-----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, Dyz+9ZdmQi71Z+CNbtJwolKmg8mm+T4sCWlHe9V/bjTKLYmGPb/TfBiuSpHpn2mb 5F07Ydlz0rQMGF+jozR/BA== 0000950152-99-004126.txt : 19990510 0000950152-99-004126.hdr.sgml : 19990510 ACCESSION NUMBER: 0000950152-99-004126 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990324 ITEM INFORMATION: FILED AS OF DATE: 19990507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CINTAS CORP CENTRAL INDEX KEY: 0000723254 STANDARD INDUSTRIAL CLASSIFICATION: MEN'S & BOYS' FURNISHINGS, WORK CLOTHING, AND ALLIED GARMENTS [2320] IRS NUMBER: 311188630 STATE OF INCORPORATION: WA FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 333-72457 FILM NUMBER: 99614035 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 8-K/A 1 CINTAS CORPORATION FORM 8-K/AMENDMENT #1 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K/A (AMENDMENT NO. 1) CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) March 24, 1999 CINTAS CORPORATION - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Washington 0-11399 31-1188630 - -------------------------------------------------------------------------------- (State or other jurisdiction (Commission (IRS Employer of incorporation) File Number) Identification No.) 6800 Cintas Boulevard, P.O. Box 625737, Cincinnati, Ohio 45262-5737 - -------------------------------------------------------------------------------- (Address of principal executive offices) Zip Code Registrant's telephone number, including area code (513) 459-1200 ----------------------------- - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report.) 2 INFORMATION TO BE INCLUDED IN THE REPORT This report amends the Form 8-K filed on April 7, 1999 to report the acquisition of Unitog Company by the Registrant under Items 2 and 7(c). Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. ------------------------------------------------------------------- Supplemental Financial Statements Report of Ernst & Young LLP, Independent Auditors to Cintas Corporation Supplemental Consolidated Statements of Income of Cintas Corporation-for the Three Years Ended May 31, 1998 Supplemental Consolidated Balance Sheets of Cintas Corporation-May 31, 1998 and 1997 Supplemental Consolidated Statements of Shareholders' Equity of Cintas Corporation-for the Three Years Ended May 31, 1998 Supplemental Consolidated Statements of Cash Flows of Cintas Corporation-for the Three Years Ended May 31, 1998 Notes to Supplemental Consolidated Financial Statements of Cintas Corporation Supplemental Consolidated Condensed Statements of Income of Cintas Corporation-for the three months and nine months ended February 28, 1999 and 1998 Supplemental Consolidated Condensed Balance Sheets of Cintas Corporation-February 28, 1999 and May 31, 1998 Supplemental Consolidated Condensed Statements of Cash Flows of Cintas Corporation-for the Nine Months Ended February 28, 1999 and 1998 Notes to Supplemental Consolidated Condensed Financial Statements of Cintas Corporation Exhibits 23 Consent of Independent Auditors 27.1 FDS (For SEC use only) 27.2 FDS (For SEC use only) 27.3 FDS (For SEC use only) - 2 - 3 Report of Ernst & Young LLP, Independent Auditors The Board of Directors Cintas Corporation We have audited the accompanying supplemental consolidated balance sheets of Cintas Corporation as of May 31, 1998 and 1997, and the related supplemental consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended May 31, 1998 (restated for the 1999 business combination which has been accounted for as a pooling of interests, as described in Note 8). These supplemental financial statements give retroactive effect to the merger with Unitog Company on March 24, 1999. These supplemental 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 generally accepted auditing standards. 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 supplemental financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cintas Corporation at May 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended May 31, 1998, after giving retroactive effect to the merger with Unitog Company as described in Note 8, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Cincinnati, Ohio April 30, 1999 4 2 Cintas Corporation SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME Years Ended May 31 (In thousands except per share data)
1998 1997 1996 (Restated) (Restated) (Restated) - -------------------------------------------------------------------------------------------------------------- Revenue: Net rentals......................................... $ 1,095,911 $ 948,588 $ 819,150 Other service revenue............................... 381,034 313,311 284,342 ---------------------------------------------------- 1,476,945 1,261,899 1,103,492 Costs and expenses (income): Cost of rentals..................................... 647,099 566,744 494,322 Cost of other service revenue....................... 259,211 213,343 194,629 Selling and administrative expenses................. 345,664 287,663 250,112 Acquisition-related expenses........................ 17,116 553 56 Interest income..................................... (4,825) (4,449) (2,685) Interest expense.................................... 15,824 16,033 14,258 ---------------------------------------------------- 1,280,089 1,079,887 950,692 ---------------------------------------------------- Income before income taxes............................. 196,856 182,012 152,800 Income taxes........................................... 63,202 63,455 53,845 ---------------------------------------------------- Net income............................................. $ 133,654 $ 118,557 $ 98,955 ==================================================== Basic earnings per share............................... $ 1.25 $ 1.13 $ 0.96 ==================================================== Diluted earnings per share............................. $ 1.23 $ 1.12 $ 0.94 ==================================================== Dividends declared and paid per share.................. $ .18 $ .15 $ .13 ==================================================== Net income as reported................................. $ 133,654 $ 118,557 $ 98,955 Pro forma adjustment for income taxes.................. 4,950 5,794 4,805 ---------------------------------------------------- Pro forma net income................................... $ 128,704 $ 112,763 $ 94,150 ==================================================== Pro forma basic earnings per share..................... $ 1.20 $ 1.08 $ 0.91 ==================================================== Pro forma diluted earnings per share................... $ 1.18 $ 1.06 $ 0.90 ====================================================
See accompanying notes. 5 3 Cintas Corporation SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS As of May 31 (In thousands except share data)
1998 1997 (Restated) (Restated) - ------------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents................................................ $ 13,423 $ 17,632 Marketable securities.................................................... 88,154 88,655 Accounts receivable, principally trade, less allowance of $7,978 and $6,586, respectively........................... 185,938 150,860 Inventories.............................................................. 129,655 99,447 Uniforms and other rental items in service............................... 181,415 152,580 Prepaid expenses......................................................... 5,524 3,331 ----------------------------------- Total current assets........................................................ 604,109 512,505 Property, plant and equipment, at cost, net................................. 488,971 397,150 Other assets................................................................ 212,320 191,527 ----------------------------------- $ 1,305,400 $ 1,101,182 =================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable......................................................... $ 54,275 $ 46,842 Accrued compensation and related liabilities............................. 