attributable to Noncontrolling Interest

Net income attributable to noncontrolling interest relates to the City of San Diego’s portion (50%) of the San Diego Medical Services Enterprise, LLC fiscal year-to-date net income.

Nine Months Ended March 31, 2010 Compared to Nine Months Ended March 31, 2009 — Segments

Overview


Segment		States
Mid-Atlantic		New York, Northern Ohio

South		Alabama, Florida (fire), Georgia, Indiana, Kentucky, Louisiana, Mississippi, Missouri, New Jersey, North Dakota, Oregon (fire), Southern Ohio, Tennessee

Southwest		Arizona

West		California, Central Florida (ambulance), Colorado, Nebraska, Oregon (ambulance), South Dakota, Washington

Each reporting segment provides ambulance services while our other services are provided predominantly in the South and Southwest segments.

Additionally, corporate overhead allocations have been included within segment profits. Segment results presented below reflect continuing operations only.

Mid-Atlantic

The following table presents financial results and key operating statistics for the Mid-Atlantic operations (in thousands, except medical transports, net medical transport APC and DSO):


	Nine Months Ended March 31,						$ Change			% Change
	2010			2009			$ Change			% Change
Net revenue
Ambulance services	$	67,314		$	61,368		$	5,946		9.7	%
Other services		3,072			2,915			157		5.4	%

Total net revenue	$	70,386		$	64,283		$	6,103		9.5	%

Segment profit	$	16,077		$	14,459		$	1,618		11.2	%
Segment profit margin		22.8	%		22.5	%
Medical transports		170,430			168,408			2,022		1.2	%
Net Medical Transport APC	$	384		$	353		$	31		8.8	%
DSO (1)		42			49			(7	)	(14.3	)%

(1)	Segment DSO statistics for the prior period have been modified to reflect an internal reallocation of accounts receivable reserves. DSO statistics were recalculated as if the reallocation had occurred at the beginning of the period presented.

Revenue

The increase in ambulance services revenue was primarily due to $5.3 million of increases in net medical transport APC, which is inclusive of a $1.5 million decrease for a reserve established for a change in estimate related to an internal review of levels of service on claims that were previously reimbursed and a $0.9 million increase related to a supplemental payment received from the New York Medicaid program. Increased medical transport volume accounted for $0.7 million of increase. Medical transports increased due to increased emergency and non-emergency transport volume in our Ohio and New York markets. The net medical transport APC increase was primarily due to improvement in collections. Included in the change in net medical transport APC was a $9 negative impact from the $1.5 million reserve described above. This was offset by a $5 positive impact from the supplemental payment received from the New York Medicaid program.

Payroll and employee benefits

Payroll and employee benefits was $35.8 million, or 50.9% of net revenue for the nine months ended March 31, 2010, compared to $33.7 million, or 52.4% of net revenue, for the same period in the prior year. The increase is primarily due to $0.6 million of severance expense and $0.6 million of increased health insurance expense. The remainder of the change in payroll and employee benefits expense is primarily related to increases in transports and unit hours as well as annual merit increases.

Operating expenses

Operating expenses, including general/auto liability expenses was $13.8 million for the nine months ended March 31, 2010, or 19.6% of net revenue, compared to $11.9 million, or 18.5% of net revenue for the same period in the prior year. The increase was due to $0.6 million of increased general/auto liability insurance expense and less significant changes in operational expenses primarily to support increased transport and unit hour volume.

South

The following table presents financial results and key operating statistics for the South operations (in thousands, except medical transports, net medical transport APC and DSO):


	Nine Months Ended March 31,						$ Change			% Change
	2010			2009			$ Change			% Change
Net revenue
Ambulance services	$	84,770		$	75,487		$	9,283		12.3	%
Other services		21,907			20,602			1,305		6.3	%

Total net revenue	$	106,677		$	96,089		$	10,588		11.0	%

Segment profit	$	8,068		$	8,590		$	(522	)	(6.1	)%
Segment profit margin		7.6	%		8.9	%
Medical transports		259,577			234,763			24,814		10.6	%
Net Medical Transport APC	$	300		$	292		$	8		2.7	%
DSO (1)		41			39			2		5.1	%

(1)	Segment DSO statistics for the prior period have been modified to reflect an internal reallocation of accounts receivable reserves. DSO statistics were recalculated as if the reallocation had occurred at the beginning of the period presented.

