Acuity Brands Annual Report 2002

Plain-text annual report

2002 Annual Report 2002 Annual Report 7001 Capital narrative 11/6/02 6:48 AM Page 1 Acuity Brands, Inc., with ﬁscal year 2002 sales of approximately $2.0 billion, is comprised of Acuity Lighting Group and Acuity Specialty Products Group. Acuity Lighting Group is the world’s leading lighting ﬁxture manufacturer and includes brands such as Lithonia Lighting®‚ Holophane®‚ Peerless®‚ Hydrel®, and American Electric Lighting®. Acuity Specialty Products Group is a leading provider of specialty chemicals and includes brands such as Zep®, Enforcer®, and Selig Industries™. Headquartered in Atlanta, Georgia, Acuity Brands employs 11,800 people and has operations throughout North America and in Europe. TM Acuity Brands 2002 Annual Report 1 7001 Capital narrative 11/6/02 6:48 AM Page 2 Segment Proﬁles Brands Products Markets Distribution Channels Acuity Lighting Group Acuity Specialty Products Group American Electric Lighting® Antique Street Lamps™ Carandini™ Gotham® Holophane® Hydrel® Lithonia Lighting® MetalOptics® Peerless® SpecLight™ Enforcer® National Chemical™ Selig Industries™ Zep® Exclusive distribution license: Armor All® Professional* Fluorescent lighting Industrial lighting Outdoor area lighting Landscape lighting Roadway lighting Emergency lighting Architectural lighting Flexible wiring and lighting controls Downlighting and track lighting Decorative ﬂuorescent lighting Cleaners Sanitizers Disinfectants Polishes Floor ﬁnishes Degreasers Deodorizers Pesticides Insecticides Commercial and Institutional including ofﬁces, stores, schools, and public buildings Industrial including warehouses and manufacturing facilities Infrastructure including highways, airports, and ports Consumer including home improvement centers and lighting showrooms Products are sold through independent sales agents and a direct sales force to electrical distributors, home improvement centers, utilities, and lighting showrooms. The products are delivered through a network of strategically located distribution centers, using both common carriers and a company-owned truck ﬂeet. Institutional and Industrial including food processing and preparation, transportation, education, automotive, and hospitality Retail including large and small home improvement centers and mass merchandisers Products are sold primarily through a direct sales force of 1,900 sales representatives and are delivered through regional warehouses largely using common carriers. *Armor All® is a registered trademark of Armor All Products Corporation. 2 Acuity Brands 2002 Annual Report 7001 Capital narrative 11/6/02 6:48 AM Page 3 Financial Highlights FOR THE YEAR ENDED AUGUST 31 2002 2001 % CHANGE (In thousands of dollars, except earnings per share) Operations: Net sales Gross proﬁt % Operating proﬁt Operating proﬁt % Net income Pro forma earnings per share (1) Basic weighted average number of shares outstanding Net cash provided by operating activities Depreciation and amortization Capital expenditures Employees $ 1,972,796 $ 1,982,700 (0.5%) $ $ $ $ $ $ 40.7% 120,127 6.1% 52,024 1.26 41,286 146,841 49,494 33,482 11,800 $ $ $ $ $ $ 42.4% 139,589 7.0% 40,503 0.99 41,068 183,653 62,911 47,611 11,800 (13.9%) 28.4% 27.3% 0.5% (20.0%) (21.3%) (29.7%) — AT AUGUST 31 (In thousands of dollars) Financial Position: Total assets Total debt Total stockholders’ equity Total debt to capitalization Operating working capital (2) Operating working capital as a percentage of net sales 2002 2001 % CHANGE $ 1,357,954 $ 1,330,575 $ $ $ 543,121 401,952 57.5% 377,964 19.2% $ $ $ 608,830 383,298 61.4% 399,303 20.1% 2.1% (10.8%) 4.9% (5.3%) (1) Please see Note 5 of the Notes to Consolidated Financial Statements. (2) Operating working capital is deﬁned as net receivables plus inventories minus accounts payable. Acuity Brands 2002 Annual Report 3 7001 Capital narrative 11/6/02 6:48 AM Page 4 To Our Shareholders James S. Balloun Chairman, President, and Chief Executive Ofﬁcer It has been almost a year since the launch of Acuity Brands on December 1, 2001— a year during which we have achieved a great deal while facing many challenges. While our lighting and specialty chemicals businesses have been serving customers for decades, we embraced our ﬁrst year as Acuity Brands with the vitality of a new company. During 2002, we deployed signiﬁcant resources, both human and capital, toward initiatives that will make our very good businesses better. Our efforts paid off with some major successes, and these successes helped offset the negative impact of a difﬁcult economic environment and lay the groundwork for us to strengthen our businesses. Our vision is to join the ranks of America’s premier industrial companies. Toward that goal, we’re clear about where to focus our energy in 2003—on the fundamentals that will enable us to better serve our customers and to continue to improve the effectiveness of Acuity Lighting Group (ALG) and Acuity Specialty Products Group (ASP). Through these efforts, we will become a broader and more diverse organization that is better able to deliver consistent growth in earnings and cash ﬂow for our shareholders. Our businesses are market leaders that have long histories of delivering superior value to our customers. As a consequence, Acuity Lighting Group, the world’s leading lighting ﬁxture man- ufacturer, has more than doubled in size in the last decade, generating sales of approximately $1.5 billion in 2002. ALG provides an expansive range of products marketed under such well- recognized brand names as Lithonia Lighting, Holophane, Peerless, Hydrel, American Electric Lighting, and Gotham to customers operating in numerous channels around the globe. Acuity Specialty Products Group is a leading provider of specialty chemical products for a wide range of applications in commercial, industrial, and consumer markets primarily in North America. Its brands, including Zep, Selig Industries, Enforcer, and National Chemical, are recognized as high quality solutions for a multitude of applications, including cleaning, sanitation, and water treatment. Both businesses provide unparalleled customer service. At ALG, we have the strongest sales and distribution network in the industry, with the ability to respond to orders literally overnight. At ASP, we serve a diverse array of businesses with a highly skilled direct sales force and with award-winning sales and service teams who provide our products to retail chains. While we have strong businesses, Acuity Brands is a company engaged in the challenge of not only adapting but also thriving in our rapidly changing markets. We are taking aggressive steps to improve and strengthen our businesses. We are driving to become better businesses– better in terms of delivering greater value to our customers, employees, suppliers, and shareholders. In this letter, I’ll review how we fared in the challenging economic environment of 2002 and describe what we are doing to strengthen our businesses. Solid Financial Performance in 2002 The energizing effect of becoming a new company helped us meet numerous challenges in ﬁscal 2002. During the year, we faced a tough economy that was further shaken by events such as well- publicized lapses in corporate governance, large bankruptcies, massive layoffs, and the horrible tragedy of September 11, 2001. We met these challenges by adapting our operations, ﬁnding new ways to deliver value to our customers, and reducing costs. As a result, we delivered solid ﬁnancial performance in 2002. Acuity Brands generated sales of almost $2.0 billion, net income of $52 million, and earnings per share 4 Acuity Brands 2002 Annual Report 7001 Capital narrative 11/6/02 6:48 AM Page 5 of $1.26 in 2002. This was the third consecutive year in which our businesses’ sales hovered around the two billion dollar level, while net income for 2002 was up 28 percent compared to the 2001 results. Additionally, through an intense focus on managing working capital, we were able to pay down more than $100 million of debt since December 1, 2001. This action lowered our debt- to-capitalization ratio from 63 percent to under 58 percent, bringing it closer to our targeted 40 per- cent. We’re proud that we did this while facing the toughest market we’ve seen in ten years. While our overall performance was impacted by the weakened economy, Acuity Lighting Group was particularly affected by the downward trend of the non-residential construction market. Fiscal 2002 sales of $1.5 billion were ﬂat with last year’s results. Operating proﬁt of $90 million decreased from last year’s $119 million primarily because of product mix changes and deﬂationary pricing pressures. We are encouraged that the margins in our core lighting businesses were approximately two percentage points higher than the margins we produced during the last recession in the early 1990s. This is the direct result of steps we’ve taken over the last decade to enhance the internal capa- bilities and efﬁciencies of ALG to deliver more consistent earnings and cash ﬂow and to better prepare for cyclical slowdowns in construction. Acuity Specialty Products Group generated sales of $498 million in 2002 compared to last year’s $514 million. Operating proﬁt for the seg- ment was $45 million, an increase over last year’s $41 million. ASP made signiﬁcant strides in 2002 in improving its sales and service capabilities to more effectively serve the changing needs of cur- rent customers as well as prospective ones. Meanwhile, ASP has aggressively lowered costs and enhanced productivity. These efforts allowed ASP to deliver sound earnings and cash ﬂow while ﬁghting the effects of soft demand in key markets for much of the year. For the year, Acuity Brands delivered solid and proﬁtable ﬁnancial results in times of challenge; we paid down a signiﬁcant portion of our debt; and we intensiﬁed our focus on cash ﬂow and running a leaner and more efﬁcient organization. Laying the Foundation for Better Businesses Our focus is to continue to enhance the quality of our organization, and not necessarily its size, so we will be better able to deliver superior results as markets improve. One of our ﬁrst steps upon launching the new company was to create an Acuity Brands Leadership Team (ALT) consist- ing of the top ofﬁcers in both our businesses and corporate staff. This seven-member group of energetic and experienced leaders shares ideas and resources across the organization. This team is capable of quickly making decisions that impact the total organization, which is crucial in a rapidly changing environment. Four members of this team have taken on new roles over the past year. In June, we appointed John Morgan to be our Senior Executive Vice President and Chief Operating Ofﬁcer, with overall operational responsibility for ALG and ASP. John is well prepared for this role after dedicating 25 years of his career to ALG. We named Ken Honeycutt Chief Executive Ofﬁcer of Acuity Lighting Group and Jim Heagle Chief Executive Ofﬁcer of Acuity Specialty Products Group and appoint- ed them both members of the ALT. Vernon Nagel joined us as Executive Vice President and Chief Financial Ofﬁcer. He brings a wealth of experience from his successful career and has already made a big impact on our cash ﬂow man- agement. These ofﬁcers, along with Ken Murphy, Senior Vice President and General Counsel; Joe Parham, Senior Vice President, Human Resources; and myself, serve together on the ALT. In leadership and organizational development, we’re taking steps to build the skill sets of our talent. We intend that each of our