21,470 15,007 Accrued liabilities...................................................... 70,908 70,266 Deferred income taxes.................................................... 43,745 44,906 Long-term debt due within one year....................................... 11,741 10,372 ----------------------------------- Total current liabilities................................................... 202,139 187,393 Long-term debt due after one year........................................... 307,633 227,799 Deferred income taxes....................................................... 38,833 35,387 Shareholders' equity: Preferred stock, no par value: 100,000 shares authorized, none outstanding............................ -- -- Common stock, no par value: 300,000,000 shares authorized, 109,793,716 and 105,814,822 shares issued and outstanding, respectively........................................................... 47,062 45,395 Retained earnings........................................................ 712,249 606,233 Other accumulated comprehensive income (loss)............................ (2,516) (1,025) ----------------------------------- Total shareholders' equity.................................................. 756,795 650,603 ----------------------------------- $ 1,305,400 $ 1,101,182 ===================================
See accompanying notes. 6 4 Cintas Corporation SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
Other Accumulated Total Common Stock Retained Comprehensive Shareholders' ------------------------------ Shares Amount Earnings Income (Loss) Equity - ----------------------------------------------------------------------------------------------------------- Balance at May 31, 1995 .............. 97,969 $ 42,295 $ 363,399 $ (950) $ 404,744 Adjustment for pooling of interests....... 5,116 93 76,817 -- 76,910 -------------------------------------------------------------------------------------- Balance at May 31, 1995, as restated........... 103,085 42,388 440,216 (950) 481,654 Net income......... -- -- 98,955 -- 98,955 Equity adjustment for foreign currency translation..... -- -- -- 116 116 ------------------- Comprehensive income.......... 99,071 ------------------- Dividends.......... -- -- (12,722) -- (12,722) Distributions to S Corporation shareholders.... -- -- (16,903) -- (16,903) Effects of acquisitions.... 147 3 503 -- 506 Stock options exercised net of shares surrendered..... 407 768 473 -- 1,241 Tax benefit resulting from exercise of employee stock options... -- 854 -- -- 854 -------------------------------------------------------------------------------------- Balance at May 31, 1996, as restated........ 103,639 44,013 510,522 (834) 553,701
7 5
Other Accumulated Total Common Stock Retained Comprehensive Shareholders' ------------------------------ Shares Amount Earnings Income (Loss) Equity - ----------------------------------------------------------------------------------------------------------- Net income......... -- -- 118,557 -- 118,557 Equity adjustment for foreign currency translation..... -- -- -- (191) (191) ------------------- Comprehensive income.......... 118,366 ------------------- Dividends.......... -- -- (15,634) -- (15,634) Distributions to S Corporation shareholders.... -- -- (13,764) -- (13,764) Effects of acquisitions.... 1,758 -- 5,375 -- 5,375 Stock options exercised net of shares surrendered..... 418 1,121 1,177 -- 2,298 Tax benefit resulting from exercise of employee stock options... -- 261 -- -- 261 -------------------------------------------------------------------------------------- Balance at May 31, 1997, as restated........... 105,815 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.... 3,850 13 9,479 -- 9,492 Repurchase of common stock.... (147) -- (5,793) -- (5,793) Stock options exercised net of shares surrendered..... 276 897 181 -- 1,078 Tax benefit resulting from exercise of employee stock...........
8 6 options......... -- 757 -- -- 757 ------------ ------------- ------------- --------------- =============== Balance at May 31, 1998, as restated........... 109,794 $ 47,062 $ 712,249 $ (2,516) $ 756,795 ============ ============= ============= =============== ===============
See accompanying notes. 9 7 Cintas Corporation SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended May 31 (In thousands)
1998 1997 1996 (Restated) (Restated) (Restated) - ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income.............................................. $ 133,654 $ 118,557 $ 98,955 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................ 56,791 47,527 39,874 Amortization of deferred charges.................... 18,542 18,828 17,249 Deferred income taxes............................... 13,443 9,857 8,323 Change in current assets and liabilities, net of acquisitions of businesses: Accounts receivable............................. (24,227) (16,333) (16,610) Inventories..................................... (23,461) (5,684) (3,008) Uniforms and other rental items in service............................. (25,632) (11,546) (14,378) Prepaid expenses................................ (5,447) 88 (177) Accounts payable................................ (5,132) (4,179) 11,584 Accrued compensation and related liabilities.......................... 5,730 1,263 (1,428) Accrued liabilities............................. (1,586) 3,632 6,535 --------------------------------------------------- Net cash provided by operating activities.............................................. 142,675 162,010 146,919 Cash flows from investing activities: Capital expenditures.................................... (128,566) (86,209) (83,677) Proceeds from sale or redemption of marketable securities................................. 117,342 49,290 74,220 Purchase of marketable securities....................... (116,841) (64,468) (108,900) Acquisitions of businesses, net of cash acquired......................................... (27,456) (18,981) (52,866) Other................................................... (899) 274 (1,841) --------------------------------------------------- Net cash used in investing activities...................... (156,420) (120,094) (173,064) Cash flows from financing activities: Proceeds from issuance of long-term debt................ 73,483 9,699 78,478 Repayment of long-term debt............................. (25,662) (18,148) (25,012) Issuance of common stock................................ 1,078 2,298 1,241 Dividends paid.......................................... (19,082) (15,634) (12,722) Distributions to S Corporation shareholders.......................................... (12,423) (13,764) (16,903) Repurchase of common stock.............................. (5,793) -- -- Other................................................... (2,065) (1,689) 1,473 --------------------------------------------------- Net cash provided by (used in) financing activities.................................... 9,536 (37,238) 26,555 --------------------------------------------------- Net (decrease) increase in cash and cash equivalents........................................ (4,209) 4,678 410 Cash and cash equivalents at beginning of year....................................... 17,632 12,954 12,544 --------------------------------------------------- Cash and cash equivalents at end of year................... $ 13,423 $ 17,632 $ 12,954 ===================================================
