-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NQaLfnVXJVAPeAlZNVQALOdUk/aTGShV9ylu3C9qq4rH8iQN1Bju1cCh2EslYvcO mtrHe0aPHcxKLoBtdHcccA== /in/edgar/work/20000828/0000912057-00-039325/0000912057-00-039325.txt : 20000922 0000912057-00-039325.hdr.sgml : 20000922 ACCESSION NUMBER: 0000912057-00-039325 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000531 FILED AS OF DATE: 20000828 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINTAS CORP CENTRAL INDEX KEY: 0000723254 STANDARD INDUSTRIAL CLASSIFICATION: [2320 ] IRS NUMBER: 311188630 STATE OF INCORPORATION: WA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-11399 FILM NUMBER: 711148 BUSINESS ADDRESS: STREET 1: 6800 CINTAS BLVD STREET 2: P O BOX 625737 CITY: CINCINNATI STATE: OH ZIP: 45262 BUSINESS PHONE: 5134591200 MAIL ADDRESS: STREET 1: 6800 CINTAS BOULEVARD STREET 2: P O BOX 625737 CITY: CINCINNATI STATE: OH ZIP: 45262 10-K 1 a10-k.txt 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES X EXCHANGE ACT OF 1934 For the Fiscal Year Ended May 31, 2000 - --- - --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-11399 CINTAS CORPORATION (Exact name of registrant as specified in its charter) Incorporated under IRS Employer ID the Laws of Washington No. 31-1188630 (State or other juris- diction of incorporation 6800 Cintas Boulevard or organization) P.O. Box 625737 Cincinnati, Ohio 45262-5737 Phone: (513) 459-1200 (Address of principal executive offices) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, No Par Value (Title of class) 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, and (2) has been subject to such filing requirements for the past 90 days. YES NO --- -- X --- -- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. The aggregate market value of Common Stock held by nonaffiliates is $7,108,872,271 based on a closing price of $42.1875 on August 24, 2000. As of August 24, 2000, 168,506,602 shares of no par value Common Stock were issued and outstanding. Documents Incorporated by Reference Portions of the Registrant's Annual Report to Shareholders for 2000 furnished to the Commission pursuant to Rule 14a-3(b) and portions of the Registrant's Proxy Statement to be filed with the Commission for its 2000 annual meeting are incorporated by reference in Parts II and III as specified. -1- CINTAS CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K
PAGE ---- Part I Item 1. - Business. 3 Item 2. - Properties. 4 Item 3. - Legal Proceedings. 5 Item 4. - Submission of Matters to a Vote of Security Holders. 5 Part II Item 5. - Market for Registrant's Common Equity and Related Stockholder Matters. 6 Item 6. - Selected Financial Data. 6 Item 7. - Management's Discussion and Analysis of Financial Condition and Results of Operations. 6 Item 7A. - Quantitative and Qualitative Disclosure About Market Risk. 6 Item 8. - Financial Statements and Supplementary Data. 6 Item 9. - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 6 Part III Item 10. - Directors and Executive Officers of the Registrant. 7 Item 11. - Executive Compensation. 7 Item 12. - Security Ownership of Certain Beneficial Owners and Management. 7 Item 13. - Certain Relationships and Related Transactions. 7 Part IV Item 14. - Exhibits, Financial Statement Schedules and Reports on Form 8-K. 7
-2- PART I ITEM 1. BUSINESS Cintas Corporation is a publicly held company, and is primarily a corporate identity uniform company which also provides ancillary services as discussed below. The Company was founded in 1968 by Richard T. Farmer, Chairman of the Board, when he left his family's industrial laundry business in order to develop uniform programs using an exclusive new fabric. In the early 1970's, Cintas acquired the family industrial laundry business. Cintas provides a highly specialized service to businesses of all types - from small service and manufacturing companies to major corporations that employ thousands of people. The Company classifies its businesses into two operating segments: Rentals and Other Services. The Rentals operating segment designs and manufactures corporate identity uniforms which it rents, along with other items, to its customers. The Other Services operating segment involves the design, manufacture and direct sale of uniforms to its customers as well as the sale of ancillary services including sanitation supplies, first aid and safety products and services and cleanroom supplies. The rental markets served by the Company are highly fragmented and competition for this business varies at each of the Company's locations. There are other companies in the uniform rental business which have financial resources comparable to those of the Company, although much of the competition consists of smaller local and regional firms. In certain instances, local competitors may also have financial resources comparable to those of the Company in a particular market. The Company believes that the primary competitive factors that affect its operations are quality, service, design and price, in that order. The service provided to the rental markets served by the Company principally consists of the rental and cleaning of uniforms as well as providing on-going uniform replacements as required to each customer. The Company also offers ancillary products which includes the rental or sale of entrance mats, fender covers, towels, mops, linen products and first aid and safety products and services. Due to its diverse customer base and average account size, the loss of one account would not have a significant financial impact on the Company. In its sale of customized uniforms, Cintas competes on a national basis with other uniform suppliers and manufacturers. The Company operates fourteen manufacturing facilities, which provide for a substantial amount of its standard uniform needs. Additional products are purchased from several outside suppliers. Because of the Company's ability to manufacture much of its own uniform needs, the loss of one vendor would not have a significant impact on the Company. The Company purchases fabric, used in its manufacturing process, from several suppliers. The Company is not aware of any circumstances that would hinder its ability to obtain these materials. The Company does not anticipate any material capital expenditures for environmental remediation that would have a material effect on its financial condition. The Company is not aware of any material non-compliance with environmental laws. At May 31, 2000, the Company employed approximately 22,500 employees of which approximately 900 were represented by labor unions. The Company considers its relationship with its employees to be satisfactory. -3- The table sets forth the revenues derived from each service provided by Cintas.
Year Ended May 31 2000 1999 1998 ---- ---- ---- (in thousands) Rentals $ 1,424,892 $ 1,297,248 $ 1,090,577 Other Services 477,099 454,320 386,368 ----------------- -------------- -------------- $ 1,901,991 $ 1,751,568 $ 1,476,945 ================= ============== ==============
ITEM 2. PROPERTIES The Company occupies 269 facilities located in 207 cities, of which 106 facilities are leased for various terms ranging from monthly to the year 2019. The Company expects that it will be able to renew its leases on satisfactory terms. All other properties are owned. The corporate offices provide centrally located administrative functions including accounting, finance, marketing and computer system development and support. The Company operates processing plants that house administrative, sales and service personnel and the necessary equipment involved in the cleaning of uniforms and bulk items. Branch operations provide administrative, sales and service functions. Cintas operates six distribution facilities and has fourteen manufacturing plants. The Company also operates facilities that distribute first aid products. The Company considers the facilities it operates to be adequate for their intended use. The Company owns or leases 5,918 vehicles. The following chart provides additional information concerning Cintas' facilities:
Type of Facility # of Facilities ---------------- --------------- Processing Plant 131 Branch 70 First Aid Facility 38 Distribution Center 6 Manufacturing Facility 14 Direct Sales Office 10 ------------ Total 269
-4- ITEM 3. LEGAL PROCEEDINGS In December 1992, the Company was served with an "Imminent and Substantial Endangerment and Remedial Action Order" (the "Order") by the California Department of Toxic Substances Control relating to the facility leased by the Company in San Leandro, California. The Order requires Cintas and three other allegedly responsible parties to respond to alleged soil and groundwater contamination at and around the San Leandro facility. It is not possible at this time to estimate the loss or range of loss associated with the claim. Based on information that has been made available to the Company, however, it is not believed that the matter will have a material adverse effect on the Company's financial condition or results of its operations. In acquiring Unitog in March 1999, the Company became a potentially responsible party, and thus faces the possibility of joint and several liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) in connection with alleged environmental contamination in an area near a rental facility in Tempe, Arizona. This facility, located near the South Indian Bend Wash Federal Superfund (SIBW) site, has been tested for soil and groundwater contamination. Soil testing at the Company's facility detected volatile organic compounds, and the Company immediately took action to remediate such contamination. Groundwater testing in the area of the Company's property has detected a very low level of volatile organic compound contamination. The United States Environmental Protection Agency (EPA) in March 1999 issued a Record of Decision to the effect that groundwater contamination in the vicinity of the Company's plant does not warrant remediation at this time. Instead, the low levels of groundwater contamination near the Company's facility will be monitored and allowed to attenuate naturally. The Record of Decision requires active groundwater remediation in other parts of the SIBW site, which are believed to be unrelated to the Company. According to the Record of Decision, the EPA estimates that the 30 year net present value of costs to be incurred to remediate and monitor groundwater contamination at the SIBW site is $22 million. It is possible that the EPA will attempt to recover from the potentially responsible parties the costs it has incurred to date with respect to the SIBW site as well as the costs it expects to incur going forward. As part of the Agreement and Plan of Merger between Unitog Company and the Company, the Company performed environmental testing at nine previously untested Unitog laundry facilities. The testing resulted in the discovery of soil and groundwater contamination at certain of these sites. As a result of all of the environmental matters noted above, the Company recorded a charge to operating expense of $5 million during the third quarter of fiscal 1999 to reflect its current estimate of the additional costs to be incurred relative to these sites. At May 31, 2000, the Company has an undiscounted liability of $5.2 million for environmental matters. The Company is also a party to incidental litigation brought in the ordinary course of business, none of which individually or in the aggregate, is considered to be material to its operations or financial condition. Cintas maintains insurance coverage against certain liabilities that it may incur in its operations from time to time. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None in the fourth quarter of fiscal 2000. -5- PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS "Market for Registrant's Common Stock and Security Holder Information" on page 39 of the Registrant's Annual Report to Shareholders for 2000 is incorporated herein by reference. Dividend information is incorporated by reference to the Consolidated Statements of Shareholders' Equity on page 20. Dividends on the outstanding Common Stock are paid annually and amounted to $.19 and $.15 per share in fiscal 2000 and 1999, respectively. During the quarterly period ended May 31, 2000, the Registrant issued 40,509 shares of Common Stock as the result of an adjustment to the consideration payable in connection with the acquisition of a company in April 1998. The issuance occurred in a transaction separate from the 1998 closing and the securities were issued to a total of 21 selling shareholders. These issuances were exempt from the registration requirements of the Securities Act of 1933 as private offerings pursuant to Section 4(2) of the Act. ITEM 6. SELECTED FINANCIAL DATA The "Eleven Year Financial Summary" on page 17 of the Registrant's Annual Report to Shareholders for 2000 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS "Management's Discussion and Analysis of Financial Condition and Results of Operations" commencing on page 35 of the Registrant's Annual Report to Shareholders for 2000 is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK "Quantitative and Qualitative Disclosure About Market Risk" on page 37 of the Registrant's Annual Report to Shareholders for 2000 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Financial Statements of the Registrant shown on pages 18 through 34 of its Annual Report to Shareholders for 2000 are incorporated herein by reference: Consolidated Statements of Income for the years ended May 31, 2000, 1999 and 1998 Consolidated Balance Sheets as of May 31, 2000 and 1999 Consolidated Statements of Shareholders' Equity for the years ended May 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended May 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements Report of Independent Auditors ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -6- PART III Items 10., 11., 12., and 13. of Part III are incorporated by reference to the Registrant's Proxy Statement for its 2000 Annual Shareholders' Meeting to be filed with the Commission pursuant to Regulation 14A. PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORT ON FORM 8-K (a) (1) Financial Statements. All financial statements required to be filed by Item 8 of this Form and included in this report are listed in Item 8. No additional financial statements are filed because the requirements for paragraph (d) under Item 14 are not applicable to the Company. (a) (2) Financial Statement Schedule: For each of the three years in the period ended May 31, 2000. Schedule II: Valuation and Qualifying Accounts and Reserves. All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the Consolidated Financial Statements or Notes thereto. (a)(3) Exhibits. Exhibit Filing Number Description of Exhibit Status ------- ---------------------- ------ 3.1 Restated Articles of Incorporation (1) 3.2 By-laws (1) 3.3 Amendments to the Articles of Incorporation of Cintas Corporation (2) Management Compensatory Contracts (Exhibits 10.1-10.11) 10.1 Incentive Stock Option Plan (3) 10.2 Partners' Plan, as Amended (4) 10.3 1990 Directors' Stock Option Plan (5) 10.4 1994 Directors' Stock Option Plan (6) 10.5 Agreement and Plan of Merger and Reorganization (7) dated January 12, 1998 by and among Uniforms To You and Company, Cintas Merger Sub, Inc. - Illinois, other acquired companies, certain shareholders and Cintas Corporation -7- 10.6 Agreement and Plan of Merger dated January 9,1999 (8) by and among Unitog Company, Cintas Image Acquisition Company and Cintas Corporation 10.7 Amendment No. 1 to Agreement and Plan of Merger (9) dated March 23, 1999 by and among Unitog Company, Cintas Image Acquisition Company and Cintas Corporation 10.8 Unitog Company 1992 Stock Option Plan (10) 10.9 Amendment No. 1 to Unitog Company 1992 Stock Option Plan (11) 10.10 Unitog Company 1997 Stock Option Plan (12) 10.11 2000 Employee Stock Option Plan (13) 13 2000 Annual Report to Shareholders (a) filed herewith 21 Subsidiaries of the Registrant filed herewith 23 Consent of Independent Auditors filed herewith 27 Financial Data Schedule - Twelve Months Ended May 2000 filed herewith (a) Only portions of the 2000 Annual Report to Shareholders specifically incorporated by reference are filed herewith. A supplemental paper copy of this report will be provided to the SEC for informational purposes. (1) Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended May 31, 1989. (2) Incorporated by reference to the Company's 1994 Proxy Statement. (3) Incorporated by reference to the Company's Registration Statement No. 33-23228 on Form S-8 filed under the Securities Act of 1933. (4) Incorporated by reference to the Company's Registration Statement No. 33-56623 on Form S-8 filed under the Securities Act of 1933. (5) Incorporated by reference to the Company's Registration Statement No. 33-71124 on Form S-8 filed under the Securities Act of 1933. (6) Incorporated by reference to the Company's Proxy Statement for its 1994 Annual Shareholders Meeting. (7) Incorporated by reference to the Company's Form 8-K dated April 8, 1998. (8) Incorporated by reference to the Unitog Company's Form 8-K dated January 9, 1999. (9) Incorporated by reference to the Company's Form 8-K dated March 24, 1999. -8- (10) Incorporated by reference to the Unitog Company's Form 10-K for the fiscal year ended January 26, 1992. (11) Incorporated by reference to the Unitog Company's Form 10-K for the fiscal year ended January 30, 1994. (12) Incorporated by reference to the Unitog Company's 1997 Proxy Statement. (13) Incorporated by reference to the Company's Form 10-Q for the quarter ended November 30, 1999. -9- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CINTAS CORPORATION DATE SIGNED: August 28, 2000 /s/ Robert J. Kohlhepp By: Robert J. Kohlhepp ------------------ Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Capacity Date - --------- -------- ---- /s/ Richard T. Farmer Chairman of the Board - ----------------------- of Directors August 28, 2000 Richard T. Farmer /s/ Robert J. Kohlhepp Chief Executive - ----------------------- Officer and Director August 28, 2000 Robert J. Kohlhepp /s/ Scott D. Farmer President, Chief Operating - ----------------------- Officer and Director August 28, 2000 Scott D. Farmer /s/ James J. Gardner Director August 28, 2000 - ----------------------- James J. Gardner /s/ Donald P. Klekamp Director August 28, 2000 - ----------------------- Donald P. Klekamp /s/ William C. Gale Vice President and Chief - ----------------------- Financial Officer (Principal William C. Gale Financial and Accounting Officer) August 28, 2000
-10- CINTAS CORPORATION Schedule II - Valuation and Qualifying Accounts and Reserves (In Thousands)
ADDITIONS ---------------------------- (1) (2) (3) BALANCE AT CHARGED TO CHARGED TO BALANCE BEGINNING COSTS AND OTHER AT END OF DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS YEAR ----------- -------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS May 31, 1998 $6,745 $3,206 $960 $2,933 $7,978 ========================================================================= May 31, 1999 $7,978 $3,576 $1,447 $4,247 $8,754 ========================================================================= May 31, 2000 $8,754 $1,994 $1,123 $4,507 $7,364 ========================================================================= RESERVE FOR OBSOLETE INVENTORY May 31, 1998 $18,738 $6,899 $1,033 $3,348 $23,322 ========================================================================= May 31, 1999 $23,322 $13,104 $1,930 $6,503 $31,853 ========================================================================= May 31, 2000 $31,853 $1,220 (4) $821 $11,590 (5) $22,304 =========================================================================
(1) Represents amounts charged to expense to increase reserve for estimated future bad debts or to increase reserve for obsolete inventory. Amounts related to inventory are computed by performing a thorough analysis of future marketability by specific inventory item. (2) Represents an increase in the appropriate balance sheet reserve due to acquisitions during the respective period, excluding Uniforms To You and Unitog Company. (3) Represents reductions in the balance sheet reserve due to the actual write-off of non-collectible accounts receivable or the physical disposal of obsolete inventory items. These amounts do not impact the Company's income statement. (4) In the years ended May 31, 1998 and 1999, Cintas acquired several new businesses resulting in a broader and more complex product line. The amount recorded in the year ended May 31, 2000 was significantly less than in the prior years due to the extensive improvements made in product development, forecasting, distribution and sourcing for these acquired operations. Such improvements have resulted in significantly reducing the exposure to obsolete inventory. (5) Represents inventory values either contributed to charitable organizations or destroyed. A reserve for obsolescence was recognized as an expense in prior periods. Most of these amounts were attributed to inventories from acquired companies. -11- EX-13 2 ex-13.txt EX 13 ELEVEN YEAR FINANCIAL SUMMARY (In thousands except per share data) Years Ended May 31 Restated to give effect to the 3-for-2 stock split effective March 2000.