people has clearly deﬁned goals, written feedback, coaching for development, and ﬁnancial rewards for performance. We’ve introduced the “Acuity Brands Way,” our statement of how we intend Acuity Brands 2002 Annual Report 5 7001 Capital narrative 11/6/02 6:48 AM Page 6 to preserve the strengths that our organization has always had–loyalty, care for our customers, and honesty, to name three–and add a tone of greater individual responsibility for more aggres- sive performance. ALT members are reaching out to all Acuity Brands people to discuss these changes in an open but demanding way. We’re adding leadership talent with selective hiring, and we’re investing in all of our people to build their futures. In the ﬁnancial area, we’re implementing tools that help us make better decisions. We are enhancing the dissemination of information to those who can help drive down costs and improve efﬁciencies. We’ve modiﬁed our performance metrics to emphasize proﬁtability and cash ﬂow. As our 2002 results show, we are successfully managing our working capital to reduce debt and are also focused on redeploying our non-core assets into areas with greater potential for return. As a result, in 2002 we converted certain non-core assets into $8.4 million of cash, with which we paid down debt. Our most important improvement efforts are taking place in the businesses themselves. We’re building better businesses by making aggressive efforts to strengthen productivity and by ﬁnding new ways to reach our markets. Strengthening Productivity We are seeking better, faster, and more cost- effective ways of doing business across our organization and have initiated a number of processes to improve the productivity of Acuity Brands. Major initiatives include Six Sigma, strategic sourcing, supply chain management, and the opening of better situated regional distri- bution centers. We began implementing Six Sigma programs at our lighting business three years ago and have now provided black belt training to over 125 employees. On an annualized basis, Six Sigma is contributing in excess of $10 million in annual savings. The momentum in Six Sigma is building and becoming an impor- tant part of the culture of our two business segments. The signiﬁcant impact of Six Sigma and these other initiatives on productivity in our core lighting businesses is evidenced in ALG’s margins being two percentage points higher than margins during the last recession. At ASP, our sourcing initiative contributed several million dollars of cost savings in 2002. We are actively implementing such programs to improve our businesses. Expanding Into New Channels Companies with vibrant futures continually ﬁnd new ways to take their products to market and to expand their customer base; this is what we are doing. Over the past few years, we have expanded into new markets through acquisitions, such as Enforcer Products (entering the chemical retail channel), Holophane (obtaining a direct lighting ﬁxture sales force), and the more recent purchase of American Electric Lighting (strengthening our relationships with electric utilities). Also, we have focused efforts in both our lighting and specialty products segments to continue expansion into key channels, such as retail, and to further penetrate national accounts. At ASP, for example, our sales to home improvement centers such as The Home Depot® have increased by over 10 percent in each of the past two years. In total, our expansion efforts into new channels and markets over the past ﬁve years have added nearly $500 million to our 2002 top-line sales. We believe these steps will make Acuity Brands a better and more diverse business that is capable of delivering more consistent growth in earnings and cash ﬂow in the future. We know that main- taining our market-leading positions depends on the reputation of our brands. Improved customer service, new products, and more effective processes as well as expansion into new channels will help us strengthen our brands and position us for growth as markets rebound. 6 Acuity Brands 2002 Annual Report 7001 Capital narrative 11/6/02 6:48 AM Page 7 Members of the Acuity Brands Leadership Team include (seated from left to right): Jim Balloun, Joe Parham, Ken Honeycutt, and John Morgan; (standing from left to right): Ken Murphy, Vernon Nagel, and Jim Heagle. Corporate Governance Finally, a word about governance. At Acuity Brands, we are committed to a governance process that instills conﬁdence and on which all stakeholders can rely. We were committed to this process well before governance became an issue across the country, and integrity is a value that goes back to the origins of our businesses. Here are some further steps we have taken to assure you of the strength of our commitment. First, aside from me, all of our directors are independent of Acuity Brands. They have no material relationship with the company. Accordingly, each board member provides Acuity Brands with wise counsel and independent judg- ment based on his or her broad range of knowledge and experience. We are pleased to announce the recent additions of Earnest Deavenport, former Chairman and Chief Executive Ofﬁcer of Eastman Chemical Company, and Julia North, former President of Consumer Services at BellSouth Corporation. These additions further enhance and diversify our already strong board. Second, Acuity Brands will be among the ﬁrst companies in America to comply with the requirements of the Sarbanes-Oxley Act and the related rules of the Securities and Exchange Commission that were recently put in place to ensure accurate ﬁnancial reporting and independent auditing. Signiﬁcant costs are associated with these additional compliance requirements, and we are paying a heavy price for other people’s sins. However, we are committed not only to comply with these critical regulations but also to embrace their spirit as we continue to carry out our daily activities with honesty and transparency, just as we have done since the inception of our businesses. We have executed all required certiﬁcations. Vernon Nagel, our Chief Financial Ofﬁcer, and I feel conﬁdent in our signatures, saying in essence that Acuity Brands remains an honest company with honest people who keep honest books. Acuity Brands is a dynamic new organization with a bright future. While the current economic environment makes it difﬁcult to realize the full potential of our company, we are quietly but effectively working to improve our businesses and become the preferred brands by even more customers in more channels than we serve today. As the marketplace revives, I am conﬁdent that the actions of our almost 12,000 employees will enable Acuity Brands to deliver the full reward of our tremendous capabilities. Thank you for your investment in our businesses. James S. Balloun Chairman, President, and Chief Executive Ofﬁcer Acuity Brands, Inc. Acuity Brands 2002 Annual Report 7 7001 Capital narrative 11/6/02 6:48 AM Page 8 Acuity Lighting Group Acuity Lighting Group (ALG) is the world’s leading lighting ﬁxture manufacturer and has such well known brands as Lithonia Lighting‚ Holophane‚ Peerless, Hydrel, American Electric Lighting‚ and Gotham. Headquartered in Conyers, Georgia, ALG employs 8,400 people and has 24 manufacturing facilities. Its extensive product line includes architectural, commercial, industrial, and residential indoor and outdoor lighting ﬁxtures; emergency lighting systems; lighting control systems; and wiring systems. Principal customers include wholesale electrical distributors, home improvement centers, utilities, and lighting showrooms located throughout North America and in select international markets. Key to Acuity Lighting Group’s success is its breadth of market coverage, with more sales forces providing more products to more customers than any other lighting enterprise. ALG is made up of multiple customer-focused units, each charged with proﬁtably growing revenues by delivering a speciﬁc value proposition to a particular market segment. At Holophane, for example, that means product innovation and leadership–delivering superior optical performance, energy efﬁciency, total relia- bility, and outstanding quality and service. At Lithonia, it means offering “the best value in lighting,” enabled by a state-of-the-art network and distribution system that allows lighting employees and distributors to oversee major proj- ects from start to ﬁnish. It also means being able to immediately meet the needs of distributors by having over 1,200 key products in stock for same- day or next-day shipment. For American Electric, it means providing a customizable Internet appli- cation that enables utilities to be more successful in selling lighting to their customers. And in the home improvement center business, it means delivering order ﬁll rates in excess of 98 percent and being named The Home Depot’s Partner of the Year for lighting each of the past two years. ALG is focused on becoming a better organiza- tion through: Strengthening Productivity As the world’s leading lighting ﬁxture manufacturer, ALG has the volume to leverage signiﬁcant cost savings in its operations. To that end, ALG is now engaged in a major supply chain redesign initiative, which is intended to improve efﬁciency in each step of the lighting ﬁxture manufacturing process. The supply chain redesign impacts many opera- tional functions and has many facets–inventory 8 Acuity Brands 2002 Annual Report Boy Scouts of America recently opened a new Volunteer Service Center in Atlanta, Georgia. Enhancing this magniﬁcent structure are ALG indoor and outdoor lighting ﬁxtures. 7001 Capital narrative 11/6/02 6:48 AM Page 9 ofﬁce ﬂuorescents to swimming pool lighting. One way that ALG has further expanded its offerings is through acquisitions such as Holophane and, more recently, American Electric, which offers an outdoor product line for the utility industry and highway infrastructure. ALG has leveraged its distribution network capability to expand its customer base in existing and new channels of distribution, including an increasing number of national accounts that are building large facilities both nationally and internationally as well as maintenance and repair organizations. In June 2002, for example, ALG was selected as the primary lighting supplier to W.W. Grainger, one of the world’s largest catalog service providers for maintenance and repair organizations. This partnership will accelerate ALG’s growth in the industrial, government, retail, and health care markets. Also, ALG continues its expansion into retail outlets such as The Home Depot® and has been selected as a lighting supplier to a number of the nation’s largest food and drugstore chains, including Walgreens® and Albertsons®. ALG expects to translate this continued expansion of its end market and customer base into more consistent earnings and cash ﬂow and less dependence on any single industry. Acuity Lighting Group is an organization of breadth and scale that is continuously focused on its customer service, product offerings, and price competitiveness. It is also an organization in the process of bettering itself through improving its efﬁciencies and expanding into new markets. ALG Holophane brand products light up the Visitors Center in San Antonio, Texas. optimization, cycle time reductions, strategic sourcing, better utilization of the distribution network and enterprise resource planning plat- form, and increasing Internet capabilities. Six Sigma, a process improvement method that has been implemented in much of the lighting organization over the past few years, has