10 8 See accompanying notes. 11 9 CINTAS CORPORATION NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except per share and share data) 1. SIGNIFICANT ACCOUNTING POLICIES Restatement. The accompanying supplemental consolidated financial statements of Cintas Corporation include the financial position and operating results of Unitog Company (Unitog), acquired on March 24, 1999. The acquisition was treated as a pooling of interests for accounting purposes and all Cintas financial statements for all periods prior to the merger have been restated. The restatement includes the consolidated financial position of Cintas at May 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for the three years ended May 31, 1998, 1997 and 1996 and the financial position of Unitog at April 26, 1998 and April 27, 1997 and the recasted results of its operations and its cash flows for the three fiscal years ended April 26, 1998, April 27, 1997 and April 28, 1996. Unitog previously had a fiscal year ending on the last Sunday in January. Business description. Cintas designs, manufactures and implements corporate identity uniform programs which it rents or sells to customers throughout the United States and Canada. The Company also provides ancillary services including entrance mats, sanitation supplies and first aid products and services. The Company provides these highly specialized services to businesses of all types - from small service and manufacturing companies to major corporations that employ thousands of people. Principles of consolidation. The supplemental 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 generally accepted accounting principles 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, plant 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. 12 10 Other assets. Other assets consist primarily of service contracts and non-compete or 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 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. Revenue recognition. Rental revenue is recognized when services are performed and other service 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 Accumulated Comprehensive Income. The Company has adopted Statement of Financial Accounting Standard No. 130, Reporting Comprehensive Income. This pronouncement establishes standards for reporting items that affect shareholders' equity but are not components of reported net income. The Company's only component of comprehensive income is foreign currency translation adjustment. Other accounting pronouncements. The Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information. Also, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities. These pronouncements which become effective in fiscal 1999 and 2000, respectively, 13 11 are presently being reviewed by the Company and are not expected to have a material effect on the Company's financial position or results of operations, although they may result in additional disclosures in the future. 14 12 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 at May 31, 1998 and 1997:
1998 1997 - --------------------------------------------------------------------------------------------------------------------- Estimated Estimated Cost Fair Value Cost Fair Value --------------------------------------------------------------------- Obligations of state and political subdivisions................... $ 65,791 $ 65,757 $ 63,573 $ 63,476 U.S. Treasury securities and obligations of U.S. government agencies...................... 4,938 4,918 11,444 11,420 Other debt securities....................... 17,425 17,504 13,638 13,621 --------------------------------------------------------------------- $ 88,154 $ 88,179 $ 88,655 $ 88,517 =====================================================================
The gross realized gains on sales of available-for-sale securities totaled $84, $31 and $77 for the years ended May 31, 1998, 1997 and 1996, and the gross realized losses totaled $25, $96 and $127, respectively. Net unrealized gains/(losses) are $25 and $(138) at May 31, 1998 and 1997, respectively. The amortized cost and estimated fair value of debt and marketable securities at May 31, 1998, 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........................... $ 44,669 $ 44,660 Due after one year through three years............ 28,478 28,562 Due after three years............................. 15,007 14,957 =================================== $ 88,154 $ 88,179 ===================================
15 13 3. PROPERTY, PLANT AND EQUIPMENT
1998 1997 - ---------------------------------------------------------------------------------------- Land.............................................. $ 41,550 $ 34,991 Buildings and improvements........................ 225,313 192,595 Equipment......................................... 426,337 346,298 Leasehold improvements............................ 8,467 6,153 Construction in progress.......................... 53,749 35,459 ----------------------------------- 755,416 615,496 Less: accumulated depreciation................... 266,445 218,346 ----------------------------------- $ 488,971 $ 397,150 =================================== 4. OTHER ASSETS 1998 1997 - ---------------------------------------------------------------------------------------- Goodwill.......................................... $ 116,027 $ 97,499 Service contracts................................. 103,178 94,307 Noncompete and consulting agreements.............. 57,823 59,519 ----------------------------------- 277,028 251,325 Less: accumulated depreciation................... 81,756 72,589 ----------------- ----------------- 195,272 178,736 Other............................................. 17,048 12,791 ----------------- ----------------- $ 212,320 $ 191,527 ===================================
16 14 5. LONG-TERM DEBT
1998 1997 - ------------------------------------------------------------------------------------------------------------------ Secured and unsecured term notes due through 2003 at an average rate of 6.99%.............................................. $ 36,257 $ 35,390 Unsecured revolving note due in 2000 at a rate of 6.05%............................................................ 10,000 20,880 Unsecured bank agreement due in 2001 at an average rate of 6.20%.................................................... 62,024 33,832 Unsecured term notes due through 2003 at an average rate of 7.08%.................................................... 32,967 35,714 Unsecured senior notes due in 2003 at a rate of 5.79%................................................................. 18,462 20,000 Unsecured senior notes due in 2005 at a rate of 6.88%................................................................. 40,000 40,000 Unsecured notes due through 2009 at an average rate of 6.25%.................................................... 97,906 30,884 Industrial development revenue bonds due through 2013 at an average rate of 5.18%................................. 10,879 10,888 Industrial revenue bonds due through 2020 at an average rate of 3.60%.............................................. 8,889 9,134 Other ..................................................................... 1,990 1,449 ----------------------------------- 319,374 238,171 Less: amounts due within one year........................................... 11,741 10,372 =================================== $ 307,633 $ 227,799 ===================================
Debt in the amount of $9,804 is secured by assets with a carrying value of $10,127 at May 31, 1998, and letters of credit approximating $12,000. Maturities of long-term debt during each of the next five years are: $11,741, $96,969, $20,972, $38,713 and $15,095, respectively. As a result of the merger with Unitog in March 1999, the Company repaid the Bank Agreement using a new financing arrangement. This new financing arrangement provides the Company on a revolving basis up to $50 million at interest rates targeted to approximate LIBOR. The Company has entered into an interest rate swap agreement to manage its exposure to swings in short-term interest rates. This agreement totals $10 million, expires in March 2001 and allows the Company to pay an effective interest rate of approximately 6.16%. In October 1998, the Company entered into an additional agreement which totals $35 million, expires in October 2000 and allows the Company to pay an effective interest rate of approximately 4.6%. Interest expense is net of capitalized interest of $1,808, $1,022 and $567 for the years ended May 31, 1998, 1997 and 1996, respectively. Interest paid, net of amount capitalized, was $15,189, $16,468 and $14,288 for the years ended May 31, 1998, 1997 and 1996, respectively. 17 15 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 ending May 31, 2003, and thereafter are: $7,776, $6,089, $4,689, $3,788, $3,188 and $10,532, respectively. Rent expense under operating leases during the years ended May 31, 1998, 1997 and 1996 was $11,390, $9,650 and $8,026, respectively. 7. INCOME TAXES