1990 1991 1992 1993 1994 1995 Revenue $518,948 569,583 621,041 711,663 803,009 929,534 Net Income $33,716 35,261 45,744 54,956 67,141 85,413 Pro Forma Net Income (1) $32,761 34,063 45,151 53,374 64,459 80,752 Basic EPS $0.23 0.24 0.31 0.36 0.44 0.55 Diluted EPS $0.23 0.24 0.31 0.35 0.43 0.55 Pro Forma Basic EPS (1) $0.22 0.23 0.30 0.35 0.42 0.52 Pro Forma Diluted EPS (1) $0.22 0.23 0.30 0.35 0.41 0.51 Dividends Per Share $0.03 0.03 0.04 0.05 0.06 0.07 Total Assets $410,628 467,608 501,769 634,197 700,872 816,508 Shareholders' Equity $203,156 233,693 273,501 324,562 409,053 481,654 Return on Average Equity 17.9% 15.6% 17.8% 17.8% 17.6% 18.1% Long-Term Debt $116,148 130,967 122,372 158,311 132,929 164,332
10 YEAR COMPD 1996 1997 1998 1999 2000 GROWTH Revenue $1,103,492 1,261,899 1,476,945 1,751,568 1,901,991 13.9%(3) Net Income $98,956 118,557 133,654 138,939 193,387 19.1% Pro Forma Net Income (1) $94,151 112,763 128,704 138,939 193,387 19.4% Basic EPS $0.64 0.75 0.83 0.84 1.16 17.6% Diluted EPS $0.63 0.75 0.82 0.82 1.14 17.4% Pro Forma Basic EPS (1) $0.61 0.72 0.80 0.84 1.16 18.1% Pro Forma Diluted EPS (1) $0.60 0.71 0.79 0.82 1.14 17.9% Dividends Per Share $0.09 0.10 0.12 0.15 0.19 20.3% Total Assets $996,046 1,101,182 1,305,400 1,407,818 1,581,342 14.4% Shareholders' Equity $553,701 650,603 756,795 871,423 1,042,876 17.8% Return on Average Equity 18.2% 18.7% 18.8%(2) 20.1%(2) 20.2% Long-Term Debt $237,550 227,799 307,633 283,581 254,378
Note: Results prior to March 24, 1999, have been restated to include Unitog Company. Results prior to April 8, 1998, have also been restated to include Uniforms To You Companies. Results prior to October 1, 1991, have also been restated to include Rental Uniform Service of Greenville, S.C., Inc. (1) Results for 1998 and prior years were adjusted on a pro forma basis to reflect the true tax impact of Uniforms To You as if it had been reported as a C Corporation prior to the merger with Cintas. (2) Return on average equity before one-time items. Please refer to Management's Discussion and Analysis for additional information. (3) Represents the 10 year compound annual growth rate based on revenue as restated for pooling of interests transactions noted above. Please refer to the graph below for the 10 year compound annual growth rates in revenue based on financial data, as originally reported by Cintas Corporation, before restatement for pooling of interests transactions. 10 Year Compound Growth-Revenue
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 - ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- 19.4% 20.6% 21.8% 20.2% 19.0% 19.4% 17.8% 19.3% 21.8% 20.9%
(Source: Based on financial data as originally reported by Cintas Corporation before restatement for pooling of interests transactions.) Each bar represents the compound annual growth rate for the 10 years ended, for each year presented. For example, the compound annual growth rate for the 10 years ended May 31, 2000, is 20.9%. -17- CONSOLIDATED STATEMENTS OF INCOME
Years Ended May 31 (In thousands except per share data) 2000 1999 1998 Revenue: Rentals $ 1,424,892 $ 1,297,248 $ 1,090,577 Other services 477,099 454,320 386,368 - ----------------------------------------------------------------------------------------------------- 1,901,991 1,751,568 1,476,945 Costs and expenses (income): Cost of rentals 807,301 745,142 631,474 Cost of other services 315,138 305,657 260,246 Selling and administrative expenses 455,794 419,487 360,254 Acquisition-related expenses 834 12,088 17,116 Special charge -- 28,429 -- Environmental charge -- 5,000 -- Interest income (4,742) (4,671) (4,825) Interest expense 15,907 16,442 15,824 - ----------------------------------------------------------------------------------------------------- 1,590,232 1,527,574 1,280,089 - ----------------------------------------------------------------------------------------------------- Income before income taxes 311,759 223,994 196,856 Income taxes 118,372 85,055 63,202 - ----------------------------------------------------------------------------------------------------- Net income $ 193,387 $ 138,939 $ 133,654 ===================================================================================================== Basic earnings per share $ 1.16 $ .84 $ .83 - ----------------------------------------------------------------------------------------------------- Diluted earnings per share $ 1.14 $ .82 $ .82 - ----------------------------------------------------------------------------------------------------- Dividends declared and paid per share $ .19 $ .15 $ .12 - ----------------------------------------------------------------------------------------------------- Net income as reported $ 193,387 $ 138,939 $ 133,654 Pro forma adjustment for income taxes -- -- 4,950 - ----------------------------------------------------------------------------------------------------- Pro forma net income $ 193,387 $ 138,939 $ 128,704 ===================================================================================================== Pro forma basic earnings per share $ 1.16 $ .84 $ .80 - ----------------------------------------------------------------------------------------------------- Pro forma diluted earnings per share $ 1.14 $ .82 $ .79 - -----------------------------------------------------------------------------------------------------
See accompanying notes. -18- CONSOLIDATED BALANCE SHEETS
As of May 31 (In thousands except share data) 2000 1999 ASSETS Current assets: Cash and cash equivalents $ 52,182 $ 15,803 Marketable securities 57,640 72,315 Accounts receivable, principally trade, less allowance of $7,364 and $8,754, respectively 225,735 202,079 Inventories 164,906 137,983 Uniforms and other rental items in service 213,770 200,154 Prepaid expenses 7,237 6,151 - ------------------------------------------------------------------------------------------------------- Total current assets 721,470 634,485 Property and equipment, at cost, net 642,507 573,087 Other assets 217,365 200,246 - ------------------------------------------------------------------------------------------------------- $ 1,581,342 $ 1,407,818 ======================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 50,976 $ 46,783 Accrued compensation and related liabilities 28,140 25,521 Accrued liabilities 90,058 83,209 Deferred income taxes 49,614 40,214 Long-term debt due within one year 16,604 16,370 - ------------------------------------------------------------------------------------------------------- Total current liabilities 235,392 212,097 Long-term debt due after one year 254,378 283,581 Deferred income taxes 48,696 40,717 Shareholders' equity: Preferred stock, no par value: 100,000 shares authorized, none outstanding -- -- Common stock, no par value: 300,000,000 shares authorized, 168,281,506 and 166,423,911 shares issued and outstanding, respectively 54,738 49,974 Retained earnings 992,450 825,268 Other accumulated comprehensive income (loss) (4,312) (3,819) - ------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,042,876 871,423 - ------------------------------------------------------------------------------------------------------- $ 1,581,342 $ 1,407,818 =======================================================================================================
See accompanying notes. -19- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
OTHER COMMON STOCK ACCUMULATED TOTAL ------------------------ RETAINED COMPREHENSIVE SHAREHOLDERS' (In thousands) SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY Balance at May 31, 1997 158,723 $ 45,395 $ 606,233 $ (1,025) $ 650,603 Net income -- -- 133,654 -- 133,654 Equity adjustment for foreign currency translation -- -- -- (1,491) (1,491) ----------- Comprehensive income 132,163 ----------- Dividends -- -- (19,082) -- (19,082) Distributions to S Corporation shareholders -- -- (12,423) -- (12,423) Effects of acquisitions 5,775 13 11,657 -- 11,670 Repurchase of common stock (221) -- (7,971) -- (7,971) Stock options exercised net of shares surrendered 414 897 181 -- 1,078 Tax benefit resulting from exercise of employee stock options -- 757 -- -- 757 - -------------------------------------------------------------------------------------------------------------------------------- Balance at May 31, 1998 164,691 47,062 712,249 (2,516) 756,795 Net income -- -- 138,939 -- 138,939 Equity adjustment for foreign currency translation -- -- -- (1,303) (1,303) ----------- Comprehensive income 137,636 ----------- Adjustment to conform Unitog Company's fiscal year -- -- 689 -- 689 Dividends -- -- (24,942) -- (24,942) Effects of acquisitions 1,472 13 2,072 -- 2,085 Repurchase of common stock (143) -- (3,739) -- (3,739) Stock options exercised net of shares surrendered 404 2,309 -- -- 2,309 Tax benefit resulting from exercise of employee stock options -- 590 -- -- 590 - -------------------------------------------------------------------------------------------------------------------------------- Balance at May 31, 1999 166,424 49,974 825,268 (3,819) 871,423 Net income -- -- 193,387 -- 193,387 Equity adjustment for foreign currency translation -- -- -- (493) (493) ----------- Comprehensive income 192,894 ----------- Dividends -- -- (31,249) -- (31,249) Effects of acquisitions 1,419 825 5,044 -- 5,869 Stock options exercised net of shares surrendered 439 3,399 -- -- 3,399 Tax benefit resulting from exercise of employee stock options -- 540 -- -- 540 - -------------------------------------------------------------------------------------------------------------------------------- Balance at May 31, 2000 168,282 $ 54,738 $ 992,450 $ (4,312) $ 1,042,876 ================================================================================================================================
See accompanying notes. -20- CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended May 31 (In thousands) 2000 1999 1998 Cash flows from operating activities: Net income $ 193,387 $ 138,939 $ 133,654 Adjustment to conform Unitog Company's fiscal year -- 689 -- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 78,516 68,779 56,791 Amortization of deferred charges 20,997 21,449 18,542 Write down of assets -- 12,609 -- Deferred income taxes 17,379 (1,356) 13,443 Change in current assets and liabilities, net of acquisitions of businesses: Accounts receivable (19,259) (14,484) (24,227) Inventories (22,976) (5,897) (23,461) Uniforms and other rental items in service (14,425) (17,898) (25,632) Prepaid expenses (938) (537) (5,447) Accounts payable (600) (15,089) (5,132) Accrued compensation and related liabilities 2,270 3,559 5,730 Accrued liabilities 3,681 12,299 (1,586) - ------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 258,032 203,062 142,675 Cash flows from investing activities: Capital expenditures (161,432) (171,248) (128,566) Proceeds from sale or redemption of marketable securities 112,908 235,400 117,342 Purchase of marketable securities (98,233) (225,189) (116,841) Acquisitions of businesses, net of cash acquired (24,982) (15,588) (27,456) Proceeds from divestiture of certain facilities 25,722 19,911 -- Other (10,921) (2,785) (899) - ------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (156,938) (159,499) (156,420) Cash flows from financing activities: Proceeds from issuance of long-term debt 140,739 65,778 73,483 Repayment of long-term debt (177,651) (85,502) (25,662) Stock options exercised 3,399 2,309 1,078 Dividends paid (31,249) (24,942) (19,082) Distribution to S Corporation shareholders -- -- (12,423) Other common stock activity -- (562) (5,793) Other 47 1,736 (2,065) - ------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (64,715) (41,183) 9,536 - ------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 36,379 2,380 (4,209) Cash and cash equivalents at beginning of year 15,803 13,423 17,632 - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 52,182 $ 15,803 $ 13,423 ===================================================================================================================
