CINTAS CORP - Quarter Report: 2005 August (Form 10-Q)

 

 

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2005

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

For the transition period from                     to                     

Commission file number 0-11399

CINTAS CORPORATION

(Exact name of registrant as specified in its charter)

WASHINGTON		31-1188630
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6800 CINTAS BOULEVARD
P.O. BOX 625737
CINCINNATI, OHIO 45262-5737
(Address of principal executive offices)
(Zip Code)

(513) 459-1200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

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

Class		Outstanding September 30, 2005
Common Stock, no par value		167,961,160

 

 

CINTAS CORPORATION
INDEX

		Page No.
Part I. Financial Information
Item 1. Financial Statements.
Consolidated Condensed Statements of Income - Three Months Ended August 31, 2005 and 2004			3
Consolidated Condensed Balance Sheets - August 31, 2005 and May 31, 2005			4
Consolidated Condensed Statements of Cash Flows - Three Months Ended August 31, 2005 and 2004			5
Notes to Consolidated Condensed Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.			27
Item 4. Controls and Procedures.			28
Part II. Other Information			29
Item 1. Legal Proceedings.			29
Item 2(c). Issuer Purchases of Equity Securities			30
Item 6. Exhibits			30
Signatures			31
Certifications			32
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

CINTAS CORPORATION

ITEM 1. FINANCIAL STATEMENTS.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

(In thousands except per share data)

		Three Months Ended
		August 31,
		2005				2004
Revenue:
Rentals		$	628,008			$	581,659
Other services			195,467				164,297
			823,475				745,956
Costs and expenses (income):
Cost of rentals			339,425				317,754
Cost of other services			128,562				109,364
Selling and administrative expenses			223,437				198,809
Interest income			(1,702	)			(1,122	)
Interest expense			7,336				5,833
			697,058				630,638
Income before income taxes			126,417				115,318
Income taxes			46,882				42,652
Net income		$	79,535			$	72,666
Basic earnings per share		$	.47			$	.42
Diluted earnings per share		$	.47			$	.42

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(In thousands except share data)

		August 31, 2005				May 31, 2005
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	43,437			$	43,196
Marketable securities			214,310				266,232
Accounts receivable, net			337,930				326,896
Inventories, net			222,030				216,412
Uniforms and other rental items in service			308,768				305,450
Prepaid expenses			10,032				8,358
Total current assets			1,136,507				1,166,544
Property and equipment, at cost, net			823,678				817,198
Goodwill			903,356				889,538
Service contracts, net			144,424				146,596
Other assets, net			34,761				39,868
		$	3,042,726			$	3,059,744
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	65,781			$	69,296
Accrued compensation and related liabilities			37,441				38,710
Accrued liabilities			97,483				166,428
Income taxes:
Current			38,265				32,864
Deferred			59,370				41,883
Long-term debt due within one year			7,258				7,300
Total current liabilities			305,598				356,481
Long-term debt due after one year			510,572				465,291
Deferred income taxes			133,735				133,837
Shareholders’ equity:
Preferred stock, no par value:
100,000 shares authorized, none outstanding			—				—
Common stock, no par value:
425,000,000 shares authorized,
FY 2006: 172,306,726 issued and 168,234,196 outstanding
FY 2005: 172,127,502 issued and 170,658,601 outstanding			117,356				114,171
Retained earnings			2,115,527				2,035,992
Treasury stock:
FY 2006: 4,072,530 shares
FY 2005: 1,468,901 shares			(160,461	)			(58,204	)
Other accumulated comprehensive income (loss):
Foreign currency translation			21,657				13,507
Unrealized loss on derivatives			(1,258	)			(1,331	)
Total shareholders’ equity			2,092,821				2,104,135
		$	3,042,726			$	3,059,744

See accompanying notes.