driven signiﬁcant cost reductions. As a result of Six Sigma and other initiatives, plant productivity levels improved an average of seven percent in 2002, even in the face of declining production volumes at most facilities. Through its efforts to streamline and to create a leaner organization, ALG has reduced working capital more than $90 million over the past two years, cutting its cash conversion cycle by more than 30 days. Expanding Into New Channels Acuity Lighting Group is a market-focused organization with great breadth. Its brands are sold in the residential, commercial and institu- tional, transportation, and outdoor channels, and its products range from outdoor street lamps to The Royal and Ancient Golf Club of St. Andrews in Scotland was recently renovated featuring ALG Hydrel brand lighting ﬁxtures. Acuity Brands 2002 Annual Report 9 7001 Capital narrative 11/6/02 6:48 AM Page 10 Acuity Specialty Products Group Headquartered in Atlanta, Georgia, Acuity Specialty Products Group (ASP) is a leading provider of specialty chemical products in the institutional, industrial, and retail markets. Its brands include Zep, Enforcer, Selig Industries, and National Chemical, with roots dating back more than 100 years. ASP products cover a broad range of uses and applications such as cleaners, sanitizers, disinfectants, polishes, ﬂoor ﬁnishes, degreasers, deodorizers, pesticides, and insecticides. ASP, with over 300,000 customers primarily in North America, serves a broad array of industries including auto repair shops, food processors, restaurants, contract cleaners, car washes, hotels, and laundries. Traditionally ASP has served smaller customers in the industrial and institutional market. In recent years, though, ASP has increased its leadership position with an emerging presence in the retail market and an expansion of its customer base to include larger national accounts with consolidated buying programs. The breadth and quality of the ASP product line, as well as the superior network of 1,900 ASP direct sales representatives, are key to servicing customers–both large and small. Differentiating the ASP sales force is a focus on being solution providers for customers. These sales representa- tives are knowledgeable about solving critical problems involving sanitation, water treatments, and a variety of environmental issues. ASP sales representatives are found all across North America, making it simple for ASP to provide service to local branches of national accounts. Currently, the company is engaged in a number of activities to further better itself, including: Strengthening Productivity The direct sales force of Acuity Specialty Products Group is regarded as the best in the industry, and ASP is ensuring it stays that way. A New Sales Representative Development program recently got under way; the ﬁrst phase of this program focuses on identifying new training, recruiting, and motivational methods to increase the sales volumes and retention of new sales representatives. Second, real-time product and customer information was recently made available to sales representa- tives by utilizing wireless technology that accesses information previously available only via repre- sentatives contacting branch personnel. ASP has made many recent improvements in its distri- bution processes as well. In the summer of 2002, the company opened a new world-class distribu- tion facility in Atlanta, Georgia. The Atlanta The Atlanta Distribution Center is a new world-class facility with the technological capabilities and size to handle future ASP growth. 10 Acuity Brands 2002 Annual Report 7001 Capital narrative 11/6/02 6:48 AM Page 11 Distribution Center is over 400,000 square feet and features 72 loading docks. Key reasons to build this facility were to enhance productivity, improve safety requirements, and create a center that can most effectively handle future growth. The creation of this superior facility made possible the closure and sale of three other less effective warehouses. All ASP products are being consoli- dated at the Atlanta Distribution Center. Further contributing to efﬁciency, this center is a paper- less facility; therefore, all records of products being moved in and out are kept through state- of-the art inventory management technologies. Expanding Into New Channels ASP continues to grow in the retail channel– Zep Commercial™ and Enforcer products are sold at The Home Depot®; sales through the home improvement center channel have increased sig- niﬁcantly over the past two years. Additionally, an increasing number of Selig Commercial™ products are being sold at hardware stores, and ASP has also reached a licensing agreement with Armor All Products Corporation to sell car wash operators more than 100 products under the Armor All® Professional brand name. This con- tinued expansion into retail provides more ways for ASP to get its brands to market. The superior sales force at ASP continues to do an outstanding job of selling to and servicing numerous commercial channels. Over the past ASP’s network of 1,900 direct sales representatives provides superior service to customers–both large and small. Expansion into home improvement centers has been a key area of growth for Acuity Specialty Products Group. The Home Depot® sells the Zep Commercial and Enforcer product lines. three years, growth in the North American market has been driven by larger, value-seeking customers, and this has created a very attractive opportunity for ASP. This trend has been spurred primarily by cost pressures that have driven large companies toward unbundled services and away from integrated solution providers. Also contribut- ing to this trend is the formation of consolidated buying groups, in which small customers have joined together to become large customers. Based on this shift, ASP continues to increase its number of national accounts and grow its business in niche markets, especially in the areas of vehicle wash and food, enabling further expansion in the institutional and industrial channel. Its extensive network of sales representatives has the capability to service large, technically demanding accounts such as Midas® and Tyson Foods while maintain- ing its quality of service to smaller customers who make up the core business. Recently, Zep became the only approved vendor to sell drain care products and services to Burger King® company-owned and franchise restaurant locations primarily because of ASP’s access to proprietary technology and its servicing techniques. Acuity Specialty Products Group is focused on improvement in every area of the organization. Comprised of strong and long-lasting brands, ASP is revitalizing itself to continue to provide the quality of products and services generations of people have grown to depend upon. Acuity Brands 2002 Annual Report 11 7001 Capital narrative 11/6/02 6:48 AM Page 12 Shareholder Information Board of Directors James S. Balloun Chairman, President, and Chief Executive Ofﬁcer, Acuity Brands, Inc. Leslie M. Baker, Jr. Chairman, President, and Chief Executive Ofﬁcer, Wachovia Corporation Peter C. Browning Dean, McColl Graduate School of Business at Queens University of Charlotte; Non-Executive Chairman, Nucor Corporation John L. Clendenin Chairman Emeritus, BellSouth Corporation Earnest W. Deavenport, Jr. Former Chairman and Chief Executive Ofﬁcer, Eastman Chemical Company Julia B. North Former President of Consumer Services, BellSouth Corporation; Former President and Chief Executive Ofﬁcer, VSI Enterprises, Inc. Ray M. Robinson President of Southern Region, AT&T Corporation Neil Williams General Counsel and a Global Partner, AMVESCAP PLC Committees of the Board Acuity Brands Leadership Team AUDIT John L. Clendenin* Earnest W. Deavenport, Jr. Julia B. North James S. Balloun Chairman, President, and Chief Executive Ofﬁcer, Acuity Brands, Inc. COMPENSATION Ray M. Robinson* Peter C. Browning GOVERNANCE Neil Williams* Leslie M. Baker, Jr. EXECUTIVE James S. Balloun* John L. Clendenin Ray M. Robinson Neil Williams *Committee Chairman John K. Morgan Senior Executive Vice President and Chief Operating Ofﬁcer, Acuity Brands, Inc. James H. Heagle Executive Vice President, Acuity Brands, Inc.; President and Chief Executive Ofﬁcer, Acuity Specialty Products Group, Inc. Kenneth W. Honeycutt, Jr. Executive Vice President, Acuity Brands, Inc.; President and Chief Executive Ofﬁcer, Acuity Lighting Group, Inc. Vernon J. Nagel Executive Vice President and Chief Financial Ofﬁcer, Acuity Brands, Inc. Kenyon W. Murphy Senior Vice President and General Counsel, Acuity Brands, Inc. Joseph G. Parham, Jr. Senior Vice President, Human Resources, Acuity Brands, Inc. Corporate Headquarters Acuity Brands, Inc. 1170 Peachtree Street, NE Suite 2400 Atlanta, Georgia 30309-7676 (404) 853-1400 www.acuitybrands.com Acuity Lighting Group, Inc. One Lithonia Way Conyers, Georgia 30012-3957 (770) 922-9000 www.acuitylightinggroup.com Acuity Specialty Products Group, Inc. 1310 Seaboard Industrial Blvd., NW Atlanta, Georgia 30318 (404) 352-1680 www.acuitysp.com Independent Auditors Ernst & Young LLP 600 Peachtree Street Suite 2800 Atlanta, Georgia 30308-2215 (404) 874-8300 Annual Meeting Thursday, December 19, 2002 1:00 p.m. EST Renaissance Waverly Hotel Chambers Amphitheatre 2450 Galleria Parkway Atlanta, Georgia 30339-3177 Stock Listing New York Stock Exchange Ticker symbol: AYI Reports Available to Shareholders Copies of the following Company reports may be obtained, without charge: 2002 Annual Report to the Securities and Exchange Commission, ﬁled on Form 10-K, and Quarterly Reports to the Securities and Exchange Commission, ﬁled on Form 10-Q. Requests should be directed to: Acuity Brands, Inc. Attention: Investor Relations 1170 Peachtree Street, NE Suite 2400 Atlanta, Georgia 30309-7676 (404) 853-1400 www.acuitybrands.com Remittance of optional cash investments and plan transaction requests should be directed to: Acuity Brands, Inc. c/o Investment Plan Services P. O. Box 64863 St. Paul, Minnesota 55164-0863 Account Access Shareholders can access their account information on the Internet through the Web site of Acuity Brands’ transfer agent, Wells Fargo, at www.wellsfargo.com/shareownerservices. Shareholders can securely view their account information and check their holdings 24 hours a day. Transfer Agent and Registrar Cash Dividends Questions about shareholder accounts, dividend checks, lost stock certiﬁcates, registration changes, and address changes should be directed to: Wells Fargo Shareowner ServicesSM Shareowner Relations Department P. O. Box 64854 St. Paul, Minnesota 55164-0854 (800) 468-9716 www.wellsfargo.com/shareownerservices Acuity Brands offers direct deposit of dividends to bank, savings, or money market accounts. For more information, contact Wells Fargo at (800) 468-9716. Shareholders of Record The number of shareholders of record of Acuity Brands common stock was 5,346 as of October 24, 2002. Shareowner Service Plus PlanSM Forward-Looking Statements The Shareowner Service Plus PlanSM is offered and administered by Wells Fargo Shareowner Services, a registered transfer agent. It offers a direct investment program for investors wishing to purchase Acuity Brands common stock. Dividends can be automatically reinvested. The plan is available to both present shareholders of record as well as to individual investors wishing to make an initial purchase of Acuity Brands common stock. The plan is not sponsored or administered by Acuity Brands. This annual report includes forward-looking statements regarding: (a) future earnings and cash ﬂow and (b) initiatives during ﬁscal 2003 in each of the Company’s business segments. A variety of factors could cause actual results to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements, including, without limitation: (a) the uncertainty of general business and economic conditions; (b) the level of success of planned cost reduction and proﬁt improvement initiatives; and (c) the other risk factors described in the Company’s Annual Report on Form 10-K for the year ended August 31, 2002. 