See accompanying notes. -21- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share and share data) 1. SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- BUSINESS DESCRIPTION. Cintas classifies its businesses into two operating segments: Rentals and Other Services. The Rentals operating segment designs and manufactures corporate identity uniforms which it rents along with other items to its customers. The Other Services operating segment involves the design, manufacture and direct sale of uniforms to its customers, as well as the sale of ancillary services including sanitation supplies, first aid products and services and cleanroom supplies. All of these services are provided throughout the United States and Canada to businesses of all types - from small service and manufacturing companies to major corporations that employ thousands of people. PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of Cintas Corporation and its subsidiaries. Intercompany balances and transactions have been eliminated. USE OF ESTIMATES. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Financial results could differ from those estimates. CASH AND CASH EQUIVALENTS. The Company considers all highly liquid investments with a maturity of three months or less, at date of purchase, to be cash equivalents. INVENTORIES. Inventories are valued at the lower of cost (first-in, first-out) or market. Substantially all inventories represent finished goods. UNIFORMS AND OTHER RENTAL ITEMS IN SERVICE. These items are valued at cost less amortization, calculated using the straight-line method generally over periods of eight to thirty-six months. PROPERTY AND EQUIPMENT. Depreciation is calculated using the straight-line method over the following estimated useful lives, in years: Buildings and Improvements 5 to 40 Equipment 3 to 10 Leasehold Improvements 2 to 5 LONG-LIVED ASSETS. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. OTHER ASSETS. Other assets consist primarily of service contracts and noncompete and consulting agreements obtained through the acquisition of businesses, which are amortized by use of the straight-line method over the estimated lives of the agreements which are generally three to twelve years, and goodwill, which is amortized using the straight-line method over twenty to forty years. STOCK OPTIONS. The Company applies the provisions of Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, no compensation expense has been reflected in the financial statements as the exercise price of options granted to employees is equal to the fair market value of the Company's common stock on the date of grant. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK BASED COMPENSATION. INTEREST RATE SWAP AGREEMENTS. Periodic settlements under interest rate swap agreements are recognized as adjustments to interest expense for the relevant periods. -22- REVENUE RECOGNITION. Rental revenue is recognized when services are performed and other services revenue is recognized when products are shipped. The Company also establishes an estimate of allowances for uncollectible accounts when revenue is recorded. PRO FORMA ADJUSTMENT FOR INCOME TAXES. During fiscal 1998, the Company acquired Uniforms To You Companies (UTY) in a merger transaction accounted for as a pooling of interests. Prior to the merger, UTY had elected S Corporation status for income tax purposes. As a result of the merger, UTY terminated its S Corporation election. The pro forma adjustment for income taxes presents the pro forma tax expense of UTY as if UTY had been a C Corporation during the financial statement periods presented. FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and assumptions were used by the Company in estimating the fair value of financial instruments: Cash and cash equivalents. The amounts reported approximate market value. Marketable securities. The amounts reported are at cost, which approximate market value. Market values are based on quoted market prices. Long-term debt. The amounts reported are at carrying value which approximate market value. Market values are determined using similar debt instruments currently available to the Company that are consistent with the terms, interest rates and maturities. OTHER ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This pronouncement which becomes effective in fiscal 2001 is presently being reviewed by the Company and is not expected to have a material effect on the Company's financial position or results of operations, although it may result in additional disclosures in the future. RECLASSIFICATION. Certain prior year amounts have been reclassified to conform with current year presentation. 2. MARKETABLE SECURITIES - -------------------------------------------------------------------------------- All marketable securities are comprised of debt securities and classified as available-for-sale. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in interest income. Realized gains and losses and declines in value determined to be other than temporary on available-for-sale securities are included in interest income. The cost of the securities sold is based on the specific identification method. Interest on securities classified as available-for-sale is included in interest income. The following is a summary of marketable securities:
2000 1999 ------------------------ ------------------------- ESTIMATED ESTIMATED COST FAIR VALUE COST FAIR VALUE Obligations of state and political subdivisions $ 44,828 $ 44,346 $ 42,579 $ 42,616 U.S. Treasury securities and obligations of U.S. government agencies 900 836 3,414 3,383 Other debt securities 11,912 11,858 26,322 26,299 - -------------------------------------------------------------------------------------------------------------------- $ 57,640 $ 57,040 $ 72,315 $ 72,298 ====================================================================================================================
The gross realized gains on sales of available-for-sale securities totaled $54, $241 and $84 for the years ended May 31, 2000, 1999 and 1998, and the gross realized losses totaled $130, $25 and $25, respectively. Net unrealized losses are $600 and $17 at May 31, 2000 and 1999, respectively. -23- The amortized cost and estimated fair value of debt securities at May 31, 2000, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay the obligations without prepayment penalties.
ESTIMATED COST FAIR VALUE Due in one year or less $ 27,022 $ 26,924 Due after one year through three years 23,765 23,437 Due after three years 6,853 6,679 - -------------------------------------------------------------------------------------------------------------------- $ 57,640 $ 57,040 ==================================================================================================================== 3. PROPERTY AND EQUIPMENT - -------------------------------------------------------------------------------------------------------------------- 2000 1999 Land $ 49,829 $ 48,868 Buildings and improvements 285,510 277,176 Equipment 528,467 473,839 Leasehold improvements 10,978 9,993 Construction in progress 73,217 45,480 - --------------------------------------------------------------------------------------------------------------------- 948,001 855,356 Less: accumulated depreciation 305,494 282,269 - -------------------------------------------------------------------------------------------------------------------- $ 642,507 $ 573,087 ==================================================================================================================== 4. OTHER ASSETS - -------------------------------------------------------------------------------------------------------------------- 2000 1999 Goodwill $ 129,626 $ 115,936 Service contracts 107,598 109,447 Noncompete and consulting agreements 56,872 57,203 - -------------------------------------------------------------------------------------------------------------------- 294,096 282,586 Less: accumulated amortization 103,607 96,734 - -------------------------------------------------------------------------------------------------------------------- 190,489 185,852 Other 26,876 14,394 - -------------------------------------------------------------------------------------------------------------------- $ 217,365 $ 200,246 ==================================================================================================================== 5. LONG-TERM DEBT - -------------------------------------------------------------------------------------------------------------------- 2000 1999 Secured and unsecured term notes due through 2003 at an average rate of 9.98% $ 9,500 $ 11,741 Unsecured revolving note at a rate of 5.20% - 10,000 Unsecured term notes due through 2026 at an average rate of 6.40% 66,846 99,299 Unsecured notes due through 2009 at an average rate of 6.57% 172,946 160,010 Industrial development revenue bonds due through 2026 at an average rate of 5.40% 15,168 15,705 Other 6,522 3,196 - --------------------------------------------------------------------------------------------------------------------- 270,982 299,951 Less: amounts due within one year 16,604 16,370 - --------------------------------------------------------------------------------------------------------------------- $ 254,378 $ 283,581 ====================================================================================================================
-24- Debt in the amount of $31,190 is secured by assets with a carrying value of $34,490 at May 31, 2000. The Company has letters of credit outstanding at May 31, 2000 approximating $28,158. Maturities of long-term debt during each of the next five years are $16,604, $185,456, $18,412, $16,264 and $10,308, respectively. The Company also has $60 million available on a credit facility that supports its unsecured notes. The Company has entered into two interest rate swap agreements to manage its exposure to changes in short-term interest rates. The first agreement totals $10 million, expires in March 2001 and allows the Company to pay an effective interest rate of approximately 6.16%. The second agreement totals $35 million, expires in October 2000 and allows the Company to pay an effective interest rate of approximately 4.60%. Interest expense is net of capitalized interest of $1,257, $2,081 and $1,808 for the years ended May 31, 2000, 1999 and 1998, respectively. Interest paid, net of amount capitalized, was $16,773, $16,586 and $15,189 for the years ended May 31, 2000, 1999 and 1998, respectively. 6. LEASES - -------------------------------------------------------------------------------- The Company conducts certain operations from leased facilities and leases certain equipment. Most leases contain renewal options for periods from one to ten years. The lease agreements provide for increases in rentals if the options are exercised based on increases in certain price level factors or prearranged increases. It is anticipated that leases that expire will be renewed or replaced. The minimum rental payments under noncancelable lease arrangements for each of the next five years and thereafter are: $11,422, $8,751, $7,112, $5,356, $4,303 and $11,795, respectively. Rent expense under operating leases during the years ended May 31, 2000, 1999 and 1998 was $17,527, $14,018 and $11,390, respectively. 7. INCOME TAXES - ------------------------------------------------------------------------------
2000 1999 1998 Income taxes consist of the following components: Current: Federal $ 88,842 $ 75,304 $ 53,856 State and local 12,151 11,177 7,061 - -------------------------------------------------------------------------------------------------------------------- 100,993 86,481 60,917 Deferred 17,379 (1,426) 2,285 - -------------------------------------------------------------------------------------------------------------------- $ 118,372 $ 85,055 $ 63,202 ==================================================================================================================== 2000 1999 1998 Reconciliation of income tax expense using the statutory rate and actual income tax expense is as follows: Income taxes at the U.S. federal statutory rate $ 109,109 $ 78,398 $ 68,900 State and local income taxes, net of federal benefit 9,727 8,156 7,073 Nontaxable income earned (832) (793) (1,201) Tax credits (309) (500) (288) Nontaxable items of the company acquired in pooling of interests - - (5,050) Deferred tax benefit arising from pooling of interests - (961) (8,280) Other 677 755 2,048 - -------------------------------------------------------------------------------------------------------------------- $ 118,372 $ 85,055 $ 63,202 ====================================================================================================================