CINTAS CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

		Three Months Ended
		August 31,
		2005				2004
Cash flows from operating activities:
Net income		$	79,535			$	72,666
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			30,579				29,699
Amortization of deferred charges			7,774				6,729
Deferred income taxes			17,385				21,815
Change in current assets and liabilities, net of acquisitions of businesses:
Accounts receivable			(11,258	)			(4,776	)
Inventories			(5,610	)			(1,548	)
Uniforms and other rental items in service			(3,318	)			(3,567	)
Prepaid expenses			(1,664	)			(4,935	)
Accounts payable			(3,529	)			1,875
Accrued compensation and related liabilities			(1,269	)			(1,272	)
Accrued liabilities			(66,996	)			(67,420	)
Income taxes payable			5,401				3,569
Net cash provided by operating activities			47,030				52,835
Cash flows from investing activities:
Capital expenditures			(36,144	)			(35,336	)
Proceeds from sale or redemption of marketable securities			54,047				9,240
Purchase of marketable securities			(2,125	)			(24,304	)
Acquisitions of businesses, net of cash acquired			(20,968	)			(14,574	)
Other			3,487				1,183
Net cash used in investing activities			(1,703	)			(63,791	)
Cash flows from financing activities:
Proceeds from issuance of debt			46,000				—
Repayment of debt			(237	)			(182	)
Stock options exercised			2,996				1,514
Repurchase of common stock			(102,257	)			—
Other			8,412				4,216
Net cash (used in) provided by financing activities			(45,086	)			5,548
Net increase (decrease) in cash and cash equivalents			241				(5,408	)
Cash and cash equivalents at beginning of period			43,196				87,357
Cash and cash equivalents at end of period		$	43,437			$	81,949

See accompanying notes.

CINTAS CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands except per share data)

1. Basis of Presentation

The consolidated condensed financial statements of Cintas Corporation included herein have been prepared by Cintas, 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 U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. While we believe that the disclosures are adequately presented, it is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and notes included in our most recent annual report for the fiscal year ended May 31, 2005. A summary of our significant accounting policies is presented on page 30 of our most recent annual report. There have been no material changes in the accounting policies followed by Cintas during the fiscal year.

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.

Certain prior year amounts have been reclassified to conform to current year presentation.

2. New Accounting Standard

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004), Share-Based Payment, (Statement 123R), which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Generally, the approach in Statement 123R is similar to the approach described in Statement 123. However, Statement 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The new standard will be effective for public entities (excluding small business issuers) no later than the beginning of the first fiscal year beginning after June 15, 2005. Cintas will adopt this Statement no later than the first quarter of fiscal 2007. Cintas is in the process of determining the impact that the adoption of this Statement will have on its financial position and results of operations.

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

3. Earnings per Share

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
		August 31,
		2005				2004
Numerator:
Net income		$	79,535			$	72,666
Denominator:
Denominator for basic earnings per share — weighted average shares			168,939				171,449
Effect of dilutive securities-employee stock options			625				1,211
Denominator for diluted earnings per share — adjusted weighted average shares and assumed conversions			169,564				172,660
Basic earnings per share		$	.47			$	.42
Diluted earnings per share		$	.47			$	.42

4. Goodwill, Service Contracts and Other Assets

Changes in the carrying amount of goodwill and service contracts for the three months ended August 31, 2005, by operating segment, are as follows:

						Other
		Rentals				Services				Total
Goodwill
Balance as of June 1, 2005		$	701,422			$	188,116			$	889,538
Goodwill acquired			5,870				7,031				12,901
Foreign currency translation			821				96				917
Balance as of August 31, 2005		$	708,113			$	195,243			$	903,356

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

						Other
		Rentals				Services				Total
Service Contracts
Balance as of June 1, 2005		$	118,350			$	28,246			$	146,596
Service contracts acquired			1,568				1,935				3,503
Service contracts amortization			(5,468	)			(1,441	)			(6,909	)
Foreign currency translation			1,205				29				1,234
Balance as of August 31, 2005		$	115,655			$	28,769			$	144,424

Information regarding Cintas’ service contracts and other assets follows:

		As of August 31, 2005
		Carrying				Accumulated
		Amount				Amortization				Net
Service contracts		$	240,917			$	96,493			$	144,424
Noncompete and consulting agreements		$	38,298			$	18,883			$	19,415
Other			18,375				3,029				15,346
Total		$	56,673			$	21,912			$	34,761

		As of May 31, 2005
		Carrying				Accumulated
		Amount				Amortization				Net
Service contracts		$	236,179			$	89,583			$	146,596
Noncompete and consulting agreements		$	36,158			$	17,163			$	18,995
Other			23,671				2,798				20,873
Total		$	59,829			$	19,961			$	39,868

Amortization expense was $7,774 and $6,729 for the three months ended August 31, 2005 and August 31, 2004, respectively. Estimated amortization expense, excluding any future acquisitions, for each of the next five years is $29,680, $27,796, $25,196, $22,710 and $19,568, respectively.