12 Acuity Brands 2002 Annual Report © 2002 Acuity Brands, Inc. All referenced trademarks are the property of their respective owners. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) ¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Ñscal year ended August 31, 2002. or n TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission Ñle number 001-16583 . Acuity Brands, Inc. (Exact name of registrant as speciÑed in its charter) Delaware (State or other jurisdiction of incorporation or organization) 1170 Peachtree Street, N.E., Suite 2400 Atlanta, Georgia (Address of principal executive oÇces) 58-2632672 (I.R.S. Employer IdentiÑcation Number) 30309 (Zip Code) (404) 853-1400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: Title of Each Class Name of Each Exchange on which Registered Common Stock ($0.01 Par Value) Preferred Stock Purchase Rights New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has Ñled all reports required to be Ñled 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 Ñle such reports), and (2) has been subject to such Ñling requirements for the past 90 days. Yes ¥ No n Indicate by check mark if disclosure of delinquent Ñlers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in deÑnitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. n Based on the closing price of $12.65 as quoted on the New York Stock Exchange on October 24, 2002, the aggregate market value of the voting stock held by nonaÇliates of the registrant, was $521,284,476. The number of shares outstanding of the registrant's common stock, $0.01 par value, was 41,436,856 shares as of October 24, 2002. DOCUMENTS INCORPORATED BY REFERENCE Location in Form 10-K Incorporated Document Part II, Item 5 Part III, Items 10, 11, 12, and 13 Proxy Statement for 2002 Annual Meeting of Stockholders Proxy Statement for 2002 Annual Meeting of Stockholders ACUITY BRANDS, INC. Table of Contents PART I Item 1. Item 2. Item 3. Item 4. Business ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Properties ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Legal Proceedings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Submission of Matters to a Vote of Security Holders ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏ Item 6. Selected Financial Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 7a. Quantitative and Qualitative Disclosures about Market Risk ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financial Statements and Supplementary Data ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Item 9. Disclosure ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ PART III Item 10. Directors and Executive OÇcers of the Registrant ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 11. Executive CompensationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 12. Security Ownership of Certain BeneÑcial Owners and Management and Related Stockholder Matters ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 13. Certain Relationships and Related Transactions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 14. Controls and Procedures ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SignaturesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ CertiÑcations ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Financial Statement Schedules ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Page 2 9 10 11 11 11 12 24 25 55 55 55 55 55 55 56 63 64 66 1 Item 1. Business PART I Acuity Brands, Inc. (""Acuity Brands'' or the ""Company'') operates in two business segments Ì lighting equipment and specialty products. The lighting equipment segment of the Company (""Acuity Lighting Group'' or ""ALG'') manufactures and distributes a variety of Öuorescent and non-Öuorescent lighting Ñxtures for markets throughout North America and other foreign markets, primarily Western Europe. The specialty products segment of Acuity Brands (""Acuity Specialty Products Group'' or ""ASP'') produces and distributes cleaning, maintenance, sanitation, and water treatment chemicals and other products for customers throughout the United States, Canada, and Western Europe. Of the Company's Ñscal 2002 revenues of approximately $2.0 billion, the lighting equipment segment generated approximately 75 percent of total revenues while the specialty products segment provided the remaining 25 percent. Information relating to the revenues, operating proÑts or losses, and total assets of the Company's two segments for the past three Ñscal years is reported in the Consolidated Financial Statements included in this report. On November 7, 2001, the board of directors of National Service Industries, Inc. (""NSI'') approved the spin-oÅ (the ""Spin-oÅ'' or ""Distribution'') of its lighting equipment and specialty products businesses into a separate publicly traded company with its own management and board of directors. The Spin-oÅ was eÅected on November 30, 2001 through a tax-free distribution of 100 percent of the outstanding shares of common stock of Acuity Brands, which at that time was a wholly-owned subsidiary of NSI owning and operating the lighting equipment and specialty products businesses. Each NSI stockholder of record as of November 16, 2001, the record date for the Spin-oÅ, received one share of Acuity Brands common stock for each share of NSI common stock held on that date. Business Segments Lighting Equipment The lighting equipment business of Acuity Brands is operated under Acuity Lighting Group. Management of Acuity Brands believes that Acuity Lighting Group is the world's leading manufacturer of lighting Ñxtures for both new construction and renovation. Products include a full range of indoor and outdoor lighting for commercial and institutional, industrial and residential applications. Lighting products are manufactured in the United States, Canada, Mexico, and Europe and are marketed under numerous brand names, including Lithonia», Holophane», Home-Vue», Light Concepts», Gotham», Hydrel», Peerless», Antique Street LampsTM, and Reloc». ALG manufactures products in 22 plants in North America and in two plants in Europe. Principal customers include wholesale electrical distributors, retail home improvement centers, and lighting showrooms located in North America and select international markets. In North America, ALG's products are sold through independent sales agents and factory sales representatives who cover speciÑc geographic areas and market segments. Products are delivered through a network of distribution centers, regional warehouses, and commercial warehouses using both common carriers and a company-owned truck Öeet. To serve international customers, ALG employs a sales force that adopts distribution methods to meet individual customer or country requirements. In Ñscal 2002, North American sales accounted for approximately 98 percent of ALG's net sales. Specialty Products The specialty products business of Acuity Brands is operated under Acuity Specialty Products Group. ASP is a leading provider of specialty chemical products in the institutional and industrial (""I&I'') and retail markets. Products include cleaners, sanitizers, disinfectants, polishes, Öoor Ñnishes, degreasers, deodorizers, pesticides, insecticides, and herbicides. ASP manufactures products in four North American plants and two European plants. 2 Acuity Specialty Products Group sells products to customers primarily in North America and Western Europe. In Ñscal 2002, North American sales accounted for approximately 95 percent of the net sales of ASP. ASP serves a range of institutional and industrial customers, from small sole proprietorships to Fortune 1000 corporations. Individual markets in the I&I channel include food processing and preparation, transportation, education, automotive, and hospitality and are serviced through a direct commissioned sales force. ASP also sells numerous products under such well known brands as Enforcer», SeligTM and Zep» through retail channels such as large and small home improvement centers and mass merchandisers. Industry Overview Lighting Equipment The size of the North American lighting Ñxture market in 2002 was estimated at approximately $8.5 billion. The U.S. market, which represents approximately 95 percent of the North American market, is relatively fragmented. The Company estimates that the top four manufacturers (including Acuity Lighting Group) represent approximately 50 percent of the total lighting market. The primary demand driver is non-residential construction, both new and renovation. Major industry trends include the on-going development of new and more eÇcient lamp sources and optical designs, increased adoption of new lighting ordinances, and continued emphasis on energy eÇciency. There has been a signiÑcant increase in the size and relative presence of the retail home improvement center segment. In addition, imports of foreign sourced lighting Ñxtures continue to grow, driven by both the foreign production of U.S. manufacturers and imports of low-cost Ñxtures from Asian manufacturers. European-based electrical distributors have increased their presence in the U.S. with the acquisition of U.S.-based local and regional distributor chains, and smaller U.S. distributors continue to seek leverage through alignment with buying groups. Specialty Products The approximately $8 billion U.S. I&I janitorial cleaning and sanitation market is highly fragmented. The Company estimates that four major players (including Acuity Specialty Products Group) represent approximately 50 percent of the total market with the remainder divided among hundreds of regional players. In general, the Company estimates that the I&I market grows at a rate approximating Gross Domestic Product (""GDP''). To some extent, consumption of janitorial cleaning and sanitation products is discretionary, but in a health-driven, sophisticated market such as the U.S., the Company believes that health and safety regulations and customer expectations somewhat buÅer demand downturns. Increasing legislation in the areas of food and occupational health that require increased ranges of application and frequency of use is fueling demand increases. In addition to the I&I market, there is a U.S. retail chemical market of approximately $4.3 billion, including a $2.8 billion market for cleaners and a $1.5 billion market for pest control. The Company believes that two major trends are reshaping the industry. First, health and safety regulations are shrinking the pool of available chemicals, while at the same time increasing the total use rates. This has pushed development of improved physical product formulations and application methods. Second, increased centralized corporate buying and consolidation of the supply chain are threatening reselling distributors and requiring increased base manufacturing and logistics skills. Products Lighting Equipment Acuity Lighting Group produces a wide variety of lighting Ñxtures used in the following applications: ‚ Commercial & Institutional Ì Applications are represented by stores, hotels, oÇces, schools, and hospitals, as well as other government and public