1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- Income taxes consist of the following components: Current: Federal......................................... $ 53,856 $ 48,486 $ 37,919 State and local................................. 7,061 7,107 6,394 ---------------------------------------------------- 60,917 53,593 44,313 Deferred......................................... 2,285 9,862 9,532 ---------------------------------------------------- $ 63,202 $ 63,455 $ 53,845 ====================================================
18 16
1998 1997 1996 - -------------------------------------------------------------------------------------------------------------- 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................................ $ 68,900 $ 63,704 $ 53,480 State and local income taxes, net of federal benefit........................ 7,073 6,123 5,296 Nontaxable income earned........................ (1,201) (1,048) (599) Tax credits..................................... (288) (206) (216) Nontaxable items of the Company acquired in pooling of interests..................................... (5,050) (5,931) (4,958) Deferred tax benefit arising from pooling of interests..................... (8,280) - - Other........................................... 2,048 813 842 ---------------------------------------------------- $ 63,202 $ 63,455 $ 53,845 ====================================================
The components of deferred income taxes included on the balance sheets at May 31, 1998 and 1997 are as follows:
1998 1997 - --------------------------------------------------------------------------------------------- Deferred tax assets: Employee benefits................................... $ 7,236 $ 7,209 Allowance for bad debts and other................... 13,346 7,496 ----------------------------------- 20,582 14,705 Deferred tax liabilities: In service inventory................................ 63,084 54,059 Depreciation........................................ 37,353 31,917 Other............................................... 2,723 9,022 ----------------------------------- 103,160 94,998 ----------------------------------- Net deferred tax liability $ 82,578 $ 80,293 ===================================
Income taxes paid were $59,599, $50,657 and $46,294 for the years ended May 31, 1998, 1997 and 1996, respectively. 19 17 8. ACQUISITIONS Unitog, acquired in March 1999, is a rental and direct sale uniform provider. The Company exchanged 5,072,124 shares of its common stock for all the outstanding stock of Unitog. 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. In accordance with accounting rules for pooling of interest transactions, charges to operating income for acquisition-related expenses relating to this merger approximate $11 million. They primarily consist of investment banking fees, a pre-established retention program for certain employees and professional service fees. The Company continues to evaluate and integrate the operations of Unitog. 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 1997 1996 - --------------------------------------------------------------------------------------------------------------------- Revenue: Cintas (as previously reported)..................... $ 1,198,307 $ 995,207 $ 875,833 Unitog.............................................. 278,638 266,692 227,659 ----------------------------------------------------------- Combined............................................ $ 1,476,945 $ 1,261,899 $ 1,103,492 =========================================================== Pro forma net income: Cintas (as previously reported)..................... $ 117,907 $ 100,194 $ 82,939 Unitog.............................................. 10,797 12,569 11,211 ----------------------------------------------------------- Combined............................................ $ 128,704 $ 112,763 $ 94,150 =========================================================== Pro forma basic earnings per share: Cintas (as previously reported)..................... $ 1.16 $ 1.01 $ .84 =========================================================== Combined............................................ $ 1.20 $ 1.08 $ .91 =========================================================== Pro forma diluted earnings per share Cintas (as previously reported)..................... $ 1.14 $ .99 $ .83 =========================================================== Combined............................................ $ 1.18 $ 1.06 $ .90 ===========================================================
During the year ended May 31, 1998, the Company completed nine significant acquisitions (excluding insignificant acquisitions). Eight of these acquisitions were accounted for as a pooling of interests and one as a purchase. During the year ended May 31, 1997, the Company completed eight significant acquisitions (excluding insignificant acquisitions). Four of these acquisitions were accounted for as a pooling of interests and four as purchases. 20 18 POOLING OF INTERESTS The impact of seven of the 1998 pooling of interests transactions and four of the 1997 pooling of interests transactions on the Company's historical consolidated financial statements were not material, consequently, prior period and current year financial statements have not been restated for these transactions. 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 3,959,262 shares of its common stock for all the outstanding stock of UTY. 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 UTY. The accompanying supplemental consolidated financial statements were restated at that time 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. 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:
1998 1997 - ---------------------------------------------------------------------------------- Fair value of assets acquired......... $ 51,242 $ 22,766 Liabilities assumed and incurred...... 1,787 2,499 ----------------------------------------- Total cash paid for acquisitions...... $ 49,455 $ 20,267 =========================================
The results of operations for the acquired businesses are included in the supplemental consolidated statements of income from the dates of acquisition. The pro forma revenue, net income and earnings per share information for acquired businesses are not presented because they are not material. 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 $8,820, $7,331 and $6,188 for the years ended May 31, 1998, 1997 and 1996, respectively. 21 19 The Company also sponsors contributory thrift plans (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 contribution to these thrift plans were $1,200, $1,100 and $1,100 for the fiscal years ended May 31, 1998, 1997 and 1996, 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:
1998 1997 1996 - --------------------------------------------------------------------------------------------------------------------- Numerator: Net income.......................................... $ 133,654 $ 118,557 $ 98,955 =========================================================== Denominator: Denominator for basic earnings per share - weighted average shares (000's)........................................... 107,025 104,528 103,283 Effect of dilutive securities - employee stock options (000's).................... 1,911 1,551 1,561 ----------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions (000's)............................... 108,936 106,079 104,844 =========================================================== Basic earnings per share............................... $ 1.25 $ 1.13 $ .96 =========================================================== Diluted earnings per share............................. $ 1.23 $ 1.12 $ .94 ===========================================================
