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

Cintas Corporation 10-Q
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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
OR
     
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
       
 
       
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    21  
 
       
    27  
 
       
    28  
 
       
    29  
 
       
    29  
 
       
    30  
 
       
    30  
 
       
    31  
 
       
Certifications
    32  
 
       
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

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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.

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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.

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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.

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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.

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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  
 
                 

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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.

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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.

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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  
 
           

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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

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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

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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%.

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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:

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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  
     

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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  
     

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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  
     

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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  
     

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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  
     

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED AUGUST 31, 2004
                                                 
                                            Cintas
    Cintas           Subsidiary   Non-           Corporation
    Corporation   Corp. 2   Guarantors   Guarantors   Eliminations   Consolidated
     
Cash flows from operating activities:
                                               
Net income
  $ 72,666     $ 12,755     $ 58,524     $ 4,926     $ (76,205 )   $ 72,666  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                                               
Depreciation
          18,838       9,426       1,435             29,699  
Amortization of deferred charges
          4,439       1,738       552             6,729  
Deferred income taxes
                21,632       183             21,815  
Changes in current assets and liabilities, net of acquisitions of businesses:
                                               
Accounts receivable
          (1,896 )     (1,456 )     (335 )     (1,089 )     (4,776 )
Inventories
          (5,626 )     57       (1,124 )     5,145       (1,548 )
Uniforms and other rental items in service
          (645 )     (1,634 )     317       (1,605 )     (3,567 )
Prepaid expenses
          (4,173 )     (7 )     (755 )           (4,935 )
Accounts payable
          4,921       (5,461 )     2,415             1,875  
Accrued compensation and related liabilities
          (1,538 )     648       (382 )           (1,272 )
Accrued liabilities
          (3,276 )     (65,197 )     123       930       (67,420 )
Income taxes payable
          5,206       (2,174 )     537             3,569  
     
 
                                               
Net cash provided by (used in) operating activities
    72,666       29,005       16,096       7,892       (72,824 )     52,835  
 
                                               
Cash flows from investing activities:
                                               
Capital expenditures
          (23,547 )     (9,539 )     (2,250 )           (35,336 )
Proceeds from sale or redemption of marketable securities
          9,240                         9,240  
Purchase of marketable securities
          (19,600 )           (4,704 )           (24,304 )
Acquisitions of businesses, net of cash acquired
          (4,509 )     (10,065 )                 (14,574 )
Other
    (74,233 )     348       5,323       (3,680 )     73,425       1,183  
     
 
                                               
Net cash (used in) provided by investing activities
    (74,233 )     (38,068 )     (14,281 )     (10,634 )     73,425       (63,791 )
 
                                               
Cash flows from financing activities:
                                               
Repayment of debt
          (179 )     (2,187 )     2,785       (601 )     (182 )
Stock options exercised
    1,514                               1,514  
Other
    53       73             4,090             4,216  
     
 
                                               
Net cash provided by (used in) financing activities
    1,567       (106 )     (2,187 )     6,875       (601 )     5,548  
     
 
                                               
Net (decrease) increase in cash and cash equivalents
          (9,169 )     (372 )     4,133             (5,408 )
Cash and cash equivalents at beginning of period
          56,455       8,057       22,845             87,357  
     
 
                                               
Cash and cash equivalents at end of period
  $     $ 47,286     $ 7,685     $ 26,978     $     $ 81,949  
     