buildings. Products that serve these applications include recessed, surface and suspended Öuorescent lighting products, recessed downlighting and track-lighting, as well as ""high-abuse'' lighting products. The outdoor areas associated with these 3 application segments are addressed by the lighting equipment business' outdoor lighting products, such as area and Öoodlighting, decorative site lighting, and landscape lighting. ‚ Industrial Ì Applications primarily include warehouses and manufacturing facilities. The lighting equipment business serves these applications with a variety of glass and acrylic high intensity discharge (HID) and Öuorescent lighting products. ‚ Infrastructure Ì Applications include highways, tunnels, airports, railway yards and ports. Products that serve these applications include high-mast, oÅ-set roadway and sign lighting. ‚ Consumer Ì Applications are addressed with a combination of decorative Öuorescent and downlighting products, as well as utilitarian Öuorescent products. ‚ Other Applications & Products Ì Other applications and products include emergency lighting products, which are used in non-residential buildings, and lighting control and Öexible wiring systems. General Öuorescent lighting products accounted for approximately 24 percent of total consolidated revenue during Ñscal years 2002, 2001 and 2000. No other product category accounted for more than 10 percent of total consolidated revenue for these periods. Specialty Products ASP produces and supplies a wide variety of specialty chemical products that are used in numerous applications in a broad range of markets. These include: ‚ Food Process and Food Preparation Ì ASP provides a total solution approach to serving customers' sanitation needs. New products, increased technical training for the sales reps, integrated dispensing systems and innovative approaches to antimicrobial control have been implemented to complement the existing cleaners and sanitizers. ‚ Transportation Ì Applications include cleaning and maintenance products for numerous transporta- tion equipment including individual or Öeets of aircraft, public transport, trucks and cars. New products have delivered increased eÇciency, regulatory compliance and integrated application equipment. Major products are used to provide exterior cleaning or enhanced appearance. ‚ Education Ì Applications include schools and universities. The product range is broad and covers all cleaning and maintenance areas with speciÑc emphasis on Öoor care and general cleaning and deodorizing. ‚ Automotive Ì Applications include original equipment manufacturers, dealerships and repair/ service facilities. A comprehensive range of products includes aerosols, powders, solvents, absorbents, emulsions, acids and aqueous alkaline cleaners and degreasers to provide necessary cleaning requirements. ‚ Hospitality Ì Customers include hotels and motels. Products and dispensing systems are designed to supply maintenance, housekeeping and laundry applications with a complete cleaning solution. ‚ Contractors and Homeowners Ì Applications include contract cleaners, small business owners, and homeowners and are supplied through retail channels. Products provide a comprehensive range of Öoor care, general purpose cleaners and sanitizers, drain maintenance, and pest control in convenient ready-to-use packaging. Sales and Marketing Lighting Equipment Sales. ALG provides North American market coverage with approximately 15 separate sales forces targeted at delivering appropriate products and services to speciÑc customer or channel segments. In total, these sales forces are comprised of approximately 1,700 salespeople (200 factory-employed and 1,500 4 independent sales representatives in over 200 separate sales agencies). ALG also operates two separate European sales forces and an international sales group coordinating sales to the balance of the globe. Marketing. ALG markets its products through a broad spectrum of marketing and promotional vehicles, including direct customer contact, on-site training at training facilities, print advertising in industry publications, product brochures and other literature, as well as electronic media. Direct customer contact is performed by market development managers, whose primary role is the promotion of select products to the many buying inÖuences involved in the speciÑcation/bid process common in the industry. Most on-site training is conducted at a dedicated product training facility at ALG's headquarters in Conyers, Georgia. Specialty Products Sales. ASP is a selling organization of 1,900 sales representatives and over 180 support personnel worldwide. The compensation model is primarily 100 percent commission with exceptions in certain channels. Net sales are dependent on the hiring, training, and retention of the commissioned sales representatives. Accordingly, the future operating results of ASP may be aÅected by signiÑcant changes in the sales force. The ASP sales organization covers a wide geographic territory. The I&I market is serviced through the recently reorganized Zep business with four U.S. divisions, as well as Canadian and European divisions. Each of the four U.S. divisions includes from 230 to 370 sales representatives supplemented by a highly productive complement of customer and technical service personnel. The Canadian and European divisions have approximately 150 and 240 sales representatives, respectively. ASP's I&I business in North America uses sales automation software that allows interactive support and communication throughout North America. The retail sales division utilizes approximately 170 salaried sales and management personnel to focus on revenue in the do-it-yourself home improvement channel. Marketing. ASP's marketing eÅorts are focused on supporting a sell-through program from ASP to the sales organization and then to the customer. ASP's primary focus is in four distinct areas. Market planning includes comprehensive strategic and tactical plan development and support emphasizing Ñnancial objectives and accountability. Product management includes new product development and asset management. Market-based pricing takes into account competitive analysis and leverages the Öexibility of the ASP operating platform. Marketing services provides sales support tools and collateral sales information to ASP's worldwide sales force and customer base. ASP has expanded the size and scope of marketing since 1998 and now employs over 40 marketing professionals. The expertise of these professionals includes technical support, product management, retail marketing and market planning. Customers No single customer accounted for 10 percent or more of consolidated net sales of Acuity Brands in Ñscal year 2002. However, a single customer of Acuity Brands accounted for 14 percent and 13 percent of ASP's Ñscal year net sales in 2002 and 2001, respectively. The loss of that customer would adversely aÅect the results of that segment and the Company as a whole. Lighting Equipment Customers of the Acuity Lighting Group include electrical distributors, retail home improvement centers, national accounts, lighting showrooms, and electric utilities. In addition, there are a variety of other buying inÖuences, which for any given project could represent a signiÑcant inÖuence in the product speciÑcation process. These generally include engineers, architects and lighting designers. For the year ended August 31, 2002, sales to electrical distributors represented approximately 78 percent of ALG's revenue. For the same period, retail home improvement centers and national accounts together represented approximately 14 percent of the revenue of ALG. 5 Specialty Products Customers of ASP consist of I&I customers (82 percent of segment revenues) and retail customers (18 percent of segment revenues). I&I customers range from sole proprietorships to Fortune 1000 corporations and are in the food processing and preparation, transportation, education, automotive, and hospitality markets. Retail customers primarily include large and small home improvement centers and mass merchandisers. Manufacturing Acuity Brands operates 30 manufacturing facilities in seven countries, including 18 facilities in the United States, four facilities in Canada, four facilities in Mexico, and four facilities in Europe. Lighting Equipment ALG utilizes a blend of internal and outsourced manufacturing processes and capabilities to fulÑll a variety of customer needs in the most cost eÅective manner. Critical processes, such as reÖector forming and anodizing and high-end glass production are primarily performed at company-owned facilities, oÅering the ability to diÅerentiate end products through superior capabilities. Investment is focused on improving product quality and manufacturing eÇciency. The integration of local suppliers' factories and warehouses also provides an opportunity to lower ALG-owned component inventory while maintaining high service levels via frequent just-in-time deliveries. ALG also utilizes contract manufacturing for certain products and purchases certain Ñnished goods, primarily poles to complement its area lighting Ñxtures, but also a variety of residential and commercial lighting equipment, from Asian and European sources. U.S. operations represent approximately 56 percent of production; Mexico accounts for approximately 31 percent of production; Canada accounts for approximately four percent of production; and Europe accounts for approximately three percent of production. The remaining six percent of production is outsourced using contract manufacturing and Ñnished good suppliers. Specialty Products ASP manufactures products at six facilities located in the United States, Canada, Holland and Italy. The three U.S. facilities produce approximately 94 percent of total manufactured product; Canada accounts for approximately three percent of manufactured product, and Europe accounts for approximately three percent of manufactured product. Certain Ñnished goods purchased from contract manufacturers and Ñnished goods suppliers supplement the manufactured product line. At ASP, core manufacturing and distribution processes are being further integrated across brands in order to reduce costs and enhance eÇciency. ASP is focused on eÅorts to maximize return on employed capital through productivity improvement programs. In addition, eÅorts are underway to optimize inventories through product line rationalization and product reformulation programs. Distribution Lighting Equipment Products are delivered through a network of strategically located distribution centers, regional warehouses, and commercial warehouses in North America using both common carriers and a company- owned truck Öeet. For international customers, distribution methods are adapted to meet individual customer or country requirements. Specialty Products Products sold to institutional and industrial markets are shipped from strategically located distribution centers throughout North America, while the retail products are distributed nationwide from the Cartersville, Georgia plant and warehouse. 