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 has been adjusted to retroactively reflect the effect of this stock split for all periods presented. 22 20 11. STOCK BASED COMPENSATION Under the stock option plan adopted by the Company in fiscal 1993, the Company may grant officers and key employees incentive stock options and/or non-qualified stock options to purchase an aggregate of 4,600,000 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. Options outstanding under this plan at May 31, 1998 are 3,886,917. 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 maximum total cash settlement and compensation expense under this arrangement could amount to $5.6 million. The information presented in the following table relates primarily to stock options granted and outstanding under either the plan adopted in fiscal 1993 or under a similar plan, which expired in June 1993:
Weighted Average Shares Exercise Price ------------------------------------------------ Outstanding May 31, 1995 (731,189 shares exercisable).................................................. 2,960,612 $ 11.17 Granted.......................................................... 669,382 21.25 Cancelled........................................................ (62,807) 13.88 Exercised........................................................ (502,317) 7.07 ------------------------------------------------ Outstanding May 31, 1996 (540,622 shares exercisable).................................................. 3,064,870 13.98 Granted.......................................................... 799,413 26.22 Cancelled........................................................ (128,676) 15.20 Exercised........................................................ (313,445) 7.09 ------------------------------------------------ Outstanding May 31, 1997 (505,282 shares exercisable).................................................. 3,422,162 17.44 Granted.......................................................... 1,163,069 36.45 Cancelled........................................................ (158,005) 22.88 Exercised........................................................ (297,985) 8.00 ------------------------------------------------ Outstanding May 31, 1998 (445,946 shares exercisable).................................................. 4,129,241 $ 23.24 ================================================
23 21 The following table summarizes the restated information about stock options outstanding at May 31, 1998:
Outstanding Options Exercisable Options ------------------------------------------------------------------ Average Weighted Weighted Remaining Average Average Range of Exercise Number Option Exercise Number Exercise Price Outstanding Life Price Exercisable Price - -------------------------------------------------------------------------------------------------------------------- $ 5.50 - $13.80 1,030,317 3.59 $ 10.91 274,717 $ 8.61 13.88 - 24.38 1,120,030 6.38 18.26 82,448 19.94 25.25 - 31.00 807,959 8.02 26.27 62,702 29.21 34.88 - 50.25 1,170,935 9.09 36.76 26,079 41.12 - -------------------------------------------------------------------------------------------------------------------- $ 5.50 - $50.25 4,129,241 6.77 $ 23.24 445,946 $ 15.50 ====================================================================================================================
At May 31, 1998, 1,210,700 shares of common stock are reserved for future issuance. 24 22 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 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:
1998 1997 1996 - ------------------------------------------------------- ----------------- ---------------- ----------------- Risk free interest rate.............................. 5.50% 6.63% 6.46% Dividend yield....................................... .45% .53% .56% Expected volatility of the Company's common stock 24% 26% 27% Expected life of the option in years 8 8.5 9
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:
1998 1997 1996 - ------------------------------------------------------------------------------------------------------------ Net income: As reported....................................... $ 133,654 $ 118,557 $ 98,955 Pro forma for Statement No. 123................... $ 130,797 $ 117,207 $ 98,428 Earnings per share: Pro forma basic earnings per share for Statement No. 123........................... $ 1.22 $ 1.12 $ .95 Pro forma diluted earnings per share for Statement No. 123..................... $ 1.20 $ 1.11 $ .94
The effects of providing pro forma disclosure are not representative of earnings reported for future years. 25 23 12. ENVIRONMENTAL MATTERS 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. The soil testing at the Company's facility detected volatile organic compounds, and the Company is now in the process of remediating the soil. Groundwater testing at 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 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 has recorded an undiscounted liability and 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. 26 24 13. 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, 1998 and 1997. The reported amounts differ from amounts previously reported in Form 10-Q. The accompanying supplemental consolidated financial statements have been restated to include the financial position and operating results of Unitog, an acquisition accounted for using the pooling of interests method of accounting.
First Second Third Fourth May 31, 1998 Quarter Quarter Quarter Quarter (Restated) (Restated) (Restated) (Restated) - ----------------------------------------------------------------------------------------------------------------------- Revenue: Cintas(as previously reported).............. $ 272,805 $ 293,697 $ 301,889 $ 329,916 Unitog...................................... 68,671 70,088 69,544 70,335 -------------------------------------------------------------------- Combined.................................... $ 341,476 $ 363,785 $ 371,433 $ 400,251 ==================================================================== Gross profits: Cintas(as previously reported).............. $ 111,755 $ 118,652 $ 122,955 $ 134,699 Unitog...................................... 20,212 21,981 20,003 20,378 -------------------------------------------------------------------- Combined.................................... $ 131,967 $ 140,633 $ 142,958 $ 155,077 ==================================================================== Pro forma net income: Cintas(as previously reported).............. $ 26,653 $ 30,913 $ 29,289 $ 31,052 Unitog...................................... 2,362 3,997* 2,722 1,716 -------------------------------------------------------------------- Combined.................................... $ 29,015 $ 34,910 $ 32,011 $ 32,768 ==================================================================== Basic earnings per share $ .29 $ .34 $ .31 $ .31 ==================================================================== Diluted earnings per share $ .28 $ .34 $ .31 $ .30 ==================================================================== Pro forma basic earnings per share $ .27 $ .33 $ .30 $ .30 ==================================================================== Pro forma diluted earnings per share $ .27 $ .32 $ .29 $ .30 ==================================================================== Weighted average number of shares outstanding (000's) 106,094 106,757 107,107 108,133 ====================================================================
* Includes a $2.1 million gain from the sale of certain facilities. 27 25