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

5. Debt, Derivatives and Hedging Activities

Cintas formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Cintas’ hedging activities are transacted only with highly-rated institutions, reducing the exposure to credit risk in the event of nonperformance.

From time to time, Cintas will use derivatives for both cash flow hedging and fair value hedging purposes. For derivative instruments that hedge the exposure of variability in short-term interest rates, designated as cash flow hedges, the effective portion of the net gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. For the ineffective portion of the hedge, gains or losses are charged to earnings in the current period. For derivative instruments that hedge the exposure to changes in the fair value of certain fixed rate debt, designated as fair value hedges, the effective portion of the net gain or loss on the derivative instrument, as well as the offsetting gain or loss on the fixed rate debt attributable to the hedged risk, are recorded in current period earnings.

From time to time, Cintas uses interest rate swap and lock agreements as hedges against variability in short-term interest rates. These agreements effectively convert a portion of the floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. Cintas uses the Hypothetical Derivative Method for assessing the effectiveness of these swaps. There are no interest rate swap agreements outstanding as of August 31, 2005. When outstanding, the effectiveness of these swaps is reviewed at least every fiscal quarter. Cintas also uses reverse interest rate swap agreements to convert a portion of fixed rate debt to a floating rate basis, thus hedging for changes in the fair value of the fixed rate debt being hedged. These agreements involve the receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the agreements without an exchange of underlying principal amount. The mark-to-market values of both the fair value hedging instruments and the underlying debt obligations are equal and recorded as offsetting gains and losses in current period earnings. Cintas has determined that the current reverse interest rate swap agreements, designated as fair value hedges, qualify for treatment under the short-cut method of measuring effectiveness. Under the provisions of SFAS 133, these hedges are determined to be perfectly effective and there is no requirement to periodically evaluate effectiveness.

Cintas entered into two lock agreements as part of the Omni acquisition in fiscal 2002. The amortization of the cash flow hedge, pertaining to these lock agreements, resulted in a credit to other comprehensive income of $73 for the three months ended August 31, 2005. The reverse interest rate swap agreements are fair value hedges that convert $225 million of fixed rate debt to a floating rate. These agreements expire in 2007 and allow Cintas to receive an effective interest rate of 5.13% and pay an interest rate based on LIBOR. Because these fair value hedges are 100% effective, the net $500 unfavorable change in the fair value of these hedges for the three months ended August 31, 2005, was directly offset by a decrease in the fair value of the debt, reflecting increased floating interest rates over the prior fiscal year. (See Note 10 entitled Subsequent Events.)

Cintas has certain significant covenants related to debt agreements. These covenants limit Cintas’ ability to incur certain liens, to engage in sale-leaseback transactions and to merge, consolidate or sell all or substantially all of Cintas’ assets. These covenants also require Cintas to maintain certain debt to capitalization and interest coverage ratios. Cross default provisions exist between certain debt instruments. Cintas is in compliance with all of the significant debt covenants for all periods presented. Were a default of a significant covenant to occur, the default could result in an acceleration of indebtedness, impair liquidity and limit the ability to raise future capital. Cintas’ debt, net of cash and marketable securities, is $260 million. For the three months ended August 31, 2005, net cash provided by operating activities was $47 million. Capital expenditures were approximately $36 million for the same period.

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

6. Stock-Based Compensation

Cintas follows the disclosure requirements of FASB Statement No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, but continues to apply Accounting Principles Board Opinion No. 25 as the method used to account for stock-based employee compensation arrangements. See Note 2 entitled New Accounting Standard regarding a new accounting standard for share-based payments, which Cintas will adopt no later than the first quarter of fiscal 2007. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.

		Three Months Ended
		August 31,
		2005				2004
Net income, as reported		$	79,535			$	72,666
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			1,113				2,056
Pro forma net income		$	78,422			$	70,610
Earnings per share:
Basic — as reported		$	.47			$	.42
Basic — pro forma		$	.46			$	.41
Diluted — as reported		$	.47			$	.42
Diluted — pro forma		$	.46			$	.41

During the third quarter of fiscal 2005, Cintas vested certain employee stock options whose exercise price was greater than current market value.