6 Research and Development Lighting Equipment Research and development eÅorts at ALG are targeted toward the development of products with an ever-increasing performance-to-cost ratio, and close relationships with lamp and ballast manufacturers are maintained to understand and incorporate technology enhancements in ALG's Ñxture designs. ALG operates six separate product development model shops and seven photometers for testing and optimizing Ñxture photometric performance. The Conyers, Georgia lab is approved by the National Voluntary Laboratory Accreditation Program for both Öuorescent and high intensity discharge Ñxtures. For the years ended August 31, 2002, 2001, and 2000, research and development expense at ALG was $20.3 million, $14.5 million, and $16.2 million, respectively. Specialty Products At ASP, the research and development focus is directed towards product systems aimed at comprehensive solutions for a broad customer base. EÅorts to enhance existing formulations by utilizing new raw materials or combinations of raw materials have resulted in both new and improved products. Technical expertise was employed to move proven technologies into new applications. Enhanced information systems were developed to increase the speed and quality of training and customer assistance. Research and development expense at ASP for the years ended August 31, 2002, 2001, and 2000, excluding technical services, was $1.7 million, $1.1 million, and $1.0 million, respectively. Competition Lighting Equipment The lighting equipment industry in which ALG operates is highly competitive, with the largest suppliers serving many of the same markets and competing for the same customers. Competition is based on numerous factors, including brand name recognition, price, product quality and design, customer relationships, and service capabilities. Main competitors in the lighting industry include Cooper Industries, Genlyte Thomas Group, and Hubbell. The management of Acuity Brands believes that, together with ALG, the four largest lighting manufacturers possess approximately a 50 percent share of the total North American lighting market. Specialty Products The specialty products industry in which ASP operates is highly competitive. Overall, competition is fragmented, with numerous local and regional operators and a few national competitors. Many of these competitors oÅer products in some, but not all, of the markets served by ASP. Competition is based primarily on brand name recognition, price, product quality, and customer service. Competitors in the specialty products industry include Ecolab, NCH and SC Johnson. Management estimates that the four major players (including ASP) have approximately 50 percent of the total U.S. market and the remainder is divided among hundreds of regional players. Environmental Regulation The operations of the Company are subject to comprehensive laws and regulations relating to the generation, storage, handling, transportation, and disposal of hazardous substances and solid and hazardous wastes and to the remediation of contaminated sites. Permits and environmental controls are required for certain of the Company's operations to limit air and water pollution, and these permits are subject to modiÑcation, renewal, and revocation by issuing authorities. Acuity Brands believes that it is in substantial compliance with all material environmental laws, regulations, and permits. On an ongoing basis, Acuity Brands incurs capital and operating costs relating to environmental compliance. Environmental laws and regulations have generally become stricter in recent years, and the cost of responding to future changes may be substantial. See Item 3 Legal Proceedings below for a discussion of certain environmental matters. 7 Raw Materials The businesses of Acuity Brands require certain raw materials to produce and distribute their products, including aluminum, plastics, electrical components, solvents, surfactants, and certain grades of steel and glass. Acuity Brands purchases most of these raw materials on the open market and relies on third parties for the sourcing of some Ñnished goods. As such, the cost of products sold may be aÅected by changes in the market price of the above-mentioned raw materials or the sourcing of Ñnished goods. Acuity Brands does not expect to engage in signiÑcant commodity hedging transactions for raw materials. SigniÑcant increases in the prices of Acuity Brands' products due to increases in the cost of raw materials or sourcing could have a negative eÅect on demand for products and on proÑtability as well as a material adverse eÅect on the results of operations of Acuity Brands. ASP has a sole supplier of a critical packaging raw material. While this material only accounts for approximately three percent of the total raw material costs, it is used in products that account for approximately 10 percent of sales. Each business constantly monitors and investigates alternative suppliers and materials. Additionally, each business has conducted internet auctions as a new method of competitive bidding. Backlog Orders The Company produces and stocks large quantities of inventory at key distribution centers and warehouses throughout North America. As a consequence, it satisÑes a signiÑcant portion of customer demand within 24 to 48 hours from the time a customer order is placed. This is especially true at ASP. Sales order backlogs of the lighting equipment business believed to be Ñrm as of August 31, 2002 and 2001 were $144.7 million and $141.5 million, respectively. Sales order backlogs for the specialty products business were not material. Patents, Licenses and Trademarks Acuity Brands owns or has licenses to use various domestic and foreign patents, patent applications and trademarks related to its products, processes and businesses. These intellectual property rights, particularly the trademarks relating to the brands of Acuity Brands' products, are important factors for Acuity Brands' business. To protect these proprietary rights, Acuity Brands relies on copyright, trade secret and trademark laws. Despite these protections, unauthorized parties may attempt to infringe on Acuity Brands' intellectual property. Management of Acuity Brands is not aware of any such material unauthorized use or of any claims that Acuity Brands does not have the right to use any intellectual property material to Acuity Brands' businesses. While patents and patent applications in the aggregate are important to Acuity Brands' competitive position, no single patent or patent application is material to the Company. Seasonality and Cyclicality The businesses of Acuity Brands are somewhat seasonal in nature, with revenues being aÅected by the impact of weather and seasonal demand on construction and installation programs, as well as the annual budget cycles of major customers. Because of these seasonal factors, Acuity Brands has experienced, and generally expects to experience, its highest sales in the last two quarters of its Ñscal year ended August 31. A signiÑcant portion of the revenues of ALG relates to customers in the new construction and renovation industries primarily for commercial and industrial applications. These industries are cyclical in nature and subject to changes in general economic conditions. Volume has a major impact on the proÑtability of ALG and Acuity Brands as a whole. In addition, sales at ASP are dependent on the retail, wholesale and industrial markets, demand for which is generally associated with GDP in the United States. Economic downturns and the potential decline in key construction markets and demand for specialty chemicals may have a material adverse eÅect on the net sales and operating income of Acuity Brands. 8 International Operations Acuity Brands manufactures and assembles products at numerous facilities, some of which are located outside the United States. Approximately 38 percent and six percent of the lighting equipment and specialty products segments' products, respectively, are manufactured outside the United States, primarily in Mexico and Canada. Acuity Brands also obtains components and certain Ñnished goods from suppliers located outside the United States. Approximately 31 percent of Acuity Brands' lighting equipment products are produced in Mexico. Mexico has enacted legislation to promote the use of such manufacturing operations, known as ""Maquiladoras,'' by foreign companies. These operations are authorized to operate as Maquiladoras by the Ministry of Economy of Mexico. Maquiladora status allows Acuity Brands to import certain items from the United States into Mexico duty-free, provided that such items, after processing, are re-exported from Mexico within 18 months. Maquiladora status, which is renewed every year, is subject to various restrictions and requirements, including compliance with the terms of the Maquiladora program and other local regulations. In recent years many companies have established Maquiladora operations. Although the Company's manufacturing operations in Mexico continue to be less expensive than comparable operations in the United States, increasing demand for labor, particularly skilled labor and professionals, from new and existing Maquiladora operations has in the past and could in the future result in increased labor costs. Acuity Brands may be required to make additional investments in automating equipment to partially oÅset potential increased labor costs. For the Ñscal year ended August 31, 2002, international sales represented approximately 11 percent and 13 percent of the total sales of the lighting equipment and specialty products businesses, respectively. Employees Acuity Brands employs approximately 11,800 employees, of whom approximately 8,010 are employed in the United States, 2,530 in Mexico, 680 in Canada, and 580 in other international locations, including Europe and Asia/PaciÑc. Union recognition and collective bargaining arrangements are in place, covering approximately 4,680 persons (including approximately 2,500 in the United States). Management believes that it generally has a good relationship with both its unionized and non-unionized employees. Item 2. Properties The general corporate oÇces of Acuity Brands are located in Atlanta, Georgia. Because of the diverse nature of operations and the large number of individual locations, it is neither practical nor meaningful to describe each of the operating facilities owned or leased by the Company. The following listing summarizes the signiÑcant facility categories by business: Division Owned Leased Nature of Facilities Lighting EquipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Specialty Products ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 17 1 3 9 4 12 Ì Ì 7 9 4 11 2 38 4 11 Manufacturing Facilities Warehouses Distribution Centers OÇces Manufacturing Facilities Warehouses Distribution Centers OÇces 9 The following table provides additional geographic information related to Acuity Brands' manufactur- ing facilities: United States Canada Mexico Europe Total Lighting Equipment Owned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Leased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Specialty Products Owned ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Leased ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13 2 3 Ì 18 1 2 Ì 1 4 3 1 Ì Ì 4 Ì 2 1 1 4 17 7 4 2 30 None of the individual properties of Acuity Brands is considered to have a value that is signiÑcant in relation to the assets of Acuity Brands as a whole. Though a loss at certain facilities could have an impact on the Company's ability to serve the needs of its customers, the Company believes that the Ñnancial impact would be partially mitigated by various insurance programs in place. Acuity Brands believes that its properties are well maintained and are in good operating condition. Acuity Brands' properties are suitable and adequate for its present needs. The Company believes that it has additional capacity available at most of its production facilities and that it could signiÑcantly