-25- The components of deferred income taxes included on the balance sheets are as follows:
2000 1999 Deferred tax assets: Employee benefits $ 9,240 $ 9,179 Restructuring and other acquisition-related items - 7,275 Allowance for bad debts and other 30,017 23,316 - -------------------------------------------------------------------------------------------------------------------- 39,257 39,770 Deferred tax liabilities: In service inventory 77,501 71,276 Depreciation 50,481 40,686 State taxes 7,468 6,648 Other 2,117 2,091 - -------------------------------------------------------------------------------------------------------------------- 137,567 120,701 - -------------------------------------------------------------------------------------------------------------------- Net deferred tax liability $ 98,310 $ 80,931 ====================================================================================================================
Income taxes paid were $85,509, $77,381 and $59,599 for the years ended May 31, 2000, 1999 and 1998, respectively. 8. ACQUISITIONS - -------------------------------------------------------------------------------- During the years ended May 31, 2000, 1999 and 1998, the Company completed several acquisitions. In fiscal years ended 1999 and 1998, there was one acquisition in each year that was significant and required restatement. POOLING OF INTERESTS In March 1999, the Company acquired Unitog Company (Unitog), a rental and direct sale uniform provider. The Company exchanged 7,608,186 shares of its common stock for all the outstanding stock of Unitog. The acquisition was treated as a pooling of interests for accounting purposes and the accompanying consolidated financial statements were restated at that time to include the financial position and operating results of Unitog for all periods prior to the merger. In accordance with the pooling of interests method of accounting, no adjustment has been made to the historical carrying amount of assets and liabilities of Unitog. As the Company and Unitog had different year ends at the time of the acquisition, the consolidated statements combine the consolidated financial position of the Company at May 31, 1999, and the consolidated results of its operations and its cash flows for the fiscal years ended May 31, 1999 and 1998 with the financial position of Unitog at May 31, 1999 and the recasted results of its operations for the fiscal years ended April 30, 1999 and April 26, 1998 and its cash flows for the periods ended May 31, 1999 and April 26, 1998. Due to the different fiscal year-ends, retained earnings includes an adjustment to record Unitog's net income for the month ended May 31, 1999, which is not included in the consolidated financial statements for any fiscal period. For this period, Unitog had revenue of $19,544, operating expenses of $17,944 including $1,424 of depreciation and amortization and net income of $689. -26- A reconciliation of revenue, pro forma net income and pro forma basic and diluted earnings per share of Cintas (as previously reported), Unitog, and combined is as follows:
1998 Revenue: Cintas (as previously reported) $ 1,198,307 Unitog 278,638 - -------------------------------------------------------------------------------------------------------------------- Combined $ 1,476,945 ==================================================================================================================== Pro forma net income: Cintas (as previously reported) $ 117,907 Unitog 10,797 - -------------------------------------------------------------------------------------------------------------------- Combined $ 128,704 ==================================================================================================================== Pro forma basic earnings per share: Cintas (as previously reported) $ .77 - -------------------------------------------------------------------------------------------------------------------- Combined $ .80 ==================================================================================================================== Pro forma diluted earnings per share: Cintas (as previously reported) $ .76 ==================================================================================================================== Combined $ .79 ====================================================================================================================
In accordance with accounting rules for pooling of interests transactions, charges to operating income for acquisition-related expenses relating to this merger approximated $11,000 ($7,000 after tax). They primarily consisted of investment banking fees, a pre-established retention program for certain employees and professional service fees. In April 1998, the Company acquired Uniforms To You (UTY), a direct sale uniform provider. The acquisition was accounted for using the pooling of interests method of accounting. The Company exchanged 5,938,893 shares of its common stock for all the outstanding stock of UTY. In accordance with the pooling of interests method of accounting, no adjustment was made to the historical carrying amount of assets and liabilities of UTY. The accompanying consolidated financial statements were restated for the year ended May 31, 1998 to include the financial position and operating results of UTY for all periods prior to the merger. In accordance with accounting rules for pooling of interests transactions, charges to operating income for acquisition-related expenses were recorded upon completion of the pooling acquisitions. These acquisition-related expenses totaled $16,000 ($11,000 after tax) for the UTY transaction and primarily consisted of a pre-established compensation program for UTY's senior executives. The remaining acquisition-related expenses were for other acquisition activity during the year. PURCHASES For all acquisitions accounted for as purchases, including insignificant acquisitions, the purchase price paid for each has been allocated to the fair value of the assets acquired and liabilities assumed. The following summarizes the aggregate purchase price for all businesses acquired which have been accounted for as purchases:
2000 1999 Fair value of assets acquired $ 32,577 $ 18,941 Liabilities assumed and incurred 1,969 3,756 - -------------------------------------------------------------------------------------------------------------------- Total cash paid for acquisitions $ 30,608 $ 15,185 ====================================================================================================================
The results of operations for the acquired businesses are included in the consolidated statements of income from the dates of acquisition. The pro forma revenue, net income and earnings per share information relating to acquired businesses are not presented because they are not material. -27- 9. DEFINED CONTRIBUTION PLANS - -------------------------------------------------------------------------------- The Company's Partners' Plan (the Plan) is a non-contributory profit sharing plan and ESOP for the benefit of certain Company employees who have completed one year of service. The Plan also includes a 401(k) savings feature covering substantially all employees. The amount of contributions to the profit sharing plan and ESOP, as well as the matching contribution to the 401(k), are made at the discretion of the Company. Total contributions, including the Company's matching contributions, were $15,600, $12,100 and $8,820 for the years ended May 31, 2000, 1999 and 1998, respectively. As a result of previous mergers and acquisitions, the Company also sponsors contributory thrift plans covering certain salaried and clerical employees and certain employees subject to collective bargaining agreements. Under the provisions of these thrift plans, employees are permitted to contribute a maximum of 6% of their earnings and the Company makes matching contributions of 25% to 50%. Employees may make additional unmatched contributions to the plan of up to 9% of their earnings. The Company's contributions to these thrift plans were $596, $1,191 and $1,200 for the fiscal years ended May 31, 2000, 1999 and 1998, respectively. 10. EARNINGS PER SHARE - -------------------------------------------------------------------------------- Earnings per share and pro forma earnings per share are computed in accordance with Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE. The basic computations are computed based on the weighted average number of common shares outstanding during each period. The diluted computations reflect the potential dilution that could occur if stock options were exercised into common stock, under certain circumstances, that then would share in the earnings of the Company. The following table represents a reconciliation of the shares used to calculate basic and diluted earnings per share for the respective years:
2000 1999 1998 Numerator: Net income $ 193,387 $ 138,939 $ 133,654 - -------------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic earnings per share - weighted average shares (000's) 167,067 165,603 160,538 Effect of dilutive securities - employee stock options (000's) 2,920 3,738 2,866 - -------------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions (000's) 169,987 169,341 163,404 - -------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 1.16 $ .84 $ .83 - -------------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 1.14 $ .82 $ .82 - --------------------------------------------------------------------------------------------------------------------
On January 18, 2000, the Board of Directors approved a three-for-two common stock split effective March 7, 2000. On October 22, 1997, the Board of Directors approved a two-for-one common stock split effective November 18, 1997. All share and per share information have been adjusted to retroactively reflect the effect of these stock splits for all periods presented. -28- 11. STOCK BASED COMPENSATION - -------------------------------------------------------------------------------- Under the stock option plan adopted by the Company in fiscal 2000, the Company may grant officers and key employees incentive stock options and/or non-qualified stock options to purchase an aggregate of 9,000,000 shares of the Company's common stock. Options are granted at the fair market value of the underlying common stock on the date of grant and generally become exercisable at the rate of 20% per year commencing five years after grant, so long as the holder remains an employee of the Company. As a result of the Unitog acquisition in March 1999, the Company retained a non-qualified stock option plan for certain of its employees. The exercise price of the options granted under this plan is the fair market value at date of grant and the options vest ratably over four years and expire ten years after the date of grant. Certain provisions of the plan require immediate vesting and a cash settlement, as opposed to the issuance of common stock, upon termination of the option holders' employment prior to March 24, 2000. The total compensation expense under this arrangement recorded during the fourth quarter of fiscal 1999 was $5,100, which has been paid. The information presented in the following table relates primarily to stock options granted and outstanding under either the plan adopted in fiscal 2000 or under similar plans:
WEIGHTED AVERAGE SHARES EXERCISE PRICE Outstanding May 31, 1997 (757,923 shares exercisable) 5,133,242 $ 11.62 Granted 1,744,604 24.30 Cancelled (237,008) 15.26 Exercised (446,978) 5.33 - ----------------------------------------------------------------------------------------------------------------------- Outstanding May 31, 1998 (668,919 shares exercisable) 6,193,860 15.49 Granted 620,175 32.90 Cancelled (299,972) 20.15 Exercised (592,886) 11.72 - ----------------------------------------------------------------------------------------------------------------------- Outstanding May 31, 1999 (623,280 shares exercisable) 5,921,177 17.46 Granted 760,825 41.39 Cancelled (249,575) 25.72 Exercised (493,736) 10.71 - ----------------------------------------------------------------------------------------------------------------------- Outstanding May 31, 2000 (671,391 shares exercisable) 5,938,691 $ 20.74 =======================================================================================================================