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CINTAS CORPORATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
BUSINESS STRATEGY
We are North America’s leading provider of corporate identity uniforms through rental and sales programs, as well as a significant provider of related business services, including entrance mats, restroom products and services, first aid, safety and fire protection products and services, document management services and cleanroom services. Our services are designed to enhance our customers’ images and to provide additional safety and protection in the workplace.
Our business strategy is to increase our market share of the uniform rental and sales business in North America through the sale of new uniform programs and to provide our customers with all of the products and services we offer. We will also continue to identify additional product and service opportunities to provide to our current and future customers. Our long-term goal is to provide a product or service to every business in North America.
To pursue this strategy, we focus on the development of a highly talented and diverse team of employees (who we call partners) — a team that is properly trained and motivated to service our customers. We support our partners’ service efforts by providing superior products with distinct competitive advantages and we embrace technological advances.
Continuous cost containment and product and process innovation are considered hallmarks of our organization. In order to sustain these efforts, we have implemented a Six Sigma effort within Cintas. Six Sigma is an analytical process that assists companies in improving quality and customer satisfaction while reducing cycle time and operating costs. We are pleased with our progress in this endeavor and are optimistic about the improved efficiencies that this process will continue to yield to Cintas.
We continue to leverage our size and core competencies to become a more valued business service provider to our current and future customers. We will also continue to supplement our internal growth with strategic acquisitions and the cultivation of new businesses.
RESULTS OF OPERATIONS
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.

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Three Months Ended August 2005 Compared to Three Months Ended August 2004
Revenue, Expenses and Income
Revenue Comparison
Total revenue increased 10.4% for the three months ended August 31, 2005, over the same period in fiscal 2005. Internal growth for this period was 8.4%. The remaining 2.0% represents external growth derived mainly through the acquisitions of first aid, safety and fire protection businesses and document management businesses within our Other Services segment.
Net Rentals revenue increased 8.0% for the three months ended August 31, 2005, over the same period in the prior fiscal year. Rentals operating segment internal growth for the first quarter of fiscal 2006 was 7.5% as compared to the three months ended August 31, 2004. This increase is primarily due to the sale of new rental programs to customers, offset by lost business. Cintas estimates that hurricane Katrina reduced this internal growth of 7.5% by approximately 0.2%.
Other Services revenue increased 19.0% for the three months ended August 31, 2005, over the same period in the prior year. Other Services operating segment internal growth for the first quarter of fiscal 2006 was 11.4% as compared to the three months ended August 31, 2004. This internal growth was generated primarily through the increased direct sale of uniforms to national customers and increased sales of first aid and safety products and services and document management services to customers. External growth of 7.6% was generated through a combination of acquisitions of first aid, safety and fire protection businesses and document management businesses.
Expense Comparison
Cost of rentals consists primarily of production expenses, delivery expenses and the amortization of in service inventory, including uniforms, mats, shop towels and other rental items. Cost of rentals increased 6.8% for the three months ended August 31, 2005, as compared to the three months ended August 31, 2004, which corresponds to the growth in Rentals revenue. Energy costs were approximately $21 million for the three months ended August 31, 2005, versus approximately $17.5 million for the same period in the prior year, a 20% increase. Various operational efficiencies offset this increase, which provided a decrease in cost of rentals as a percent to Rentals revenue from 54.6% for the three months ended August 31, 2004, to 54.0% for the three months ended August 31, 2005.
Cost of other services consists primarily of cost of goods sold (predominantly uniforms and first aid products), delivery expenses and distribution expenses. Cost of other services increased 17.6% for the three months ended August 31, 2005, as compared to the three months ended August 31, 2004. This increase was mainly due to increased sales in this segment. Gross margin within this segment will fluctuate depending on the type of product or service sold, as products which require additional services generate higher gross margins. Generally, the gross margin for Other Services is in the 30% to 35% range. The current quarter’s gross margin is 34.2%, which is at the upper end of that general range, mainly due to product mix.
Selling and administrative expenses increased 12.4% for the three months ended August 31, 2005, as compared to the three months ended August 31, 2004. Selling and administrative expenses increased mainly due to higher selling expenses. In order to accelerate revenue growth, we continue to increase our sales force, marketing plans and sales promotions. These measures combined to increase our selling costs by approximately $6 million over the prior year. Selling expenses were consistent quarter to quarter on a percent to sales basis. The cost of providing medical benefits to our employees increased $5 million, representing a 22.5% increase over the prior year. In addition, administrative expenses increased by $4 million as a result of an increase in the bad debt reserve and an increase in professional services relating to the outsourcing of certain human resource functions.