increase production without substantial capital expenditures. Item 3. Legal Proceedings Acuity Brands is subject to various legal claims arising in the normal course of business, including patent infringement and product liability claims. Based on information currently available, it is the opinion of management that the ultimate resolution of pending and threatened legal proceedings will not have a material adverse eÅect on the Ñnancial condition or results of operations of Acuity Brands. However, in the event of unexpected future developments, it is possible that the ultimate resolution of such matters, if unfavorable, could have a material adverse eÅect on the future Ñnancial results of Acuity Brands. Acuity Brands establishes reserves for legal claims when payments associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher than the amounts reserved for such claims. Genlyte Thomas Group LLC (""Genlyte Thomas'') Ñled suit on March 29, 2000, in the United States District Court, Western District of Kentucky, alleging that certain Lithonia Lighting products infringe a patent related to a frame for recessed lighting Ñxtures and that the infringement is willful. The Company believes that it has valid defenses to the lawsuit and is vigorously defending the asserted allegations. SpeciÑcally, the Company has received a formal opinion from independent patent counsel that the patent is invalid and unenforceable. In discovery, which recently has been substantially completed, Genlyte Thomas submitted an expert report on its damages claim asserting that Genlyte Thomas has sustained approximately $20 million in damages. Any damages awarded at trial may be increased by the court by up to three times if willful infringement is found. The Company has reserved the expected defense costs for this litigation. Extensive pre-trial motions have been Ñled and it is expected that the case, if it proceeds to trial, will not be heard until late 2003. Acuity Brands also establishes reserves for known environmental claims when payments associated with the claims become probable and the costs can be reasonably estimated. The environmental reserves of Acuity Brands, for all periods presented in the Consolidated Financial Statements included in this report, are immaterial. The actual costs of environmental issues may be higher than that reserved due to diÇculty in estimating such costs and potential changes in the status of government regulations. Certain environmental laws can impose liability regardless of fault. The federal Superfund law is an example of such an environmental law. However, management believes that the liability under Superfund is mitigated by the presence of other parties who will share in the costs associated with the clean up of 10 sites. The extent of liability is determined on a case-by-case basis taking into account many factors, including the number of other parties whose status or activities also subjects them to liability regardless of fault. Acuity Brands is currently a party to, or otherwise involved in, legal proceedings in connection with state and federal Superfund sites. Based on information currently available, the Company believes its liability is immaterial at each of the currently active sites which it does not own where it has been named as a responsible party or a potentially responsible party (""PRP'') due to its limited involvement at the site and/or the number of viable PRPs. For example, the preliminary allocation among 48 PRPs at the Crymes LandÑll site in Georgia indicates that Acuity Brands' liability is not signiÑcant, and there are more than 1,000 PRPs at the M&J Solvents site in Georgia. For property that Acuity Brands owns on Seaboard Industrial Boulevard in Atlanta, Georgia, the Company has conducted an investigation on its properties and adjoining properties and submitted a Compliance Status Report (""CSR'') to the State of Georgia Environmental Protection Division (""EPD'') pursuant to the Georgia Hazardous Site Response Act. Until the EPD approves the CSR and Acuity Brands evaluates the necessity for and scope of any appropriate corrective action, Acuity Brands will not be able to determine whether corrective action will be required and what the costs of such action will be. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted for a vote of the security holders during the three months ended August 31, 2002. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Acuity Brands' common stock is listed on the New York Stock Exchange under the symbol ""AYI''. At October 24, 2002, there were 5,346 stockholders of record. The following table sets forth the New York Stock Exchange high and low stock prices and the dividend payments for Acuity Brands' common stock for the periods indicated. Price Per Share Low High Dividends Per Share 2002 First Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ * Second QuarterÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $14.89 Third Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $19.40 Fourth Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $18.60 * $10.70 $14.00 $11.35 * $0.15 $0.15 $0.15 * Public trading of the Acuity Brands shares (other than on a when-issued basis) did not commence until December 3, 2001. The information required by this item, with respect to equity compensation plans, is included under the caption Disclosure with Respect to Equity Compensation Plans of the Company's proxy statement for the annual meeting of stockholders to be held December 19, 2002, Ñled with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 6. Selected Financial Data The following table sets forth certain selected consolidated Ñnancial data of Acuity Brands, which have been derived from the Consolidated Financial Statements of Acuity Brands for each of the Ñve years in the period ended August 31, 2002. The historical information may not be indicative of the Company's future performance as an independent company. The information set forth below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations 11 and the Consolidated Financial Statements and the notes thereto. Operating expenses in the historical income statements prior to December 1, 2001 reÖect direct expenses of the Acuity Brands' businesses together with allocations of certain NSI corporate expenses that were charged to Acuity Brands based on usage or other methodologies appropriate for such expenses. In the opinion of Acuity Brands management, these allocations have been made on a reasonable basis. Actual per share data has not been presented since the businesses that comprise Acuity Brands were wholly-owned subsidiaries of NSI during all or a portion of such periods. 2002 Net sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,972,796 Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 52,024 Pro forma basic earnings Year Ended August 31, 2001 1999 2000 (In thousands, except per-share data) $2,023,644 83,691 $1,701,568 89,116 $1,982,700 40,503 per share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-term debt (excluding current portion) ÏÏÏÏÏÏÏÏ Total debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends declared per common share ÏÏÏÏÏÏÏÏÏ 1.26 1,357,954 0.99 1,330,575 n/a 1,422,880 n/a 1,337,038 410,630 543,121 373,707 608,830 380,518 636,434 435,199 544,577 1998 $1,555,559 81,811 n/a 700,112 78,092 81,073 0.45 n/a n/a n/a n/a In September 2001, the Company adopted Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets. Refer to Note 2 of the Notes to Consolidated Financial Statements for information related to the impact of the adoption of this standard on the Company's net income and pro forma earnings per share. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes. References made to years are for Ñscal year periods. Dollar amounts are in thousands, except share and per-share data and as indicated. Overview History and Purpose On November 7, 2001, the board of directors of National Service Industries, Inc. approved the spin- oÅ (the ""Spin-oÅ'') of its lighting equipment and specialty products businesses into a separate publicly traded company with its own management and board of directors. The Spin-oÅ was eÅected on November 30, 2001 through a tax-free distribution to NSI stockholders (""Distribution'') of 100 percent of the outstanding shares of common stock of Acuity Brands, Inc. (""Acuity Brands'' or ""the Company''), at that time a wholly-owned subsidiary of NSI owning and operating the lighting equipment and specialty products businesses. Each NSI stockholder of record as of November 16, 2001, the record date for the Distribution, received one share of Acuity Brands common stock for each share of NSI common stock held at that date. The Company operates on a Ñscal year end of August 31. Therefore, the results of operations prior to November 30, 2001 are based on certain assumptions more fully described in Note 1 of the Notes to Consolidated Financial Statements. The purpose of this discussion and analysis is to enhance the understanding and evaluation of the results of operations, Ñnancial position, cash Öows, indebtedness and other key Ñnancial information of Acuity Brands and its subsidiaries for the years ended August 31, 2002, 2001, and 2000 and to describe certain potential risk factors associated with the Company. For a more complete understanding of this discussion, please read the Notes to Consolidated Financial Statements included in this report. Also, please refer to the Company's Registration Statement on Form 10/A Ñled with the Securities and Exchange 12 Commission on November 9, 2001 for additional information regarding the Company, its formation and potential risk factors associated with the Spin-oÅ. Company Acuity Brands is a holding company that owns and manages two business units, each operating a collection of businesses, which sell products and provide services to customers in numerous channels, primarily for consumer, commercial and industrial applications. The business units of Acuity Brands operate in two distinct segments based on the diÅerent products manufactured and the customers served: Acuity Lighting Group (""ALG'') and Acuity Specialty Products Group (""ASP''). The Company believes ALG is the world's leading manufacturer and distributor of lighting Ñxtures, with a broad, highly conÑgurable product oÅering consisting of roughly 500,000 active products as part of over 2,000 product groups that are sold to approximately 5,000 customers. ALG operates 31 factories and distribution facilities to serve its extensive customer base. ASP is a leading producer and distributor of cleaning and maintenance products in North America and portions of Western Europe. ASP manufactures over 9,000 diÅerent products from six plants and serves over 300,000 customers through a network of distribution centers and warehouses. Acuity Brands, with its principal oÇce in Atlanta, Georgia, has almost 12,000 employees worldwide. While Acuity Brands is less than one year old, the two segments that make up the Company are comprised of organizations with long histories and well-known brands. Strategy A long-term objective of Acuity Brands is to be a broader, more diversiÑed manufacturing and distribution organization capable of delivering consistent growth in earnings and cash Öow. A broader and more diversiÑed organization is one that creates less dependency on a single market or customer and generally reduces volatility in earnings and cash Öow caused by the cyclicality of a dominant industry. The Company's longer-term Ñnancial goals, focused on enhancing shareholder value, are to grow