The following table summarizes the information related to stock options outstanding at May 31, 2000:
OUTSTANDING OPTIONS EXERCISABLE OPTIONS ------------------- ------------------- AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF EXERCISE NUMBER OPTION EXERCISE NUMBER EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE $ 4.44 - $12.79 1,458,358 3.02 $ 9.22 495,508 $ 8.23 12.92 - 16.83 1,526,163 5.60 14.90 28,113 15.32 17.25 - 23.54 1,490,918 7.04 22.43 112,643 18.31 24.37 - 50.71 1,463,252 8.65 36.60 35,127 27.75 ----------------------------------------------------------------------------------------------------------- $ 4.44 - $50.71 5,938,691 6.08 $20.74 671,391 $11.24 ===========================================================================================================
At May 31, 2000, 8,950,375 shares of common stock are reserved for future issuance under the 2000 plan. -29- Pro forma information regarding earnings and earnings per share is required by Statement No. 123 and has been determined as if the Company had accounted for its stock options granted subsequent to May 31, 1995 under the fair value method of that Statement. The weighted average fair value of stock options granted during 2000, 1999 and 1998 was $21.29, $14.09 and $10.06, respectively. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
2000 1999 1998 ---- ---- ---- Risk free interest rate 6.25% 5.50% 5.50% Dividend yield .50% .32% .45% Expected volatility of the Company's common stock 32% 27% 24% Expected life of the option in years 9 9 8
The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are freely transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in the Company's opinion existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows:
2000 1999 1998 ---- ---- ---- Net income: As reported $ 193,387 $ 138,939 $ 133,654 Pro forma for Statement No. 123 $ 188,578 $ 135,506 $ 130,797 Earnings per share: Pro forma basic earnings per share for Statement No. 123 $ 1.13 $ .82 $ .81 Pro forma diluted earnings per share for Statement No. 123 $ 1.11 $ .80 $ .80
The effects of providing pro forma disclosure are not representative of earnings reported for future years. 12. LITIGATION AND ENVIRONMENTAL MATTERS - -------------------------------------------------------------------------------- The Company is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract and employment claims. In the opinion of management, the aggregate liability, if any, with respect to such actions will not have a material adverse effect on the financial position or results of operations of the Company. In acquiring Unitog in March 1999, the Company became a potentially responsible party, and thus faces the possibility of joint and several liability under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) in connection with alleged environmental contamination in an area near a rental facility in Tempe, Arizona. This facility, located near the South Indian Bend Wash Federal Superfund (SIBW) site, has been tested for soil and groundwater contamination. Soil testing at the Company's facility detected volatile organic compounds, and the Company promptly took steps to remediate the contamination. Groundwater testing in the area of the Company's property has detected a very low level of -30- volatile organic compound contamination. The United States Environmental Protection Agency (EPA) in March 1999 issued a Record of Decision to the effect that groundwater contamination in the vicinity of the Company's plant does not warrant remediation at this time. Instead, the low levels of groundwater contamination near the Company's facility will be monitored and allowed to attenuate naturally. The Record of Decision requires active groundwater remediation in other parts of the SIBW site, which are believed to be unrelated to the Company. According to the Record of Decision, the EPA estimates that the 30 year net present value of costs to be incurred to remediate and monitor groundwater contamination at the SIBW site is $22,000. It is possible that the EPA will attempt to recover from the potentially responsible parties the costs it has incurred to date with respect to the SIBW site as well as the costs it expects to incur going forward. As part of the Agreement and Plan of Merger dated January 9, 1999 between Unitog Company and the Company, the Company performed environmental testing at nine previously untested Unitog laundry facilities. The testing resulted in the discovery of soil and groundwater contamination at certain of these sites. As a result of all of the environmental matters noted above, the Company recorded a charge to operating expense of $5,000 during the third quarter of fiscal 1999 to reflect its current estimate of the additional costs to be incurred relative to these sites. At May 31, 2000, the Company has an undiscounted liability of $5,200 for environmental matters. 13. SPECIAL CHARGE - -------------------------------------------------------------------------------- As a result of the acquisition of Unitog in March 1999, the Company developed a plan during the fourth quarter of fiscal 1999 to integrate Unitog into the Company and close duplicate facilities. The intention of the plan was to position the Company to improve service to its customers and achieve higher profitability. This plan was completed in fiscal 2000. The plan primarily addressed: (1) exiting certain rental and manufacturing duplicate facilities resulting in asset write downs to estimated fair value, lease abandonments and costs to terminate employees and (2) selling the Unitog headquarters in Kansas City, Missouri resulting in asset write downs to their fair value upon sale and costs to terminate employees. Accordingly, the Company recognized a special charge of $28,429, or $17,626 after income taxes and $.11 per share during 1999. Details of the special charge and related activity for fiscal years 1999 and 2000 are as follows:
1999 ACCRUAL AT 2000 ACCRUAL AT SPECIAL CHARGE ACTIVITY MAY 31, 1999 ACTIVITY MAY 31, 2000 Severance $ 15,820 $ (9,772) $ 6,048 $ (6,048) $ -- Asset write downs 12,609 (12,609) - - -- - ------------------------------------------------------------------------------------------------------------------ Total $ 28,429 $ (22,381) $ 6,048 $ (6,048) $ - ==================================================================================================================
Severance costs included the cost of separation payments to certain employees who have been terminated. Asset write downs associated with the exit of certain redundant rental and manufacturing facilities related to the consolidation of facilities in areas where the Company had sufficient capacity in existing facilities to meet anticipated requirements. The asset write down associated with the sale of the Unitog headquarters related to the closure of the facility and relocation of business functions to the Company's headquarters in Cincinnati, Ohio. 14. SEGMENT INFORMATION - -------------------------------------------------------------------------------- The Company classifies its businesses into two operating segments: Rentals and Other Services. The Rentals operating segment designs and manufactures corporate identity uniforms which it rents, along with other items, to its customers. The Other Services operating segment involves the design, manufacture and direct sale of uniforms to its customers, as well as the sale of ancillary services including sanitation supplies, first aid products and services and cleanroom supplies. All of these services are provided throughout the United States and Canada to businesses of all types - from small service and manufacturing companies to major corporations that employ thousands of people. -31- Information as to the operations of the Company's different business segments is set forth below based on the distribution of products and services offered. The Company evaluates performance based on several factors of which the primary financial measures are business segment revenue and income before income taxes. As a result of this Statement, certain prior year amounts have been reclassified to conform to the current year presentation. The accounting policies of the business segments are the same as those described in the Significant Accounting Policies (Note 1).
OTHER RENTALS SERVICES CORPORATE TOTAL MAY 31, 2000 Revenue $1,424,892 $ 477,099 $ - $ 1,901,991 - --------------------------------------------------------------------------------------------------------------------- Gross margin $ 617,591 $ 161,961 $ - $ 779,552 Selling and administrative expenses 338,887 116,907 - 455,794 Acquisition-related expenses - - 834 834 Interest income - - (4,742) (4,742) Interest expense - - 15,907 15,907 - --------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 278,704 $ 45,054 $ (11,999) $ 311,759 - --------------------------------------------------------------------------------------------------------------------- Depreciation and amortization $ 86,270 $ 13,243 $ - $ 99,513 - --------------------------------------------------------------------------------------------------------------------- Capital expenditures $ 129,838 $ 31,594 $ - $ 161,432 - --------------------------------------------------------------------------------------------------------------------- Total assets $1,214,318 $ 257,202 $ 109,822 $ 1,581,342 ===================================================================================================================== MAY 31, 1999 Revenue $1,297,248 $ 454,320 $ - $ 1,751,568 - --------------------------------------------------------------------------------------------------------------------- Gross margin $ 552,106 $ 148,663 $ - $ 700,769 Selling and administrative expenses 314,127 105,360 - 419,487 Acquisition-related expenses - - 12,088 12,088 Special charge - - 28,429 28,429 Environmental charge - - 5,000 5,000 Interest income - - (4,671) (4,671) Interest expense - - 16,442 16,442 - --------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 237,979 $ 43,303 $ (57,288) $ 223,994 - --------------------------------------------------------------------------------------------------------------------- Depreciation and amortization $ 80,550 $ 9,678 $ - $ 90,228 - --------------------------------------------------------------------------------------------------------------------- Capital expenditures $ 150,007 $ 21,241 $ - $ 171,248 - --------------------------------------------------------------------------------------------------------------------- Total assets $1,080,194 $ 239,506 $ 88,118 $ 1,407,818 ===================================================================================================================== MAY 31, 1998 Revenue $1,090,577 $ 386,368 $ - $ 1,476,945 - --------------------------------------------------------------------------------------------------------------------- Gross margin $ 459,103 $ 126,122 $ - $ 585,225 Selling and administrative expenses 266,872 93,382 - 360,254 Acquisition-related expenses - - 17,116 17,116 Interest income - - (4,825) (4,825) Interest expense - - 15,824 15,824 - --------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 192,231 $ 32,740 $ (28,115) $ 196,856 - --------------------------------------------------------------------------------------------------------------------- Depreciation and amortization $ 67,550 $ 7,783 $ - $ 75,333 - --------------------------------------------------------------------------------------------------------------------- Capital expenditures $ 107,293 $ 21,273 $ - $ 128,566 - --------------------------------------------------------------------------------------------------------------------- Total assets $ 994,969 $ 208,854 $ 101,577 $ 1,305,400 ====================================================================================================================
-32- 15. QUARTERLY FINANCIAL DATA (UNAUDITED) - -------------------------------------------------------------------------------- The following is a summary of the results of operations for each of the quarters within the years ended May 31, 2000 and 1999.
