<PAGE>
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.
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
10 YEAR
COMPD
1996 1997 1998 1999 2000 GROWTH
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19.4% 20.6% 21.8% 20.2% 19.0% 19.4% 17.8% 19.3% 21.8% 20.9%
</TABLE>
(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-
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended May 31 (In thousands except per share data) 2000 1999 1998
<S> <C> <C> <C>
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
-----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
-18-
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of May 31 (In thousands except share data) 2000 1999
<S> <C> <C>
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
=======================================================================================================
</TABLE>
See accompanying notes.
-19-
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
OTHER
COMMON STOCK ACCUMULATED TOTAL
------------------------ RETAINED COMPREHENSIVE SHAREHOLDERS'
(In thousands) SHARES AMOUNT EARNINGS INCOME (LOSS) EQUITY
<S> <C> <C> <C> <C> <C>
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
================================================================================================================================
</TABLE>
See accompanying notes.
-20-
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended May 31 (In thousands) 2000 1999 1998
<S> <C> <C> <C>
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
===================================================================================================================
</TABLE>
See accompanying notes.
-21-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
2000 1999
------------------------ -------------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
<S> <C> <C> <C> <C>
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
====================================================================================================================
</TABLE>
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-
<PAGE>
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.
<TABLE>
<CAPTION>
ESTIMATED
COST FAIR VALUE
<S> <C> <C>
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
====================================================================================================================
</TABLE>
-24-
<PAGE>
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
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
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
====================================================================================================================
</TABLE>
-25-
<PAGE>
The components of deferred income taxes included on the balance sheets are as
follows:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
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
====================================================================================================================
</TABLE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
1998
<S> <C>
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
====================================================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
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
====================================================================================================================
</TABLE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
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
--------------------------------------------------------------------------------------------------------------------
</TABLE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
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
=======================================================================================================================
</TABLE>
The following table summarizes the information related to stock options
outstanding at May 31, 2000:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
------------------- -------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER OPTION EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$ 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
===========================================================================================================
</TABLE>
At May 31, 2000, 8,950,375 shares of common stock are reserved for future
issuance under the 2000 plan.
-29-
<PAGE>
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:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
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
</TABLE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
1999 ACCRUAL AT 2000 ACCRUAL AT
SPECIAL CHARGE ACTIVITY MAY 31, 1999 ACTIVITY MAY 31, 2000
<S> <C> <C> <C> <C> <C>
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) $ -
==================================================================================================================
</TABLE>
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-
<PAGE>
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).
<TABLE>
<CAPTION>
OTHER
RENTALS SERVICES CORPORATE TOTAL
<S> <C> <C> <C> <C>
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
====================================================================================================================
</TABLE>
-32-
<PAGE>
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.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
MAY 31, 2000 QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
MAY 31, 1999 QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
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
</TABLE>
* 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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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.
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<PAGE>
DIRECTORS AND OFFICERS
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C> <C>
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
</TABLE>
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<PAGE>
SHAREHOLDER INFORMATION
<TABLE>
<CAPTION>
EXECUTIVE OFFICES 10-K REPORT
<S> <C>
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.
</TABLE>
FISCAL 2000
<TABLE>
<CAPTION>
Quarter ended High Low Quarter Ended High Low
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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