Revenue

The increase in ambulance services revenue was primarily due to a $8.2 million increase in same service area revenue and a $1.1 million increase related to new emergency and non-emergency contracts in Tennessee. The increase in ambulance services revenue was primarily due to a $6.4 million increase in medical transport volume and a $2.1 million increase in net medical APC. The increase in medical transports was due to growth in non-emergency transport volume in our Alabama, Tennessee, Georgia and Kentucky markets related to concentrated marketing efforts to expand our non-emergency business. The increase in net medical transport APC is primarily due to changes in service level mix and rate increases.

Other services revenue growth is primarily due to increases in master fire contract revenue related to additional services performed for an industrial fire protection customer.

Payroll and employee benefits

Payroll and employee benefits was $68.8 million, or 64.5% of net revenue for the nine months ended March 31, 2010, compared to $60.3 million, or 62.8% of net revenue, for the same period in the prior year. The increase was due to $1.8 million of increased health insurance expense, $1.0 million of increased workers compensation insurance expense as well as increased expenses related to increased transports, unit hours and annual merit increases.

Operating expenses

Operating expenses, including general/auto liability expenses, for the nine months ended March 31, 2010 was $22.3 million, or 20.9% of net revenue compared to $20.8 million, or 21.6% of net revenue, for the same period in the prior year. The increase was due to $0.9 million in increased general/auto liability insurance expense and less significant changes in operational expenses primarily to support increased transport and unit hour volume.

Southwest

The following table presents financial results and key operating statistics for the Southwest operations (in thousands, except medical transports, net medical transport APC and DSO):


	Nine Months Ended March 31,						$ Change			% Change
	2010			2009			$ Change			% Change
Net revenue
Ambulance services	$	109,229		$	97,304		$	11,925		12.3	%
Other services		29,858			30,653			(795	)	(2.6	)%

Total net revenue	$	139,087		$	127,957		$	11,130		8.7	%

Segment profit	$	22,446		$	17,742		$	4,704		26.5	%
Segment profit margin		16.1	%		13.9	%
Medical transports		182,217			182,326			(109	)	(0.1	)%
Net Medical Transport APC	$	592		$	526		$	66		12.5	%
DSO (1)		39			59			(20	)	(33.9	)%

(1)	Segment DSO statistics for the prior period have been modified to reflect an internal reallocation of accounts receivable reserves. DSO statistics were recalculated as if the reallocation had occurred at the beginning of the period presented.

Revenue

The increase in ambulance services revenue was primarily due to $12.0 million of increases in net medical APC. The increase in net medical transport APC was primarily due to collection rate increases as well as rate increases.

The decrease in other services revenue was related to decreased fire subscription revenue due to a decreasing subscriber base primarily in our southern Arizona market.

Payroll and employee benefits

Payroll and employee benefits was $74.7 million, or 53.7% of net revenue for the nine months ended March 31, 2010, compared to $72.2 million, or 56.4% of net revenue, for the same period in the prior year. The increase was primarily due to $1.1 million of increased health insurance expense, $0.7 million of increased workers compensation expense and $0.7 million of increased pension expense.

Operating expenses

Operating expenses, including general/auto liability expenses increased to $32.6 million for the nine months ended March 31, 2010, or 23.4% of net revenue, compared to $29.8 million, or 23.3% of net revenue, for the same period in the prior year. The increase was due to $1.7 million of increased vehicle and equipment and station expenses as well as a $0.6 million in increase in general/auto liability insurance expense.