FIRST SECOND THIRD FOURTH MAY 31, 2000 QUARTER QUARTER QUARTER QUARTER Revenue $ 457,375 $ 465,849 $ 473,929 $ 504,838 Gross profits $ 184,289 $ 190,166 $ 194,575 $ 210,522 Net income $ 43,165 $ 48,335 $ 49,062 $ 52,825 Basic earnings per share $ .26 $ .29 $ .29 $ .32 Diluted earnings per share $ .25 $ .29 $ .29 $ .31 Weighted average number of shares outstanding (000's) 166,502 166,898 167,368 167,498
FIRST SECOND THIRD FOURTH MAY 31, 1999 QUARTER QUARTER QUARTER QUARTER Revenue $ 426,430 $ 436,498 $ 433,669 $ 454,971 Gross profits $ 167,675 $ 174,440 $ 176,678 $ 181,976 Net income $ 36,251 $ 44,378* $ 38,631** $ 19,679 Basic earnings per share $ .22 $ .27 $ .23 $ .12 Diluted earnings per share $ .22 $ .26 $ .22 $ .12 Weighted average number of shares outstanding (000's) 164,894 165,537 166,224 166,287
* Includes a $2,100 gain from the sale of certain facilities and a $2,000 legal recovery on a breach of contract settlement. **Includes a $5,000 charge relating to environmental matters. -33- REPORT OF AUDIT COMMITTEE The Audit Committee (the Committee) of the Board of Directors is composed of three independent directors. The Committee, which held two meetings during fiscal 2000, oversees the Company's financial reporting process on behalf of the Board of Directors. In fulfilling its responsibilities, the Committee recommended to the Board of Directors the selection of the Company's independent auditors. The Committee discussed with the independent auditors the overall scope and specific plan for their audits. The Committee also discussed the Company's consolidated financial statements and the adequacy of the Company's system of internal control. The Committee meets with the Company's independent auditors, without management present, to discuss the results of their evaluation of the system of internal control and the overall quality of the Company's financial reporting. The meetings are designed to facilitate any private communications with the Committee desired by the independent auditors. /s/ Roger L. Howe - ----------------------------- Roger L. Howe, Chairman Audit Committee July 6, 2000 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Cintas Corporation We have audited the accompanying consolidated balance sheets of Cintas Corporation as of May 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended May 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cintas Corporation at May 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP ---------------------- Ernst & Young LLP Cincinnati, Ohio July 6, 2000 -34- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL 2000 COMPARED TO FISCAL 1999 Fiscal 2000 marked the 31st year of uninterrupted growth for Cintas. Total revenue was $1.9 billion, an increase of 9% over fiscal 1999. Because the merger with Unitog on March 24, 1999 was treated as a pooling of interests, the Company's historical financial results have been restated as if Cintas and Unitog had always been one company. Revenue from the Rentals segment increased 10% and Other Services revenue increased 5%, primarily due to growth in the customer base. Revenue contributed by Unitog was lower when compared to the prior year, while Cintas revenue increased 13%. The decline in the Unitog growth rate was caused by several reasons. Unitog divested some of its linen business shortly before the Cintas acquisition. After the acquisition, Cintas sold some additional linen volume. Internal growth in the Rentals segment, excluding Unitog volume, reached the Cintas targeted range of 14%-16% by year end. Pre-tax income was $312 million, a 39% increase over 1999. Excluding one-time items related to Unitog in fiscal 1999 (refer to Notes 8, 12, 13 and 15 for additional information), pre-tax income increased 18% in fiscal 2000 over the prior year. Pre-tax income from the Rentals and Other Services segments increased 17% and 4%, respectively, over the prior year. One-time items for fiscal 1999 relate primarily to the merger with Unitog. These items include a one-time charge of $39 million related to transaction fees and integration costs, a $5 million Unitog environmental charge and one-time income of $4 million generated by Unitog. The one-time charge of $39 million included $11 million for transaction fees (investment banking, legal and accounting fees and retention bonuses) and a special charge of $28 million related to integration costs (severance and asset write downs). As a result of the integration of Unitog and Cintas, redundant operating facilities were identified based on an evaluation of operating capacity by location. These redundant facilities were merged into existing operations during fiscal 2000. In addition, Unitog corporate functions were consolidated and the Unitog corporate office building was sold in December 1999. The cost to exit all corporate and operating facilities included severance payments to affected employees and the write-off of assets. Severance costs included a pre-established severance plan for corporate executives and the cash settlement of stock options for terminated employees. These actions have improved service to customers, while enabling Cintas to reduce future operating costs. Net interest expense decreased $1 million over the prior year, despite higher interest rates, due to a lower level of average debt in fiscal 2000. The Company's effective tax rate was 38% for fiscal 2000 and fiscal 1999. Excluding one-time items impacting fiscal 1999, net income for fiscal 2000 of $193 million and basic earnings per share of $1.16 represent an increase of 18% and 17%, respectively, over fiscal 1999. Including these one-time items, net income and basic earnings per share represent a 39% and 38% increase, respectively, over the 1999 fiscal year. Return on average equity is 20% compared to 17% for the prior year; however, excluding one-time items, return on average equity is 20% for both fiscal 2000 and the prior year. Cash, cash equivalents and marketable securities increased by $22 million in 2000, or 25%, primarily due to strong operating results. The cash, cash equivalents and marketable securities will be used to finance future acquisitions and capital expenditures. Marketable securities consist primarily of municipal bonds and federal government securities. Accounts receivable increased $24 million due to sales growth and acquisitions made during the year. Inventories increased $27 million due to acquisitions and sales growth in both business segments, as well as to support new product roll-outs in the Other Services segment. -35- Net property and equipment increased by $69 million. In fiscal 2000, the Company completed construction of eleven new uniform rental facilities and had another six uniform rental facilities in various stages of construction to accommodate growth in rental operations. FISCAL 1999 COMPARED TO FISCAL 1998 Fiscal 1999 total revenue was $1.8 billion, an increase of 19% over fiscal 1998. Revenue from the Rentals segment increased 19% and Other Services increased 18%, primarily due to growth in the customer base. Revenue contributed by Unitog was flat when compared to the prior year, while Cintas revenue increased 23%. Pre-tax income was $224 million, an increase of 14% over fiscal 1998. Pre-tax income from the Rentals and Other Services segments increased 24% and 32%, respectively, over the prior year. Excluding one-time charges related to the mergers with Unitog in fiscal 1999 (refer to Notes 8, 12, 13 and 15 for additional information) and UTY in fiscal 1998, pre-tax income was $264 million, an increase of 24% over the prior year. Results for 1998 were adjusted on a pro forma basis to reflect the true tax impact of UTY as if they had been reported as a C Corporation prior to the merger with Cintas. These adjustments include a one-time tax credit of $8 million to establish a deferred tax asset and acquisition-related expenses of $16 million, primarily related to a pre-established compensation program for UTY executives. Net interest expense increased $1 million over the prior year due to a higher level of average debt in 1999. The Company's effective tax rate was 38% and 35% pro forma, respectively, for fiscal years 1999 and 1998. Fiscal year 1998 income taxes were offset by the $8 million credit related to the conversion of UTY from an S Corporation to a C Corporation. Excluding one-time items impacting both 1999 and 1998, pro forma net income of $164 million and pro forma basic earnings per share of $.99 represent an increase of 25% and 21%, respectively, over fiscal 1998. Including these one-time items, pro forma net income of $139 million and pro forma basic earnings per share of $.84 represent an 8% and 5% increase, respectively, over the 1998 fiscal year. Pro forma return on average equity is 17% compared to 18% for the prior year; however, excluding one-time items, pro forma return on average equity is 20% compared to 19% for the prior year. Cash, cash equivalents and marketable securities decreased by $13 million in 1999, primarily due to capital expenditures for new facilities and equipment to accommodate growth. The cash, cash equivalents and marketable securities will be used to finance future acquisitions and capital expenditures. Marketable securities consist primarily of municipal bonds and federal government securities. Accounts receivable increased $16 million, primarily due to sales growth. Inventories increased $8 million, reflecting growth in both the Rentals and Other Services segments of the business. Net property and equipment increased by $84 million. In fiscal 1999, the Company completed construction of fifteen new uniform rental facilities and had another twelve in various stages of construction to accommodate growth in rental operations. LIQUIDITY AND CAPITAL RESOURCES At May 31, 2000, the Company had $110 million in cash, cash equivalents and marketable securities. The Company's investment policy pertaining to marketable securities is conservative. Preservation of principal while earning an attractive yield are the criteria used in making investments. Working capital for fiscal 2000 increased $64 million, to $486 million in