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We anticipate a continued rise in energy and labor-related costs. Recent increases in fuel costs will continue to negatively impact our operating results in coming quarters, except to the extent we are able to offset such costs with price increases and increased operating efficiencies. We are assessing the impact of hurricanes Katrina and Rita on our operations. While physical damage to our facilities appears, at this point, to be minimal, the impact on our employee-partners and customers in the affected areas continues to be a major concern to Cintas. We are assisting our employee-partners at our operations in New Orleans and Gulfport through salary continuation and other financial assistance. The ultimate cost of this assistance, combined with lower business volume at the affected operations, will have an impact on our results. We are also evaluating our insurance coverage and related claims in association with these events.
Net interest expense (interest expense less interest income) was $5.6 million for the three months ended August 31, 2005, compared to $4.7 million for the same period in the prior fiscal year. This increase in net interest expense is due to increased borrowing to fund the stock repurchase program.
Cintas’ effective tax rate increased slightly to 37.1% for the three months ended August 31, 2005 as compared to 37.0% for the three months ended August 31, 2004. This increase is due to changes in state tax laws.
Income Comparison
Net income increased 9.5% for the three months ended August 31, 2005, over the same period in fiscal 2005, primarily due to revenue growth. Diluted earnings per share increased 11.9% for the three months ended August 31, 2005, over the same period in the prior fiscal year.
Financial Condition
At August 31, 2005, there was $258 million in cash, cash equivalents and marketable securities, a decrease of $52 million from May 31, 2005. This decrease was primarily due to prefunding of employee medical costs and the continued repurchasing of our company stock, as discussed below. Capital expenditures were approximately $36 million for the three months ended August 31, 2005. We expect capital expenditures for the year to be between $140 and $160 million. Cash, cash equivalents and marketable securities will be used to finance future acquisitions, capital expenditures, expansion and additional repurchases under the stock repurchase program as detailed below. We believe that our current cash position, funds generated from operations and the strength of our banking relationships are sufficient to meet our anticipated operational and capital requirements.
Net property and equipment increased by $6 million from May 31, 2005 to August 31, 2005, due to continued investment in rental facilities and equipment. At the end of the first quarter of fiscal 2006, Cintas had three uniform rental facilities in various stages of construction.
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. For the three months ended August 31, 2005, Cintas purchased approximately 2.6 million shares of Cintas stock at an average price of $39.27 per share for a total purchase price of approximately $102 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.
Also during the first quarter of fiscal 2006, Cintas borrowed $46 million under the $300 million commercial paper program for short-term cash requirements. This financing decision was made in order to allow certain marketable securities to reach maturity rather than Cintas incurring a penalty for early redemption.

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Following is information regarding Cintas’ long-term contractual obligations and other commitments outstanding as of August 31, 2005. Subsequent to August 31, 2005, 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%. This conversion has not been reflected in the table below, as this information is based on long-term contractual obligations and other commitments outstanding as of August 31, 2005. See Note 10 entitled Subsequent Events of “Notes to Consolidated Condensed Financial Statements”.
                                         
(In thousands)   Payments Due by Period
                    Two to        
            One year   three   Four to   After five
Long-term contractual obligations   Total   or less   years   five years   Years
 
Long-term debt (1)
  $ 515,017     $ 6,688     $ 277,501     $ 880     $ 229,948  
Capital lease obligations (2)
    2,813       570       1,225       538       480  
Operating leases (3)
    56,910       17,615       24,167       9,234       5,894  
Interest payments (4)
    120,270       28,409       39,427       27,657       24,777  
Interest swap agreements (5)
    (1,683 )     (399 )     (1,284 )            
Unconditional purchase obligations
                             
     
Total contractual cash obligations
  $ 693,327     $ 52,883     $ 341,036     $ 38,309     $ 261,099  
     
Cintas also makes payments to defined contribution plans. The amounts of contributions made to the plans are made at the discretion of Cintas. Future contributions are assumed to increase 15% annually. Assuming this 15% increase, payments due in one year or less would be $29,092, two to three years would be $71,929 and four to five years would be $95,126. Payments for years thereafter are assumed to continue increasing by 15% each year.
 