First Second Third Fourth May 31, 1997 Quarter Quarter Quarter Quarter (Restated) (Restated) (Restated) (Restated) - ----------------------------------------------------------------------------------------------------------------------- Revenue: Cintas(as previously reported).............. $ 234,474 $ 250,256 $ 244,455 $ 266,022 Unitog...................................... 65,240 66,080 66,462 68,910 -------------------------------------------------------------------- Combined.................................... $ 299,714 $ 316,336 $ 310,917 $ 334,932 ==================================================================== Gross profits: Cintas(as previously reported).............. $ 93,672 $ 99,304 $ 99,668 $ 108,908 Unitog...................................... 19,166 20,694 19,657 20,743 -------------------------------------------------------------------- Combined.................................... $ 112,838 $ 119,998 $ 119,325 $ 129,651 ==================================================================== Pro forma net income: Cintas(as previously reported).............. $ 22,563 $ 25,564 $ 23,799 $ 28,268 Unitog...................................... 3,151 3,353 3,272 2,793 -------------------------------------------------------------------- Combined.................................... $ 25,714 $ 28,917 $ 27,071 $ 31,061 ==================================================================== Basic earnings per share $ .26 $ .29 $ .27 $ .31 ==================================================================== Diluted earnings per share $ .26 $ .29 $ .27 $ .30 ==================================================================== Pro forma basic earnings per share $ .25 $ .28 $ .26 $ .29 ==================================================================== Pro forma diluted earnings per share $ .24 $ .27 $ .26 $ .29 ==================================================================== Weighted average number of shares outstanding (000's) 103,759 104,116 104,448 105,797 ====================================================================
14. IMPACT OF YEAR 2000 (UNAUDITED) The company has completed an assessment of all of its software systems and has determined the changes that need to be made so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total cost of those changes is not expected to be material and are being expensed as incurred. The Company incurred the majority of its Year 2000 costs during fiscal 1998, and the remaining costs are expected to be expensed in fiscal 1999 when all changes are expected to be completed. These expenses will be funded through existing cash resources and future operating cash flows. All of the Company's critical production systems are now fully compliant; and therefore, the Company has developed no contingency plans for its systems. The Company has contacted its major suppliers to obtain certification of their systems Year 2000 compliance in order to identify any high-risk vendors. The Company is now evaluating the responses from these vendors and is developing a strategy to minimize their risk. During 1999, the Company will follow up with all of its major suppliers to ensure that they meet their target dates. Strategies will include contingency plans such as alternative suppliers or alternative processes. The Company believes it is devoting appropriate resources to resolve any Year 2000 issues in a timely manner and believes that all internal systems will be prepared for Year 2000 processing. Based upon the work performed to date, the Company presently believes that the likelihood of the Year 2000 having a material result on its operations, liquidity or financial position is remote. 28 26 Cintas Corporation SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENTS OF INCOME (In thousands except per share data) (Unaudited)
Three months ended Nine months ended February 28 February 28 1999 1998 1999 1998 (Restated) (Restated) (Restated) (Restated) - -------------------------------------------------------------------------------------------------------------------------- Revenue: Net rentals..................................... $ 324,207 $ 273,632 $ 964,546 $ 799,690 Other service revenue........................... 109,462 97,801 332,051 277,004 --------------------------------------------------------------------- 433,669 371,433 1,296,597 1,076,694 Costs and expenses (income): Cost of rentals................................. 182,331 162,362 556,667 472,630 Cost of other service revenue................... 73,727 66,114 228,174 188,506 Selling and administrative expenses............. 107,863 88,859 304,349 253,467 Environmental charge............................ 5,000 - 5,000 - Interest income................................. (1,112) (1,266) (3,492) (3,645) Interest expense................................ 3,710 3,687 12,587 11,241 --------------------------------------------------------------------- 371,519 319,756 1,103,285 922,199 --------------------------------------------------------------------- Income before income taxes......................... 62,150 51,677 193,312 154,495 Income taxes....................................... 23,519 18,665 74,052 54,132 --------------------------------------------------------------------- Net income......................................... $ 38,631 $ 33,012 $ 119,260 $ 100,363 ===================================================================== Basic earnings per share........................... $ 0.35 $ .31 $ 1.08 $ .94 ===================================================================== Diluted earnings per share......................... $ 0.34 $ .30 $ 1.06 $ .93 ===================================================================== Net income as reported............................. $ 38,631 $ 33,012 $ 119,260 $ 100,363 Pro forma adjustment for income taxes.............. -- 1,001 -- 4,427 --------------------------------------------------------------------- Pro forma net income............................... $ 38,631 $ 32,011 $ 119,260 $ 95,936 ===================================================================== Pro forma basic earnings per share...................$ 0.35 $ 0.30 $ 1.08 $ .90 ===================================================================== Pro forma diluted earnings per share.................$. 0.34 $ 0.29 $ 1.06 $ .88 =====================================================================
See accompanying notes. 29 27 Cintas Corporation SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands except share data)
February 28 May 31 1999 1998 (Restated) (Restated) - -------------------------------------------------------------------------------------------------------------------- (Unaudited) (See Note 1) ASSETS Current assets: Cash and cash equivalents................................................ $ 30,191 $ 13,423 Marketable securities.................................................... 67,733 88,154 Accounts receivable, principally trade, less allowance of $7,739 and $7,978, respectively........................... 200,175 185,938 Inventories.............................................................. 141,292 129,655 Uniforms and other rental items in service............................... 195,181 181,415 Prepaid expenses......................................................... 6,703 5,524 ------------------------------------- Total current assets........................................................ 641,275 604,109 Property, plant and equipment, at cost, net................................. 563,326 488,971 Other assets................................................................ 199,339 212,320 ------------------------------------- $ 1,403,940 $ 1,305,400 ===================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable......................................................... $ 49,012 $ 54,275 Accrued compensation and related liabilities............................. 22,390 21,470 Accrued liabilities...................................................... 97,118 70,908 Deferred income taxes.................................................... 43,508 43,745 Long-term debt due within one year....................................... 12,488 11,741 ------------------------------------- Total current liabilities................................................... 224,516 202,139 Long-term debt due after one year........................................... 264,021 307,633 Deferred income taxes....................................................... 41,516 38,833 Shareholders' equity: Preferred stock, no par value: 100,000 shares authorized, none outstanding............................ -- -- Common stock, no par value: 300,000,000 shares authorized, 110,903,076 and 109,793,716 shares issued and outstanding, respectively........................................................... 48,783 47,062 Retained earnings........................................................ 829,497 712,249 Other accumulated comprehensive income (loss)............................ (4,393) (2,516) ------------------------------------- Total shareholders' equity.................................................. 873,887 756,795 ------------------------------------- $ 1,403,940 $ 1,305,400 =====================================