7. Comprehensive Income

Total comprehensive income represents the net change in shareholders’ equity during a period from sources other than transactions with shareholders and, as such, includes net earnings. For Cintas, the only components of total comprehensive income are the change in cumulative foreign currency translation adjustments and the change in the fair value of the forecasted cash flows associated with a derivative accounted for as a cash flow hedge. The components of comprehensive income for the three month periods ended August 31, 2005 and August 31, 2004 are as follows:

		Three Months Ended
		August 31,
		2005				2004
Net income		$	79,535			$	72,666
Other comprehensive income:
Foreign currency translation adjustment			8,150				4,090
Net unrealized income on cash flow hedges			73				73
Comprehensive income		$	87,758			$	76,829

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

8. Segment Information

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 to its customers. Other items, including entrance mats, shop towels and restroom supplies, are also rented or sold to its customers. The Other Services operating segment involves the design, manufacture and direct sale of uniforms to customers, as well as the sale of ancillary products and services. These ancillary products and services include first aid, safety and fire protection products and services, document management services and cleanroom supplies. 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.

Information as to the operations of Cintas’ different business segments is set forth below based on the distribution of products and services offered. Cintas evaluates performances based on several factors of which the primary financial measures are business segment revenue and income before income taxes.

						Other
		Rentals				Services				Corporate				Total
As of and for the three months ended August 31, 2005
Revenue		$	628,008			$	195,467			$	—			$	823,475
Income (loss) before income taxes		$	116,008			$	16,043			$	(5,634	)		$	126,417
Total assets		$	2,273,375			$	511,604			$	257,747			$	3,042,726
As of and for the three months ended August 31, 2004
Revenue		$	581,659			$	164,297			$	—			$	745,956
Income (loss) before income taxes		$	106,957			$	13,072			$	(4,711	)		$	115,318
Total assets		$	2,207,850			$	375,187			$	263,977			$	2,847,014

9. Litigation and Other Contingencies

Cintas is subject to legal proceedings and claims arising from the ordinary course of its business, including personal injury, customer contract, environmental and employment claims. In the opinion of management, the aggregate liability, if any, with respect to such ordinary course of business actions, will not have a material adverse effect on the financial position or results of operations of Cintas. Cintas is party to additional litigation not considered in the ordinary course of business, including the litigation discussed below.

Cintas is a defendant in a purported class action lawsuit, Paul Veliz, et al., v. Cintas Corporation, filed on March 19, 2003, in the United States District Court, Northern District of California, Oakland Division, alleging that Cintas violated certain federal and state wage and hour laws applicable to its service sales representatives, whom Cintas considers exempt employees, and asserting additional related ERISA claims. On August 23, 2005, an amended complaint was filed alleging additional state law wage and hour claims under the following state laws: Arkansas, Kansas, Maine, Massachusetts, Minnesota, New Mexico, Ohio, Oregon, Pennsylvania, Rhode Island, Washington and West Virginia. The plaintiffs are seeking unspecified monetary damages, injunctive relief or both. Cintas denies these claims and is defending the plaintiffs’ allegations. The court ordered arbitration for all potential plaintiffs except for those that fall into one of four narrowly defined exceptions. As a result, Cintas believes that a majority of the potential plaintiffs will be required to arbitrate their claims. No determination has been made by the court or an arbitrator regarding class certification. There can be no assurance as to whether a class will

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

be certified or, if a class is certified, as to the geographic or other scope of such class. If a court or arbitrator certifies a class in this action and there is an adverse verdict on the merits, or in the event of a negotiated settlement of the action, the resulting liability and/or any increased costs of operations on an ongoing basis could be material to Cintas. Any estimated liability relating to this lawsuit is not determinable at this time.