(1)   Long-term debt primarily consists of $450,000 in long-term notes related to the Omni acquisition.
 
(2)   Capital lease obligations are classified as long-term debt on the balance sheet.
 
(3)   Operating leases consist primarily of building leases and synthetic leases on two corporate jets.
 
(4)   Interest payments include interest on both fixed and variable rate debt. Rates have been assumed to increase 75 basis points for the remainder of fiscal 2006, an additional 75 basis points in fiscal 2007 and then remain constant in future years. Subsequent to the termination of the reverse interest rate swap agreements (as discussed above and in Note 10 entitled Subsequent Events of “Notes to Consolidated Condensed Financial Statements”), total interest payments are now as follows: $116,904 in total; $27,611 due in one year or less; $36,859 due in two to three years; $27,657 due in four to five years; and $24,777 due after five years.
 
(5)   Reference Note 5 entitled Debt, Derivatives and Hedging Activities of “Notes to Consolidated Condensed Financial Statements” for a detailed discussion of interest swap agreements. Subsequent to the termination of the reverse interest rate swap agreements (as discussed above and in Note 10 entitled Subsequent Events of “Notes to Consolidated Condensed Financial Statements”), total interest payments now and in the future will be $0.
                                         
(In thousands)   Amount of Commitment Expiration Per Period
                    Two to        
            One year   three   Four to   After five
Other commercial commitments   Total   or less   years   five years   Years
 
Lines of credit (1)
  $ 300,000     $     $     $ 300,000     $  
Standby letter of credit (2)
    60,163       60,163                    
Guarantees
                             
Standby repurchase obligations
                             
Other commercial commitments
                             
     
Total commercial commitments
  $ 360,163     $ 60,163     $     $ 300,000     $  
     
 
(1)   Back-up facility for the commercial paper program.
 
(2)   Support certain outstanding debt and self-insured workers’ compensation and general liability insurance programs.

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Cintas has no off-balance sheet arrangements other than the synthetic leases on two corporate jets. The synthetic leases on the aircraft do not currently have, and are not reasonably likely to have, a current or future material effect on Cintas’ financial condition, changes in Cintas’ financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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 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

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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 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.

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Outlook
As we look forward in fiscal 2006, our outlook remains positive, but guarded. As the economy has strengthened and employment rates have improved, our total internal growth rate has also continued to improve. Based on our marketing data, we have a relatively low 7% market share of a $42.5 billion estimated potential market. As such, we see upside potential for all of our business units. The effects of hurricanes Katrina and Rita on the gulf coast regions of the country, as well as increased fuel costs, will have a downward impact on our results. Although difficult to predict, we anticipate continued growth in all of our business units. Overall performance will be largely driven by external market conditions.
In the marketplace, competition and related pricing pressure will continue; however, we believe cost containment initiatives, technological advances and continued leverage of our infrastructure will soften or offset any impact.
When appropriate opportunities arise, we will supplement our internal growth with strategic acquisitions.
Like most other companies, we experienced, and anticipate continuing to experience, increased costs for wages and benefits, including medical benefits. Changes in oil and fuel costs and changes in federal and state tax laws also have the potential to impact our results.
Cintas continues to be the target of a corporate unionization campaign by UNITE HERE and the Teamsters unions. These unions are attempting to pressure Cintas into surrendering our employees’ rights to a government-supervised election and unilaterally accept union representation. This is unacceptable. Cintas’ philosophy in regard to unions is straightforward: We believe that employees have the right to say yes to union representation and the freedom to say no. This campaign could be materially disruptive to our business and could materially adversely affect results of operations. We will continue to vigorously oppose this campaign and to defend our employees’ rights.
We believe that the high level of customer service provided by our partners and supported by our infrastructure, quality products, financial resources and corporate culture will provide for continued business success. However, a number of factors influence future revenue, margins and profit which make forecasting difficult.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In our normal operations, Cintas has market risk exposure to interest rates. This market risk exposure to interest rates has been previously disclosed on page 64 of our most recent annual report. The exposure to variable interest rates has been mitigated through the termination of the interest rate swap agreements on September 1, 2005.
Through its foreign operations, Cintas is exposed to foreign currency risk. Foreign currency exposures arise from transactions denominated in a currency other than the functional currency and from foreign denominated revenue and profit translated into U.S. dollars. The primary foreign currency to which Cintas is exposed is the Canadian dollar. Cintas does not currently use forward exchange contracts to limit potential losses in earnings or cash flows from foreign currency exchange rate movements.