See accompanying notes. 30 28 Cintas Corporation SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine months ended February 28 1999 1998 (Restated) (Restated) - ---------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income.......................................... $ 119,260 $ 100,363 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation.................................... 49,800 41,362 Amortization of deferred charges................ 14,504 15,072 Deferred income taxes........................... 1,734 6,741 Change in current assets and liabilities, net of acquisitions of businesses: Accounts receivable......................... (9,732) (15,480) Inventories................................. (10,282) (19,295) Uniforms and other rental items in service......................... (15,924) (16,025) Prepaid expenses............................ (1,182) (1,925) Accounts payable............................ (11,222) 10,169 Accrued compensation and related liabilities...................... 937 702 Accrued liabilities......................... 22,226 1,286 ------------------------------------- Net cash provided by operating activities.............. 160,119 122,970 Cash flows from investing activities: Capital expenditures................................ (128,109) (96,814) Proceeds from sale or redemption of marketable securities............................. 117,549 69,459 Purchase of marketable securities................... (103,130) (56,558) Acquisitions of businesses, net of cash acquired..................................... (9,533) (33,783) Proceeds from divestiture of certain facilities..... 19,911 -- Other............................................... 4,842 (1,037) ------------------------------------- Net cash used in investing activities.................. (98,470) (118,733) Cash flows from financing activities: Proceeds from issuance of long-term debt............ 11,859 43,506 Repayment of long-term debt......................... (55,055) (11,473) Issuance of common stock............................ 1,482 986 Dividends paid...................................... (1,692) (19,082) Distribution to S corporation shareholders...................................... -- (8,285) Repurchase of common stock.......................... (1) (7,577) Other............................................... (1,474) (990) ------------------------------------- Net cash used in financing activities.................. (44,881) (2,915) ------------------------------------- Net increase in cash and cash equivalents.................................... 16,768 1,322 Cash and cash equivalents at beginning of period................................. 13,423 17,632 -------------------------------------
31 29 Cash and cash equivalents at end of period.............................................. $ 30,191 $ 18,954 =====================================
See accompanying notes. 32 30 CINTAS CORPORATION NOTES TO SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) (In thousands except per share data) 1. The accompanying supplemental consolidated financial statements include the financial position and operating results of Unitog Company (Unitog), acquired on March 24, 1999. The acquisition was treated as a pooling of interests for accounting purposes and all periods prior to the merger have been restated. The restatement includes the supplemental consolidated financial position of Cintas at February 28, 1999 and May 31, 1998, and the consolidated results of its operations and its cash flows for the three and nine months ended February 28, 1999 and 1998, and the financial position of Unitog at January 31, 1999 and April 26, 1998 and the recasted results of its operations and its cash flows for the three and nine months ended January 31, 1999 and January 25, 1998. Unitog previously had a fiscal year ending on the last Sunday in January. The supplemental consolidated condensed financial statements of Cintas Corporation (the "Company") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these supplemental consolidated condensed financial statements be read in conjunction with the restated audited financial statements and notes for the fiscal year ended May 31, 1998 included in this Form 8-K. A summary of the Company's significant accounting policies is presented in Note 1 of the "Notes to the Supplemental Consolidated Financial Statements" filed with this form 8-K. There have been no material changes in the accounting policies followed by the Company during fiscal year 1999. 2. Interim results are subject to variations and are not necessarily indicative of the results of operations for a full fiscal year. In the opinion of management, adjustments (which include only normal recurring adjustments) necessary for a fair statement of the results of the interim periods shown have been made. 33 31 3. The following table represents a reconciliation of the shares used to calculate basic and diluted earnings per share for the respective periods:
Three months ended Nine months ended February 28 February 28 1999 1998 1999 1998 (Restated) (Restated) (Restated) (Restated) - -------------------------------------------------------------------------------------------------------------- Numerator: Net income.......................... $ 38,631 $ 33,012 $ 119,260 $ 100,363 ===================================================================== Denominator: Denominator for basic earnings per share - weighted average shares (000's).................... 110,816 107,107 110,640 106,616 Effect of dilutive securities - employee stock options (000's)............. 2,300 1,687 2,337 1,820 --------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions (000's)........................... 113,116 108,794 112,977 108,436 ===================================================================== Basic earnings per share............... $ .35 $ .31 $ 1.08 $ .94 ===================================================================== Diluted earnings per share............................... $ .34 $ .30 $ 1.06 $ .93 =====================================================================
The following table represents a reconciliation of the shares used to calculate pro forma basic and diluted earnings per share for the respective periods:
Three months ended Nine months ended February 28 February 28 1999 1998 1999 1998 (Restated) (Restated) (Restated) (Restated) - -------------------------------------------------------------------------------------------------------------- Numerator: Pro forma net income................ $ 38,631 $ 32,011 $ 119,260 $ 95,936 =====================================================================
34 32 Denominator: Denominator for pro forma basic earnings per share - weighted average shares (000's).................... 110,816 107,107 110,640 106,616 Effect of dilutive securities - employee stock options (000's)............. 2,300 1,687 2,337 1,820 --------------------------------------------------------------------- Denominator for pro forma basic earnings per share - adjusted weighted average shares and assumed conversion shares (000's)........................... 113,116 108,794 112,977 108,436 ===================================================================== Pro forma basic earnings per share.................. $ 35 $ .30 $ 1.08 $ .90 ===================================================================== Pro forma diluted earnings per share.................. $ 34 $ .29 $ 1.06 $ .88 =====================================================================
4. The Company has adopted Statement of Financial Accounting Standard No. 130, Reporting Comprehensive Income. This pronouncement establishes standards for reporting items that affect shareholders' equity but are not components of reported net income. The Company's only component of comprehensive income is foreign currency translation adjustment. The components of comprehensive income for the three and nine month periods ended February 28, 1999 and 1998 are as follows:
Three months ended Nine months ended February 28 February 28 1999 1998 1999 1998 (Restated) (Restated) (Restated) (Restated) - -------------------------------------------------------------------------------------------------------------- Net income............................. $ 38,631 $ 33,012 $ 119,260 $ 100,363 Other comprehensive income: Foreign currency translation adjustment...................... 924 (310) (1,877) (994) --------------------------------------------------------------------- Comprehensive income................... $ 39,555 $ 32,702 $ 117,383 $ 99,369 =====================================================================
35 33 5. Unitog, acquired in March 1999, is a rental and direct sale uniform provider. The Company exchanged 5,072,124 shares of its common stock for all the outstanding stock of Unitog. In accordance with the pooling of interests method of accounting, no adjustment has been made to the historical carrying amount of the assets and liabilities of Unitog. In accordance with accounting rules for pooling of interest transactions, charges to operating income for acquisition-related expenses relating to this merger are approximate $11 million. They primarily consist of investment banking fees, a pre-established retention program for certain employees and professional service fees. The Company continues to evaluate and integrate the operations of Unitog. 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:
Three months ended Nine months ended February 28 February 28 1999 1998 1999 1998 (Restated) (Restated) (Restated) (Restated) - -------------------------------------------------------------------------------------------------------------- Revenue: Cintas (as previously.............. $ 360,504 $ 301,889 $ 1,082,176 $ 868,391 reported)....................... Unitog............................. 73,165 69,544 214,421 208,303 --------------------------------------------------------------------- Combined........................... $ 433,669 $ 371,433 $ 1,296,597 $ 1,076,694 ===================================================================== Pro forma net income: Cintas (as previously.............. reported)....................... $ 37,872 $ 29,289 $ 111,532 $ 86,855 Unitog............................. 759 2,722 7,728 9,081 --------------------------------------------------------------------- Combined........................... $ 38,631 $ 32,011 $ 119,260 $ 95,936 ===================================================================== Pro forma basic earnings Per share: Cintas (as previously.............. reported)....................... $ .36 $ .29 $ 1.06 $ .86 --------------------------------------------------------------------- Combined $ .35 $ .30 $ 1.08 $ .90 ===================================================================== Pro forma diluted earnings per share Cintas (as previously reported)....................... $ .35 $ .28 $ 1.04 $ .84 --------------------------------------------------------------------- Combined $ .34 $ .29 $ 1.06 $ .88 =====================================================================
36 34 6. 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. The soil testing at the Company's facility detected volatile organic compounds, and the Company is now in the process of remediating the soil. Groundwater testing at 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 dated January 9, 1999 between Unitog Company and the Company (Merger Agreement), 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 the environmental matters associated with the Unitog acquisition, the Company has recorded an undiscounted liability and 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. 7. The Company's effective tax rate on a pro forma basis of 38% is comparable to the prior year. 8. As a result of the merger with Unitog in March 1999, the Company repaid the Bank Agreement using a new financing arrangement. This new financing arrangement provides the Company on a revolving basis up to $50 million at interest rates targeted to approximate LIBOR. 37 35 9. The company has completed an assessment of all of its software systems and has determined the changes that need to be made so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total cost of those changes is not expected to be material and are being expensed as incurred. The Company incurred the majority of its Year 2000 costs during fiscal 1998, and the remaining costs are expected to be expensed in fiscal 1999 when all changes are expected to be completed. These expenses will be funded through existing cash resources and future operating cash flows. All of the Company's critical production systems are now fully compliant; and therefore, the Company has developed no contingency plans for its systems. The Company has contacted its major suppliers to obtain certification of their systems Year 2000 compliance in order to identify any high-risk vendors. The Company is now evaluating the responses from these vendors and is developing a strategy to minimize their risk. During 1999, the Company will follow up with all of its major suppliers to ensure that they meet their target dates. Strategies will include contingency plans such as alternative suppliers or alternative processes. The Company believes it is devoting appropriate resources to resolve any Year 2000 issues in a timely manner and believes that all internal systems will be prepared for Year 2000 processing. Based upon the work performed to date, the Company presently believes that the likelihood of the Year 2000 having a material result on its operations, liquidity or financial position is remote. 10. On January 19, 1999, the Company declared an annual cash dividend of $.22 per share on outstanding common stock, a 22% increase over the dividend paid in the prior year. The dividend was payable on March 3, 1999 to shareholders of record as of February 5, 1999. 38 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CINTAS CORPORATION. Date: May 7, 1999 By: /s/ William C. Gale ----------------------------------- William C. Gale, Vice President - Finance and Chief Financial Officer EX-23 2 EXHIBIT 23 1 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the inclusion in this Current Report on Form 8-K/A of Cintas Corporation of our report dated April 30, 1999. We also consent to the incorporation by reference in the following Registration Statements and related prospectuses of Cintas Corporation of our report dated April 30, 1999, with respect to the supplemental consolidated financial statements included in the Current Report on Form 8-K/A. Registration Form Number ---- ------------ S-8 333-75015 33-56623 33-23228 33-71124 S-4 333-72457 S-3 333-72561 S-3 333-72555 S-3 333-72553 S-3 333-72559 S-3 333-68925 S-3 333-68151 /s/ Ernst & Young LLP Cincinnati, Ohio April 30, 1999 EX-27.1 3 EXHIBIT 27.1
5 12-MOS MAY-31-1998 MAY-31-1998 13,423,000 88,154,000 193,916,000 7,978,000 311,070,000 604,109,000 755,416,000 266,445,000 1,305,400,000 202,139,000 0 0 0 47,062,000 756,795,000 1,305,400,000 381,034,000 1,476,945,000 259,211,000 906,310,000 362,780,000 0 15,824,000 196,856,000 63,202,000 0 0 0 0 133,654,000 1.25 1.23
EX-27.2 4 EXHIBIT 27.2
5 12-MOS MAY-31-1997 MAY-31-1997 17,632,000 86,655,000 157,446,000 6,586,000 252,027,000 512,505,000 615,496,000 218,346,000 1,101,182,000 187,393,000 0 0 0 45,395,000 650,603,000 1,101,182,000 313,311,000 1,126,899,000 213,343,000 780,087,000 288,216,000 0 16,033,000 182,012,000 63,455,000 0 0 0 0 118,557,000 1.13 1.12
EX-27.3 5 EXHIBIT 27.3
5 12-MOS MAY-31-1996 MAY-31-1996 12,954,000 73,477,000 132,031,000 1,757,000 230,736,000 450,691,000 394,939,000 130,881,000 996,046,000 172,862,000 0 0 0 44,013,000 553,702,000 996,046,000 284,342,000 1,103,492,000 194,629,000 688,951,000 250,168,000 0 14,258,000 152,800,000 53,845,000 0 0 0 0 98,955,000 0.96 0.94
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