West

The following table presents financial results and key operating statistics for the West operations (in thousands, except medical transports, net medical transport APC and DSO):


	Nine Months Ended March 31,						$ Change			% Change
	2010			2009			$ Change			% Change
Net revenue
Ambulance services	$	80,361		$	75,590		$	4,771		6.3	%
Other services		398			992			(594	)	(59.9	)%

Total net revenue	$	80,759		$	76,582		$	4,177		5.5	%

Segment profit	$	6,954		$	4,175		$	2,779		66.6	%
Segment profit margin		8.6	%		5.5	%
Medical transports		205,203			203,278			1,925		0.9	%
Net Medical Transport APC	$	341		$	323		$	18		5.6	%
DSO (1)		57			72			(15	)	(20.8	)%

(1)	Segment DSO statistics for the prior period have been modified to reflect an internal reallocation of accounts receivable reserves. DSO statistics were recalculated as if the reallocation had occurred at the beginning of the period presented.

Revenue

The increase in ambulance services revenue was primarily due to a $4.2 million increase in same service area revenue and a $0.6 million increase related to new emergency and non-emergency contracts in Oregon. The increase in same service area revenue included a $3.7 million increase in net medical transport APC and a $0.3 million increase in medical transport volume. Medical transports increased primarily due to non-emergency transports in San Diego. The increase in net medical transport APC is primarily due to rate increases and changes in service level mix.

The decrease in other services revenue is primarily related to the discontinuation of shuttle services previously performed for a customer.

Payroll and employee benefits

Payroll and employee benefits was $46.1 million, or 57.1% of net revenue for the nine months ended March 31, 2010, compared to $43.9 million, or 57.3% of net revenue, for the same period in the prior year. The increase was primarily due to $0.7 million in increased workers compensation expense and $0.8 million of increased health insurance expense.

Operating expenses

Operating expenses, including general/auto liability expenses, for the nine months ended March 31, 2010 was $23.8 million, or 29.5% of net revenue, compared to $24.9 million, or 32.5% of net revenue, for the same period in the prior year. The decrease was due to a $0.3 million decrease in fuel and a $0.7 million decrease in general/auto liability insurance expense.

Critical Accounting Estimates and Policies

Our critical accounting estimates and policies are disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009. During the nine months ended March 31, 2010, there have been no significant changes in our critical accounting estimates and policies other than as discussed in Note 1 to our Consolidated Financial Statements filed with this Quarterly Report on Form 10-Q. For a discussion of our critical accounting estimates and policies, see item 7 in our Form 10-K for the fiscal year ended June 30, 2009 filed on September 9, 2009.

The financial information as of March 31, 2010 should be read in conjunction with the financial statements for the year ended June 30, 2009 contained in our Form 10-K filed on September 9, 2009.

Liquidity and Capital Resources

Our ability to service our long-term debt, to remain in compliance with the various restrictions and covenants contained in our debt agreements and to fund working capital, capital expenditures and business development efforts will depend on our ability to generate cash from operating activities which in turn is subject to, among other things, future operating performance as well as general economic, financial, competitive, legislative, regulatory and other conditions, some of which may be beyond our control.

We have available to us, upon compliance with certain conditions, a $40.0 million Revolving Credit Facility, less any letters of credit outstanding under the $25.0 million letter of credit sub-line. There were $24.7 million of letters of credit outstanding under the sub-line of the revolving credit facility at March 31, 2010. No other amounts were outstanding under the Revolving Credit Facility as of March 31, 2010.

Cash Flow

The table below summarizes cash flow information for the nine months ended March 31, 2010 and 2009 (in thousands):


	Nine Months Ended March 31,
	2010			2009
Net cash provided by operating activities	$	38,337		$	37,287
Net cash used in investing activities		(27,106	)		(12,485	)
Net cash used in financing activities		(15,202	)		(12,897	)

Operating Activities

Net cash provided by operating activities totaled $38.3 million and $37.3 million for the nine months ended March 31, 2010 and 2009, respectively. The $1.0 million increase in net cash provided by operating activities was primarily due to changes in assets and liabilities, including deferred income taxes, offset by the loss on debt extinguishment.