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ITEM 4.
CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
With the participation of Cintas’ management, including Cintas’ Chief Executive Officer and President, Chief Financial Officer, General Counsel and Controllers, Cintas has evaluated the effectiveness of the disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of August 31, 2005. Based on such evaluation, Cintas’ management, including Cintas’ Chief Executive Officer and President, Chief Financial Officer, General Counsel and Controllers, have concluded that Cintas’ disclosure controls and procedures were effective in ensuring (i) information required to be disclosed by Cintas in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by Cintas in the reports that it files or submits under the Exchange Act is accumulated and communicated to Cintas’ management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
There were no changes in Cintas’ internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended August 31, 2005, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. See “Management’s Report on Internal Control over Financial Reporting” and “Report of Independent Registered Public Accounting Firm” on pages 53 and 54 of our most recent annual report.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor from civil litigation for forward-looking statements. Forward-looking statements may be identified by words such as “estimates,” “anticipates,” “projects,” “plans,” “expects,” “intends,” “believes,” “seeks,” “could,” “should,” “may” and “will” or the negative versions thereof and similar expressions and by the context in which they are used. Such statements are based upon current expectations of Cintas and speak only as of the date made. These statements are subject to various risks, uncertainties and other factors that could cause actual results to differ from those set forth in or implied by this Annual Report. Factors that might cause such a difference include, but are not limited to, the possibility of greater than anticipated operating costs including fuel costs, lower sales volumes, the performance and costs of integration of acquisitions, fluctuations in costs of materials and labor including increased medical costs, costs and possible effects of union organizing activities, uncertainties regarding any existing or newly-discovered expenses and liabilities related to environmental compliance and remediation, the cost, results and ongoing assessment of internal controls for financial reporting required by the Sarbanes-Oxley Act of 2002, the initiation or outcome of litigation, higher assumed sourcing or distribution costs of products, the disruption of operations from catastrophic events, changes in federal and state tax laws and the reactions of competitors in terms of price and service. Cintas undertakes no obligation to update any forward-looking statements to reflect the events or circumstances arising after the date on which they are made.