Cintas is also a defendant in a purported class action lawsuit, Robert Ramirez, et al., v. Cintas Corporation, filed on January 20, 2004, and pending in the United States District Court, Northern District of California, San Francisco Division. The case was brought on behalf of all past and present female, African-American and Hispanic employees of Cintas and its subsidiaries. The complaint alleges that Cintas has engaged in a pattern and practice of discriminating against women and minorities in recruitment, hiring, promotions, transfers, job assignments and pay. The complaint seeks injunctive relief, compensatory damages, punitive damages and attorney’s fees, among other things. Cintas denies these claims and is defending the plaintiffs’ allegations. The court ordered arbitration as to three of the ten named plaintiffs. On April 27, 2005, the United States Equal Employment Opportunity Commission (EEOC) filed a motion to intervene in order to participate in this lawsuit. No filings or determination has been made in regard to the lawsuit as to class certification. There can be no assurance as to whether a class will be certified or, if a class is certified, as to the geographic or other scope of such class. Several related proceedings with similar allegations and seeking similar relief damages and fees are pending, including an EEOC charge filed on April 17, 2000, by Mirna Serrano with the EEOC Detroit District office on behalf of female service sales representative job applicants at all Cintas locations in Michigan, a class action lawsuit, Mirna E. Serrano, et al., v. Cintas Corporation, filed on May 10, 2004, in the United States District Court for the Eastern District of Michigan, Southern Division on behalf of the same female service sales representative job applicants in the EEOC charge. On September 6, 2005, a Magistrate Judge granted Plaintiffs’ motion for leave to file a second amended complaint to expand the claim to a nationwide class. The EEOC’s processing of the administrative action filed on December 15, 2004, by James Morgan with the EEOC Washington, D.C. office and the California Department of Fair Employment and Housing alleging racial discrimination in compensation and training opportunities was terminated on July 15, 2005, and a right to sue letter was issued. On August 3, 2005, Morgan joined the Ramirez lawsuit. In addition, a class action lawsuit, Larry Houston, et al., v. Cintas Corporation, was filed on August 3, 2005, in the United States District Court for the Northern District of California on behalf of African-American managers alleging racial discrimination. If there is an adverse verdict or a negotiated settlement of these actions, the resulting liability and/or any increased costs of operations on an ongoing basis could be material to Cintas. Any estimated liability relating to these proceedings is not determinable at this time.

Several other similar administrative proceedings are pending including: (i) two charges filed on November 30, 2004, by an EEOC Commissioner with the EEOC Systemic Litigation Unit alleging failure to hire and assign females to production job positions, and failing to hire females, African-Americans and Hispanics into the Management Trainee program, (ii) a charge filed on January 24, 2005, by Jennifer Fargo on behalf of herself and a similarly situated class with the Augusta Human Relations Commission and the EEOC Detroit District office alleging gender and equal pay discrimination against female sales representatives and sales associates, (iii) a charge filed on March 23, 2005, by Clifton Cooper on behalf of himself and a similarly situated class with the EEOC Systemic Litigation Unit alleging discriminatory pay and treatment due to race, (iv) a charge filed on March 28, 2005, by Lorelei Reynolds on behalf of herself and a similarly situated class with the EEOC Birmingham District alleging discriminatory pay and treatment due to race and gender, (v) a charge filed on April 25, 2005, by Melissa Schulz on behalf of herself and a similarly situated class with the EEOC Systemic Litigation Unit and the Oregon Bureau of Labor and Industries, Civil Rights Division alleging discriminatory pay and treatment due to race and gender, (vi) a charge filed on May 6, 2005, by Anthony Jones on behalf of himself and a similarly situated class with the EEOC Systemic Litigation Unit alleging discriminatory pay and treatment due to race and (vii) a charge filed on June 10, 2005, by Mattie Cooper on behalf of herself and a similarly situated class

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

with the EEOC Systemic Litigation Unit alleging discriminatory pay and treatment due to race and gender. The investigations of these allegations are pending and no determinations have been made.

Cintas is also a defendant in a lawsuit, J. Lester Alexander, III vs. Cintas Corp., et al., which was originally filed on October 25, 2004, and is currently pending in the United States Bankruptcy Court for the Middle District of Alabama, Eastern Division. The case was brought by J. Lester Alexander, III, the Chapter 7 Trustee (the “Trustee”) of Terry Manufacturing Company, Inc. (“TMC”) and Terry Uniform Company, LLC (“TUC”), against Cintas in Randolph County, Alabama. The Trustee seeks damages against Cintas for allegedly breaching fiduciary duties to TMC and TUC and for allegedly aiding and abetting breaches of fiduciary duties by others to those entities. The complaint also includes allegations that Cintas breached certain limited liability company agreements, or alternatively, misrepresented their intention to perform their obligations in those agreements and acted as alter egos of the bankrupt TMC and are therefore liable for all of TMC’s debts. The Trustee is seeking $50 million in compensatory damages and $100 million in punitive damages. Cintas denies these claims and is vigorously defending itself against all claims in the complaint. If there is an adverse verdict on the merits or in the event of a negotiated settlement of this lawsuit, the resulting liability could be material to Cintas. Any estimated liability relating to this lawsuit is not determinable at this time.