We had working capital of $38.7 million at March 31, 2010, including cash and cash equivalents of $33.1 million, compared to working capital of $60.7 million, including cash and cash equivalents of $37.1 million, at June 30, 2009. The decrease in working capital as of March 31, 2010 is primarily related to the reclassification of $17.8 million of cash and cash equivalents as noncurrent restricted cash on the consolidated balance sheets to guarantee the cash collateralized letter of credit facility. Absent the amounts related to restricted cash, working capital decreased $4.2 million which is primarily being driven by the timing of payments on accrued liabilities.

Effective March 2010, the non-cash accretion of the 12.75% Senior Discount Notes ceased and cash interest began to accrue. The first $6.0 million semi-annual interest payment is due in September 2010.

Investing Activities

Net cash used in investing activities primarily reflects the use of $17.8 million for deposits of restricted cash. We made deposits of $17.8 million in connection with our cash collateralized letter of credit facility. Net cash used in investing activities includes capital expenditures. We had capital expenditures totaling $9.4 million and $12.5 million for the nine months ended March 31, 2010 and 2009, respectively.

Financing Activities

Net cash used in financing activities primarily reflects the use of cash for the repayment of debt and for payment of debt refinancing transaction fees partially offset by cash inflows due to borrowings under our 2009 Credit Facility. See discussion of the debt refinancing transaction in Note 6 to the Consolidated Financial Statements filed with this Quarterly Report on Form 10-Q. Additionally, prior to the debt refinancing transaction, we made a $10.0 million principal payment on our Term Loan B and made $0.9 million in distributions to the City of San Diego. We also made the first scheduled principal payment of $0.5 million on the Term Loan due 2014 during the quarter ended March 31, 2010.

During the nine months ended March 31, 2009, we made a $12.0 million of principal payments on our Term Loan B and $0.5 million in distributions to the City of San Diego.

Debt Covenants

The 2009 Credit Facility and Senior Discount Notes include various financial and non-financial covenants applicable to the Company’s wholly-owned subsidiary, Rural/Metro LLC as well as quarterly and annual financial reporting obligations.

Specifically, the 2009 Credit Facility requires Rural/Metro LLC and its subsidiaries to meet certain financial tests, including an interest expense leverage ratio, a total leverage ratio, and a senior secured leverage ratio. The 2009 Credit Facility also contains covenants which, among other things, limit the incurrence of additional indebtedness, dividends, transactions with affiliates, asset sales, acquisitions, mergers, prepayments of other indebtedness, liens and encumbrances, capital expenditures, business activities by the Company, as a holding company, and other matters customarily restricted in such agreements. The financial covenants related to the Senior Discount Notes are similar to or less restrictive than those under the 2009 Credit Agreement. The table below sets forth information regarding certain of the financial covenants under the 2009 Credit Agreement.


	Level to be Achieved at March 31, 2010	Level Achieved at March 31, 2010	Levels to be achieved at
Financial Covenant	Level to be Achieved at March 31, 2010	Level Achieved at March 31, 2010	June 30, 2010	September 30, 2010	December 31, 2010
Interest expense coverage ratio	> 2.00	3.95	> 2.00	> 2.00	> 2.00
Total leverage ratio (1)	< 5.60	4.15	< 5.40	< 5.20	< 5.20
Senior secured leverage ratio (1)	< 3.70	2.73	< 3.55	< 3.35	< 3.35
Capital expenditure (2)	N/A	N/A	< $ 23.0 million	N/A	N/A

(1)	Calculated using a 2009 Term Loan balance of $180.0 million. See discussion in Note 5 to the Consolidated Financial Statements filed with this Quarterly Report on Form 10-Q.

(2)	Measured annually at June 30.

We were in compliance with all of our covenants under our 2009 Credit Facility and Senior Discount Notes at March 31, 2010 as shown above. We were also in compliance with all of our covenants under our Senior Discount Notes. See Note 6 to the Consolidated Financial Statements filed with this Quarterly Report on Form 10-Q for a discussion regarding the 2009 Credit Facility and termination of the 2005 Credit Facility.