fiscal 2000. This increase is primarily due to the increase in accounts receivable and inventories related to acquisitions and sales growth in both the Rentals and Other Services segments. -36- Capital expenditures for fiscal 2000 totaled $161 million, including $130 million for the Rentals segment and $31 million for Other Services. The Company continues to reinvest in land, buildings and equipment in an effort to expand capacity for future growth. The Company anticipates that capital expenditures for fiscal 2001 will approximate $175-$180 million. The Company's percentage of debt to total capitalization was 21% at May 31, 2000, versus 26% at May 31, 1999. In fiscal 2000 , the Company initiated a $200 million commercial paper program, which received credit ratings of "A-1" from Standard & Poor's and "Prime-1" from Moody's. These ratings reflect the Company's commitment to conservative financial policies, strong financial measures and a disciplined integration strategy for acquisitions. This commercial paper program replaced bank loans and reduced interest rates on outstanding debt. The program is fully supported by a long-term credit facility and matures in 2002. The Company expects to extend the facility prior to maturity. As of May 31, 2000, $140 million in commercial paper was outstanding and $60 million was available under the commercial paper or committed credit facility. The $140 million outstanding is included in the $172 million of unsecured notes detailed in Note 5. During the year, the Company paid dividends of $31 million, or $.19 per share. This dividend is an increase of 27% over that paid in fiscal 1999. MARKET RISK The Company manages interest rate risk by using a combination of variable and fixed rate debt, marketable securities and interest rate swap agreements. The Company's earnings are affected by changes in short-term interest rates due to the use of variable rate notes and revolving credit facilities amounting to approximately $169 million, with an average interest rate of 6.36%. This exposure is limited by the purchase of marketable securities and interest rate swap agreements as a hedge against variability in short-term rates. If short-term rates increase by one-half percent (or 50 basis points), the Company's interest expense would increase, and income before taxes would decrease, by approximately $.5 million. Conversely, if short-term rates decrease by one-half percent (or 50 basis points), the Company's interest expense would decrease, and income before taxes would increase, by approximately $.5 million. This estimated exposure considers the mitigating effects of marketable securities and swap agreements on the change in the cost of variable rate debt. This analysis does not consider the effects of a change in economic activity or a change in the Company's capital structure. INFLATION AND CHANGING PRICES Management believes inflation has not had a material impact on the Company's financial condition or a negative impact on operations. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. This Annual Report contains forward-looking statements that reflect the Company's current views as to future events and financial performance with respect to its operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in this Annual Report. Factors that might cause such a difference include the possibility of greater than anticipated operating costs, lower sales volumes, the performance and costs of integration of acquisitions, fluctuations in costs of materials and labor, the outcome of pending environmental matters and the reactions of competitors in terms of price and service. Forward-looking statements speak only as of the date made. Cintas undertakes no obligation to update any forward-looking statements to reflect the events or circumstances arising after the date of which they are made. -37- DIRECTORS AND OFFICERS
BOARD OF DIRECTORS DAVID T. JEANMOUGIN LARRY A. HARMON SENIOR VICE PRESIDENT & SECRETARY VICE PRESIDENT GERALD V. DIRVIN GREAT LAKES RENTAL GROUP RETIRED EXECUTIVE VICE PRESIDENT WILLIAM C. GALE AND DIRECTOR OF THE PROCTER & GAMBLE VICE PRESIDENT & CHIEF FINANCIAL OFFICER J. PHILLIP HOLLOMAN COMPANY VICE PRESIDENT KAREN L. CARNAHAN RESEARCH & DEVELOPMENT RICHARD T. FARMER VICE PRESIDENT & TREASURER CHAIRMAN OF THE BOARD JEFFRY E. JONES OF THE CORPORATION OPERATING, STAFF, AND VICE PRESIDENT SUBSIDIARY OFFICERS NORTHWEST RENTAL GROUP SCOTT D. FARMER PRESIDENT & CHIEF OPERATING OFFICER JAMES J. CASE JOHN S. KEAN III OF THE CORPORATION VICE PRESIDENT SENIOR VICE PRESIDENT SOUTHWEST RENTAL GROUP JAMES J. GARDNER JAMES J. KRUPANSKY RETIRED VICE PRESIDENT JAMES V. CRITCHFIELD VICE PRESIDENT OF THE CORPORATION VICE PRESIDENT WESTERN RENTAL GROUP NORTHCENTRAL RENTAL GROUP ROGER L. HOWE GLENN W. LARSEN RETIRED CHAIRMAN OF THE BOARD WILLIAM L. CRONIN VICE PRESIDENT OF U.S. PRECISION LENS, INC. VICE PRESIDENT LOGISTICS & MANUFACTURING NORTHEAST RENTAL GROUP DONALD P. KLEKAMP JOHN W. MILLIGAN SENIOR PARTNER MICHAEL P. DIMINO VICE PRESIDENT OF KEATING, MUETHING & KLEKAMP PRESIDENT & CHIEF OPERATING OFFICER MIDWEST RENTAL GROUP UNIFORMS TO YOU ROBERT J. KOHLHEPP ROBERT A. OSWALD CHIEF EXECUTIVE OFFICER GREGORY J. ELING VICE PRESIDENT OF THE CORPORATION VICE PRESIDENT CENTRAL RENTAL GROUP DAVID POLLAK, JR. JOHN S. LILLARD VICE PRESIDENT CHAIRMAN OF THE BOARD MICHAEL P. GABURO FIRST AID & SAFETY DIVISION OF WINTRUST FINANCIAL CORPORATION VICE PRESIDENT CLEANROOM DIVISION RODGER V. REED CORPORATE OFFICERS VICE PRESIDENT ARNOLD GEDMINTAS NATIONAL ACCOUNT DIVISION RICHARD T. FARMER VICE PRESIDENT CHAIRMAN OF THE BOARD NORTHERN RENTAL GROUP BRUCE E. ROTTE VICE PRESIDENT ROBERT J. KOHLHEPP WILLIAM W. GOETZ SOUTHEAST RENTAL GROUP CHIEF EXECUTIVE OFFICER VICE PRESIDENT MARKETING & MERCHANDISING G. THOMAS THORNLEY SCOTT D. FARMER VICE PRESIDENT & PRESIDENT & CHIEF OPERATING OFFICER J. TODD GREGORY CHIEF INFORMATION OFFICER VICE PRESIDENT ROBERT R. BUCK SOUTHCENTRAL RENTAL GROUP SENIOR VICE PRESIDENT & PRESIDENT - UNIFORM RENTAL DIVISION
-38- SHAREHOLDER INFORMATION
EXECUTIVE OFFICES 10-K REPORT Cintas Corporation A copy of the Form 10-K annual report 6800 Cintas Boulevard filed with the Securities and Exchange P.O. Box 625737 Commission for the year ended May 31, 2000, Cincinnati, Ohio 45262-5737 is available at no charge to shareholders. Direct requests in writing for this report AUDITORS or other information to: Ernst & Young LLP William C. Gale 1300 Chiquita Center Vice President & Chief Financial Officer 250 East Fifth Street Cintas Corporation Cincinnati, Ohio 45202 6800 Cintas Boulevard P.O. Box 625737 MARKET FOR REGISTRANT'S COMMON STOCK Cincinnati, Ohio 45262-5737 (513) 459-1200 Cintas Corporation Common Stock is traded on the NASDAQ National Market System. FINANCIAL INFORMATION The symbol is CTAS. For financial information visit us on the internet at REGISTRAR AND TRANSFER AGENT http://www.nasdaq.com or http://www.cintas-corp.com The Fifth Third Bank Shareholder Services INFORMATION INTERNET ADDRESS Mail Drop 10AT66 38 Fountain Square Plaza Visit us at our web site at Cincinnati, Ohio 45263 http://www.cintas-corp.com (513) 579-5320 (800) 837-2755 SECURITY HOLDER INFORMATION ANNUAL MEETING At May 31, 2000, there were approximately 2,300 shareholders of record of the October 25, 2000 Corporation's Common Stock. The Company Cintas Corporation believes that this represents Corporate Headquarters approximately 26,000 beneficial owners. 6800 Cintas Boulevard Cincinnati, Ohio The following table shows the high and low 10:00 a.m. closing prices by quarter during the last two fiscal years. Closing prices have been adjusted to reflect a 3-for-2 stock split effective March 2000.
FISCAL 2000
Quarter ended High Low Quarter Ended High Low May 2000 $47.38 $25.25 May 1999 $48.79 $40.00 February 2000 37.08 23.17 February 1999 52.25 35.33 November 1999 41.17 30.50 November 1998 38.25 28.33 August 1999 45.33 32.25 August 1998 36.58 26.58
-39- EX-21 3 ex-21.txt EX 21 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT
STATE/PROVINCE OF NAME INCORPORATION Cintas Corporation No. 3 Nevada Cintas Corporation No. 2 Nevada Cintas Canada Limited Ontario, Canada Cintas Corporation No. 8, Inc. Nevada Cintas Investment Corp. Ontario, Canada Cintas Corporation No. 15, Inc. Nevada Respond Industries, Incorporated Colorado Cintas - R.U.S., LP Texas Partnership American First Aid Company Maryland Cintas First Aid Holdings Nevada 1202327 Ontario, Inc. Ontario, Canada XPECT First Aid Corporation Kansas UTY Canada, LTD. Quebec, Canada Affirmed Medical, Inc. California Unitog De Honduras, S.A. Honduras
-12- EX-23 4 ex-23.txt EX 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report on Form 10-K of Cintas Corporation of our report dated July 6, 2000, included in the 2000 Annual Report to Shareholders of Cintas Corporation. Our audits also included the financial statement schedule of Cintas Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in Registration Statement Number 33-56623 on Form S-8 pertaining to the Partners' Plan, Registration Statement Number 33-23228 on Form S-8 pertaining to the Incentive Stock Option Plan, Registration Statement Number 33-71124 on Form S-8 pertaining to the 1990 Directors Plan and 1992 Stock Option Plan and Registration Statement Number 333-75015 on Form S-8 pertaining to the Unitog Company 1992 and 1997 Stock Option Plans, of our report dated July 6, 2000, with respect to the financial statements of Cintas Corporation incorporated by reference in, and of our opinion with respect to the financial statement schedule of Cintas Corporation listed in Item 14(a) included in, this Annual Report on Form 10-K for the year ended May 31, 2000. Ernst & Young LLP Cincinnati, Ohio August 22, 2000 -13- EX-27 5 ex-27.txt EX 27
5 3-MOS MAY-31-2000 MAR-01-2000 MAY-31-2000 52,182,000 57,640,000 233,099,000 7,364,000 378,676,000 721,470,000 948,001,000 305,494,000 1,581,342,000 235,392,000 0 0 0 54,738,000 988,138,000 1,581,342,000 129,928,000 504,838,000 86,909,000 294,316,000 123,206,000 0 3,892,000 84,691,000 31,866,000 0 0 0 0 52,825,000 0.32 0.31
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