During fiscal 2001, the State of Connecticut filed suit against Cintas in the Superior Court District of Hartford alleging various violations of state environmental laws and alleging that Cintas violated certain wastewater discharge and hazardous waste violations. This suit was settled in August, 2005, for approximately $350 thousand. The reserve that had been established for this liability offset this charge.

The litigation discussed above, if decided adversely to or settled by Cintas, may, individually or in the aggregate, result in liability material to Cintas’ financial condition or results of operations. Cintas may enter into discussions regarding settlement of these and other lawsuits, and may enter into settlement agreements if it believes such settlement is in the best interests of Cintas’ shareholders.

10. Subsequent Events

In the first quarter of fiscal 2006, Cintas continued its stock repurchase program that the Board of Directors had authorized and announced in May 2005. Subsequent to August 31, 2005, Cintas purchased approximately 285,000 additional shares of Cintas stock at an average price of $41.31 per share for a total purchase price of approximately $12 million. From the inception of the stock repurchase program through September 30, 2005, Cintas has purchased approximately 4.4 million shares of Cintas stock at an average price of $39.53 per share for a total purchase price of approximately $172 million. The Board did not specify an expiration date for this program.

In addition, given the current interest rate environment, Cintas terminated its reverse interest rate swap agreements on September 1, 2005, thereby converting $225 million in long-term debt back to fixed rate debt with an effective interest rate of 5.13%.

CINTAS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands except per share data)

11. Supplemental Guarantor Information

Effective June 1, 2000, Cintas reorganized its legal structure and created Cintas Corporation No. 2 (Corp. 2) as its indirectly, wholly-owned principal operating subsidiary. Cintas and its wholly-owned, direct and indirect domestic subsidiaries, other than Corp. 2, unconditionally guaranteed, jointly and severally, debt of Corp. 2.

On May 13, 2002, Cintas completed the acquisition of Omni Services, Inc. (Omni). A portion of the purchase price for Omni was funded with $450,000 in long-term notes. Corp. 2 was the issuer of the long-term notes, which are unconditionally guaranteed, jointly and severally, by Cintas Corporation and the subsidiary guarantors.

As allowed by SEC rules, the following condensed consolidating financial statements are provided as an alternative to filing separate financial statements of the guarantors. Each of the subsidiaries presented in the condensed consolidating financial statements has been fully consolidated in Cintas’ financial statements. The condensed consolidating financial statements should be read in conjunction with the financial statements of Cintas and notes thereto of which this note is an integral part.

Condensed consolidating financial statements for Cintas, Corp. 2, the subsidiary guarantors and non-guarantors are presented below:

CONDENSED CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED AUGUST 31, 2005

																						Cintas
		Cintas								Subsidiary												Corporation
		Corporation				Corp. 2				Guarantors				Non-Guarantors				Eliminations				Consolidated
Revenue:
Rentals		$	—			$	461,948			$	130,007			$	36,179			$	(126	)		$	628,008
Other services			—				296,571				98,956				13,053				(213,113	)			195,467
Equity in net income of affiliates			79,535				—				—				—				(79,535	)			—
			79,535				758,519				228,963				49,232				(292,774	)			823,475
Costs and expenses (income):
Cost of rentals			—				285,787				75,683				21,306				(43,351	)			339,425
Cost of other services			—				223,756				69,570				8,410				(173,174	)			128,562
Selling and administrative expenses			—				222,205				(10,127	)			12,063				(704	)			223,437
Interest income			—				(1,335	)			(91	)			(276	)			—				(1,702	)
Interest expense			—				7,314				(1,007	)			1,029				—				7,336
			—				737,727				134,028				42,532				(217,229	)			697,058
Income before income taxes			79,535				20,792				94,935				6,700				(75,545	)			126,417
Income taxes			—				8,016				36,599				2,267				—				46,882
Net income		$	79,535			$	12,776			$	58,336			$	4,433			$	(75,545	)		$	79,535