Contractual Obligations and Other Commitments

As of March 31, 2010, there had been no material changes to our contractual obligations and other commitments as reported in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009, filed September 9, 2009 with the SEC, except for changes resulting from the 2009 debt refinancing as discussed in Note 6 in the Notes to the Consolidated Financial Statements filed with this Quarterly Report on Form 10-Q. The following table illustrates our contractual obligations under the 2009 Credit Facility and revised obligations for the Senior Subordinated Notes, Term Loan and interest payments as affected by the 2009 debt refinancing as of March 31, 2010 (in thousands). The table does not include all obligations of the Company and should be read in conjunction with the table presented in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009, filed September 9, 2009 with the SEC:


	Payments Due by Period
Contractual Obligations	Total		1 Year or less		2-3 Years		4-5 Years		After 5 Years
Term Loan due 2014	$	179,550	$	3,600	$	18,000	$	157,950	$	—
9.875% Senior Subordinated Notes due March 2015		—		—		—		—		—
Senior Secured Term Loan B due March 2011		—		—		—		—		—
Interest payments (1)		131,590		26,799		50,752		42,648		11,391

	$	311,140	$	30,399	$	68,752	$	200,598	$	11,391

(1)	Calculated using stated coupon rates for fixed rate debt and interest rates applicable at March 31, 2010 for variable rate debt.

Recent Accounting Pronouncements

See Note 2 to our Consolidated Financial Statements filed with this Quarterly Report on Form 10-Q for a summary of recent accounting pronouncements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risks

Our primary exposure to market risk consists of changes in interest rates on our borrowing activities. Current amounts outstanding under our Term Loan due 2014 and the 2009 Revolving Credit Facility bear interest at LIBOR plus 5.00% (subject to a LIBOR floor of 2.00%) or, at Rural/Metro, LLC’s option, the Alternate Base Rate plus 4.00%. Due to the 2.00% floor in LIBOR rate, our interest expense will not increase with an increase in LIBOR until LIBOR exceeds 2.00%. Based on amounts outstanding under our 2009 Credit Facility at March 31, 2010, a 1% increase in the LIBOR rate over 2.00% would increase our interest expense on an annual basis by approximately $1.8 million. If LIBOR exceeds 3.00%, our interest rate cap effectively hedges any rate increase above 3.00% for its notional amount of $60.0 million. For the remainder of the Term Loan due 2014, for a 1% increase in LIBOR over 3%, interest expense would increase by $1.2 million. The remainder of our debt is primarily at fixed interest rates. We monitor the risk associated with interest rate changes and may enter into additional hedging transactions, such as interest rate swap or cap agreements, to mitigate the related exposure. In addition, we are exposed to the risk of interest rate changes on our short-term investment activities. We had no amounts invested in auction rate securities at March 31, 2010.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e)) as of the end of the period covered by this Quarterly Report. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)), that occurred during the nine month period ended March 31, 2010 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information.

Item 1.

Legal Proceedings

The information contained in Note 12 to the Consolidated Financial Statements filed with this Quarterly Report on Form 10-Q is hereby incorporated by referenced into this Part II—Item 1 of this Quarterly Report.

Item 6.

Exhibits


Exhibits

31.1		Certification pursuant to Rule 13a—14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended *

31.2		Certification pursuant to Rule 13a—14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended *

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes—Oxley Act of 2002 +

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes—Oxley Act of 2002 +

*	Filed herewith.

+	Furnished but not filed.

SIGNATURES

Pursuant to the requirements 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.


	RURAL/METRO CORPORATION

Dated: May 10, 2010	By:	/s/ CONRAD A. CONRAD
		Conrad A. Conrad,
		President and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ KRISTINE B. PONCZAK
		Kristine B. Ponczak,
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

	By:	/s/ DONNA BERLINSKI
		Donna Berlinski,
		Vice President and Controller
		(Principal Accounting Officer)

Exhibit Index



31.1		Certification pursuant to Rule 13a—14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended *

31.2		Certification pursuant to Rule 13a—14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended *

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes—Oxley Act of 2002 +

32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes—Oxley Act of 2002 +

*	Filed herewith.

+	Furnished but not filed.

RURAL/METRO CORP /DE/ - FORM 10-Q - May 10, 2010

Attached files

RURAL/METRO CORP /DE/ Reports