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CINTAS CORPORATION
Part II. Other Information
Item 1. Legal Proceedings
I. Supplemental Information: We discuss certain legal proceedings pending against us in Part I of this quarterly report on Form 10-Q under the caption “Item 1. Financial Statements,” in Note 9 to our financial statements, which is captioned “Litigation and Other Contingencies,” and refer you to that discussion for important information concerning those legal proceedings, including the basis for such actions and, where known, the relief sought. We provide the following additional information concerning those legal proceedings which sets forth the name of the lawsuit, the court in which the lawsuit is pending and the date on which the petition commencing the lawsuit was filed.
Wage and Hour Litigation: Paul Veliz, et al., v. Cintas Corporation, United States District Court, Northern District of California, Oakland Division, March 19, 2003. 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.
Race and Gender Litigation and Related Charges: Robert Ramirez, et al., v. Cintas Corporation, United States District Court, Northern District of California, San Francisco Division, January 20, 2004; Mirna E. Serrano, et al., v. Cintas Corporation, United States District Court for the Eastern District of Michigan, Southern Division, May 10, 2004; Larry Houston, et al., v. Cintas Corporation, United States District Court for the Northern District of California, August 3, 2005; EEOC charge filed by Mirna Serrano on April 17, 2000 with the EEOC Detroit District; EEOC charge filed by an EEOC Commissioner on November 30, 2004 with the EEOC Systemic Litigation Unit; EEOC charge filed by Jennifer Fargo on January 24, 2005 with the Augusta Human Relations Commission and the EEOC Detroit District; EEOC charge filed by Clifton Cooper on March 23, 2005 with the EEOC Systemic Litigation Unit; EEOC charge filed by Lorelei Reynolds on March 28, 2005 with the EEOC Birmingham District; EEOC charge filed by Melissa Schulz on April 25, 2005 with the EEOC Systemic Litigation Unit and the Oregon Bureau of Labor and Industries, Civil Rights Division; EEOC charge filed by Anthony Jones on May 6, 2005 with the EEOC Systemic Litigation Unit and EEOC charge filed by Mattie Cooper on June 10, 2005 with the EEOC Systemic Litigation Unit. A previously disclosed EEOC charge filed by James Morgan on December 15, 2004, with the EEOC Washington, D.C. office and the California Department of Fair Employment and Housing was terminated on July 15, 2005, and a right to sue letter was issued. On August 3, 2005, Morgan joined the Ramirez lawsuit.
Breach of Fiduciary Duties: J. Lester Alexander, III vs. Cintas Corp., et al., United States Bankruptcy Court for the Middle District of Alabama, Eastern Division, October 25, 2004.
II. Environmental Matters: Item 103 of SEC Regulation S-K requires disclosure of certain environmental matters. The following matters are disclosed in accordance with that requirement:
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 $350,000. The reserve that had been established for this liability offset this charge.

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Item 2(c). Issuer Purchases of Equity Securities
On May 2, 2005, Cintas announced that the Board of Directors authorized a $500 million stock repurchase program at market prices. The Board did not specify an expiration date for this program.
                                 
                            Maximum
                    Total number of   approximate dollar
                    shares purchased   value of shares that
    Total number   Average   as part of the   may yet be
    of shares   price paid   publicly announced   purchased under
Period   purchased   per share   plan   the plan
 
June 2005
    1,725,800     $ 39.33       1,725,800     $ 373,912,821  
July 2005
    730,529     $ 38.59       730,529     $ 345,719,798  
August 2005
    147,300     $ 41.95       147,300     $ 339,540,144  
     
Total
    2,603,629     $ 39.27       2,603,629     $ 339,540,144  
     
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. For the three months ended August 31, 2005, Cintas purchased approximately 2.6 million shares of Cintas stock at an average price of $39.27 per share for a total purchase price of approximately $102 million. Subsequent to August 31, 2005, Cintas has purchased an additional 288,400 shares of Cintas stock at an average price of $41.31 per share for a purchase price of approximately $12 million. As such, from the inception of the stock repurchase program through September 30, 2005, Cintas has purchased a total of 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 maximum approximate dollar value of shares that may yet be purchased under the plan as of September 30, 2005, is $327,625,757.
During the first quarter of fiscal 2006, Cintas also acquired 25,397 shares as payment received from employees upon the exercise of options under the stock option plan.
Item 6. Exhibits
  31.1   Certification of Principal Executive Officer required by Rule 13a-14(a)
 
  31.2   Certification of Principal Financial Officer required by Rule 13a-14(a)
 
  32.1   Section 1350 Certification of Chief Executive Officer
 
  32.2   Section 1350 Certification of Chief Financial Officer

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Signatures
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
 
  CINTAS CORPORATION    
 
 
(Registrant)
   
 
Date: October 10, 2005
  William C. Gale    
 
       
 
 
William C. Gale
   
   
Senior Vice President and Chief Financial Officer
   
(Chief Accounting Officer)

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