CONDENSED CONSOLIDATING INCOME STATEMENT
THREE MONTHS ENDED AUGUST 31, 2004

																						Cintas
		Cintas								Subsidiary												Corporation
		Corporation				Corp. 2				Guarantors				Non-Guarantors				Eliminations				Consolidated
Revenue:
Rentals		$	—			$	432,791			$	117,959			$	30,980			$	(71	)		$	581,659
Other services			—				177,673				78,324				7,272				(98,972	)			164,297
Equity in net income of affiliates			72,666				—				—				—				(72,666	)			—
			72,666				610,464				196,283				38,252				(171,709	)			745,956
Costs and expenses (income):
Cost of rentals			—				263,439				70,852				17,993				(34,530	)			317,754
Cost of other services			—				136,561				38,343				4,371				(69,911	)			109,364
Selling and administrative expenses			—				185,687				(3,987	)			8,172				8,937				198,809
Interest income			—				(939	)			(3	)			(180	)			—				(1,122	)
Interest expense			—				5,691				(799	)			941				—				5,833
			—				590,439				104,406				31,297				(95,504	)			630,638
Income before income taxes			72,666				20,025				91,877				6,955				(76,205	)			115,318
Income taxes			—				7,270				33,353				2,029				—				42,652
Net income		$	72,666			$	12,755			$	58,524			$	4,926			$	(76,205	)		$	72,666

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF AUGUST 31, 2005

																						Cintas
		Cintas								Subsidiary												Corporation
		Corporation				Corp. 2				Guarantors				Non-Guarantors				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	—			$	18,818			$	7,145			$	17,474			$	—			$	43,437
Marketable securities			—				182,702				—				31,608				—				214,310
Accounts receivable, net			—				240,959				96,999				11,286				(11,314	)			337,930
Inventories, net			—				201,778				23,639				8,578				(11,965	)			222,030
Uniforms and other rental items in service			—				251,388				76,463				17,235				(36,318	)			308,768
Prepaid expenses			—				7,386				2,275				371				—				10,032
Total current assets			—				903,031				206,521				86,552				(59,597	)			1,136,507
Property and equipment, at cost, net			—				597,444				182,390				43,844				—				823,678
Goodwill			—				146,276				737,907				19,173				—				903,356
Service contracts, net			—				93,258				43,334				7,832				—				144,424
Other assets, net			1,607,175				39,573				930,099				178,875				(2,720,961	)			34,761
		$	1,607,175			$	1,779,582			$	2,100,251			$	336,276			$	(2,780,558	)		$	3,042,726
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	(465,247	)		$	7,633			$	492,520			$	(7,138	)		$	38,013			$	65,781
Accrued compensation and related liabilities			—				25,842				9,706				1,893				—				37,441
Accrued liabilities			—				178,558				(85,936	)			4,906				(45	)			97,483
Income taxes:
Current			—				4,986				33,028				280				(29	)			38,265
Deferred			—				—				58,050				1,320				—				59,370
Long-term debt due within one year			—				6,601				829				—				(172	)			7,258
Total current liabilities			(465,247	)			223,620				508,197				1,261				37,767				305,598
Long-term debt due after one year			—				517,031				(55,870	)			83,297				(33,886	)			510,572
Deferred income taxes			—				10,222				118,857				4,656				—				133,735
Total shareholders’ equity			2,072,422				1,028,709				1,529,067				247,062				(2,784,439	)			2,092,821
		$	1,607,175			$	1,779,582			$	2,100,251			$	336,276			$	(2,780,558	)		$	3,042,726

CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MAY 31, 2005

																						Cintas
		Cintas								Subsidiary												Corporation
		Corporation				Corp. 2				Guarantors				Non-Guarantors				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	—			$	13,259			$	12,570			$	17,367			$	—			$	43,196
Marketable securities			—				226,658				—				39,574				—				266,232
Accounts receivable, net			—				237,152				93,109				9,025				(12,390	)			326,896
Inventories, net			—				199,236				24,120				9,087				(16,031	)			216,412
Uniforms and other rental items in service			—				250,222				74,887				16,584				(36,243	)			305,450
Prepaid expenses			—				5,781				1,989				588				—				8,358
Total current assets			—				932,308				206,675				92,225				(64,664	)			1,166,544
Property and equipment, at cost, net			—				599,757				176,648				40,793				—				817,198
Goodwill			—				140,405				734,113				15,020				—				889,538
Service contracts, net			—				95,560				43,727				7,309				—				146,596
Other assets, net			1,626,712				44,757				829,890				164,544				(2,626,035	)			39,868
		$	1,626,712			$	1,812,787			$	1,991,053			$	319,891			$	(2,690,699	)		$	3,059,744
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	(465,247	)		$	91,255			$	402,657			$	2,618			$	38,013			$	69,296
Accrued compensation and related liabilities			—				28,287				8,523				1,900				—				38,710
Accrued liabilities			—				191,123				(28,212	)			4,479				(962	)			166,428
Income taxes:
Current			—				(640	)			32,232				1,301				(29	)			32,864
Deferred			—				—				40,635				1,248				—				41,883
Long-term debt due within one year			—				6,588				871				—				(159	)			7,300
Total current liabilities			(465,247	)			316,613				456,706				11,546				36,863				356,481
Long-term debt due after one year			—				471,750				(52,413	)			78,778				(32,824	)			465,291
Deferred income taxes			—				10,222				119,212				4,403				—				133,837
Total shareholders’ equity			2,091,959				1,014,202				1,467,548				225,164				(2,694,738	)			2,104,135
		$	1,626,712			$	1,812,787			$	1,991,053			$	319,891			$	(2,690,699	)		$	3,059,744

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED AUGUST 31, 2005

																						Cintas
		Cintas								Subsidiary				Non-								Corporation
		Corporation				Corp. 2				Guarantors				Guarantors				Eliminations				Consolidated
Cash flows from operating activities:
Net income		$	79,535			$	12,776			$	58,336			$	4,433			$	(75,545	)		$	79,535
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation			—				18,978				10,108				1,493				—				30,579
Amortization of deferred charges			—				4,494				2,596				684				—				7,774
Deferred income taxes			—				—				17,060				325				—				17,385
Changes in current assets and liabilities, net of acquisitions of businesses:
Accounts receivable			—				(4,119	)			(3,802	)			(2,261	)			(1,076	)			(11,258	)
Inventories			—				(2,542	)			489				509				(4,066	)			(5,610	)
Uniforms and other rental items in service			—				(1,166	)			(1,576	)			(651	)			75				(3,318	)
Prepaid expenses			—				(1,605	)			(276	)			217				—				(1,664	)
Accounts payable			—				(81,965	)			88,206				(9,770	)			—				(3,529	)
Accrued compensation and related liabilities			—				(2,445	)			1,183				(7	)			—				(1,269	)
Accrued liabilities			—				(12,433	)			(55,748	)			268				917				(66,996	)
Income taxes payable			—				5,626				796				(1,021	)			—				5,401
Net cash provided by (used in) operating activities			79,535				(64,401	)			117,372				(5,781	)			(79,695	)			47,030
Cash flows from investing activities:
Capital expenditures			—				(16,756	)			(15,119	)			(4,269	)			—				(36,144	)
Proceeds from sale or redemption of marketable securities			—				44,253				—				9,794				—				54,047
Purchase of marketable securities			—				(297	)			—				(1,828	)			—				(2,125	)
Acquisitions of businesses, net of cash acquired			—				(7,774	)			(8,625	)			(4,569	)			—				(20,968	)
Other			19,537				4,642				(95,552	)			(5,910	)			80,770				3,487
Net cash provided by (used in) investing activities			19,537				24,068				(119,296	)			(6,782	)			80,770				(1,703	)
Cash flows from financing activities:
Proceeds from issuance of debt			—				46,000				—				—				—				46,000
Repayment of debt			—				(181	)			(3,501	)			4,520				(1,075	)			(237	)
Stock options exercised			2,996				—				—				—				—				2,996
Repurchase of common stock			(102,257	)			—				—				—				—				(102,257	)
Other			189				73				—				8,150				—				8,412
Net cash (used in) provided by financing activities			(99,072	)			45,892				(3,501	)			12,670				(1,075	)			(45,086	)
Net increase (decrease) in cash and cash equivalents			—				5,559				(5,425	)			107				—				241
Cash and cash equivalents at beginning of period			—				13,259				12,570				17,367				—				43,196
Cash and cash equivalents at end of period		$	—			$	18,818			$	7,145			$	17,474			$	—			$	43,437