earnings per share in excess of 15 percent per annum, to generate consolidated operating margins in excess of 10 percent, to provide a return on stockholders' equity of 15 percent or better and to reduce the Company's leverage to below 40 percent of total capital. In 2002, Acuity Brands focused on the following four initiatives directed at the achievement of these goals: 1. Provide customers with superior, value-added products and services 2. Reduce debt 3. Implement proÑt improvement and cost containment programs 4. Diversify the customer base and channels of distribution In Ñscal 2002, the Company made signiÑcant progress in each of these key areas. Each segment continued to develop new products and provide high levels of service, which helped mitigate the impact of weak demand caused by a soft economic environment in other more mature product lines, described more fully below. As signiÑcantly, the Company was able to reduce debt by approximately $100 million from the date of Spin-oÅ to $543 million at August 31, 2002 through a combination of operating income and improved working capital management. Also, beneÑting the results of the Company in 2002 was the impact of proÑt improvement and cost containment programs implemented throughout the Company. The impact of these programs helped to partially oÅset the signiÑcant price degradation due to severe competition in key markets, particularly non-residential construction in North America. Lastly, the Company was able to continue with its eÅort to diversify its customer base and end markets through the acquisition of American Electric Lighting in October 2001 and the addition of certain key accounts in both segments. During Ñscal 2003, management expects to build on the momentum and the accomplishments of these and other initiatives implemented in prior years. The expected outcome of these activities will be to 13 better position the Company to deliver on its full potential and provide a platform for future growth opportunities. Market Conditions Ì Fiscal 2002 Fiscal 2002 was a very challenging inaugural year for Acuity Brands. Events that impacted business generally in 2002 were well-publicized lapses in proper corporate governance by certain companies, sensational business bankruptcies, large layoÅs and the tragedy on September 11, 2001, all of which took their toll on an economy that had not experienced recession in a decade. Gross Domestic Product in the United States, the Company's primary area of operation, for the Ñscal year ended August 31, 2002 increased approximately 2.2 percent, with most of the gain occurring late in the year. During that same period, activity in the Company's primary market, non-residential commercial construction, declined approximately 11 percent year over year (based on square footage put in place). Management believes that was the largest annual decline in 10 years. For Acuity Brands, these conditions created an economic environment characterized by weak demand in key markets, rising costs for raw materials and insurance, and intense price competition. Highlight Ì Fiscal 2002 The Company responded and adapted to these challenging and volatile market conditions by implementing strategies and programs to reduce costs, enhance productivity and, by better managing its capital expenditures and working capital, improve cash Öow from operations. Acuity Brands generated almost $2 billion in revenues and produced net income of $52 million, or $1.26 per share for the year ended August 31, 2002. More importantly, the Company strengthened its balance sheet by reducing debt to $543 million at August 31, 2002 from $644 million on November 30, 2001. While the Company aspired to better results, Acuity Brands is proud of these Ñnancial achievements given the economic conditions that existed in 2002. Critical Accounting Policies Management's Discussion and Analysis of Financial Condition and Results of Operations addresses the Ñnancial condition and results of operations as reÖected in the Company's Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. As discussed in Note 2 of the Notes to Consolidated Financial Statements, the preparation of Ñnancial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that aÅect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Ñnancial statements and reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to inventory valuation; depreciation, amortization and the recoverability of long-lived assets, including intangible assets; medical, product warranty and other reserves; litigation; and environmental matters. Management bases its estimates and judgments on its substantial historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. See Note 2 of the Notes to Consolidated Financial Statements for a summary of the accounting policies of Acuity Brands. The management of Acuity Brands believes the following represent the Company's critical accounting policies: Inventories Acuity Brands records inventory at the lower of cost (on a Ñrst-in, Ñrst-out basis) or market. Management reviews inventory quantities on hand and records a provision for excess or obsolete inventory primarily based on estimated future demand and current market conditions. A signiÑcant change in 14 customer demand or market conditions could render certain inventory obsolete and thus could have a material adverse impact on the Company's operating results in the period the change occurs. Long-Lived and Intangible Assets and Goodwill Acuity Brands reviews goodwill and intangible assets with indeÑnite useful lives for impairment on an annual basis or on an interim basis if an event occurs that might reduce the fair value of the long-lived asset below its carrying value. All other long-lived and intangible assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized based on the diÅerence between the carrying value of the asset and its estimated fair value, which would be determined based on either discounted future cash Öows or other appropriate fair value methods. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (""SFAS No. 142''), Goodwill and Other Intangible Assets. Acuity Brands adopted SFAS No. 142 as of September 1, 2001. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001 and establishes a new method for testing goodwill for impairment. SFAS No. 142 also requires that an identiÑable intangible asset that is determined to have an indeÑnite useful economic life not be amortized, but separately tested for impairment using a fair value based approach. The evaluation of goodwill and intangibles with indeÑnite useful lives for impairment requires management to use signiÑcant judgments and estimates including, but not limited to, projected future revenue, operating results, and cash Öow of each of the Company's businesses. Although management currently believes that the estimates used in the evaluation of goodwill and intangibles with indeÑnite lives are reasonable, diÅerences between actual and expected revenue, operating results, and cash Öow could cause these assets to be deemed impaired. If this were to occur, the Company would be required to charge to earnings the write-down in value of such assets, which could have a material adverse eÅect on the Company's results of operations and Ñnancial position. SpeciÑcally, Acuity Brands has two unamortized intangible assets with an aggregate carrying value of $65.0 million. The carrying value is comprised of $62.6 million and $2.4 million associated with the Company's Holophane and American Electric Lighting trade names, respectively. Management estimates the fair value of these unamortized trade names using a fair value model based on discounted future cash Öows. Future cash Öows associated with each of the Company's unamortized trade names are calculated by applying a theoretical royalty rate a willing third party would pay for use of the particular trade name to estimated future revenue. The present value of the resulting after-tax cash Öow is management's current estimate of the fair value of the trade names. This fair value model requires management to make several signiÑcant assumptions, including estimated future revenue, the royalty rate, and the discount rate. DiÅerences between expected and actual results can result in signiÑcantly diÅerent valuations. If future operating results of Holophane are unfavorable compared to forecasted amounts, the Company may be required to reduce the theoretical royalty rate used in the fair value model. A reduction in the theoretical royalty rate would result in lower expected, future after-tax cash Öow. Accordingly, an impairment charge would be recorded at that time. To illustrate the potential impact of unfavorable changes in the assumptions underlying the fair value model, a one percent reduction in the theoretical royalty rate related to the Holophane trade name would result in a pre-tax impairment charge of approximately 27 percent, or $17.0 million, of the carrying value of the trade name. Self-Insurance It is the policy of the Company to self insure for certain insurable property and casualty risks consisting primarily of physical loss to property, business interruptions resulting from property losses, workers' compensation, comprehensive general liability, and auto liability. Insurance coverage is obtained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. Based on an independent actuary's estimate of the aggregate liability for claims incurred, a provision for claims under the self-insured program is recorded and revised annually. The actuarial 15 estimates are subject to uncertainty from various sources, including, among others, changes in claim reporting patterns, claim settlement patterns, judicial decisions, legislation, and economic conditions. Although Acuity Brands believes that the actuarial estimates are reasonable, signiÑcant diÅerences related to the items noted above could materially aÅect the Company's self-insurance obligations and future expense. The Company is also self-insured for the majority of its medical beneÑt plans. The Company estimates its aggregate liability for claims incurred by applying a lag factor to the Company's historical claims and administrative cost experience. The appropriateness of the Company's lag factor is evaluated and revised, if necessary, annually. Although management believes that the current estimates are reasonable, signiÑcant diÅerences related to claim reporting patterns, legislation, and general economic conditions could materially aÅect the Company's medical beneÑt plan liabilities and future expense. Product Warranty Acuity Brands records an allowance for the estimated amount of future warranty costs when the related revenue is recognized, primarily based on historical experience. Although historical warranty costs have been within expectations, there can be no assurance that future warranty costs will not exceed historical amounts. If actual future warranty costs exceed historical amounts, additional allowances may be required, which could have a material adverse impact on the Company's operating results in future periods. Litigation Acuity Brands reserves for legal claims when payments associated with the claims become probable and can be reasonably estimated. Due to the diÇculty in estimating costs of resolving legal claims, actual costs may be substantially higher than the amounts reserved. Environmental Matters The Company reserves for known environmental claims when payments associated with the claims become probable and the costs can be reasonably estimated. Acuity Brands' environmental reserves, for all periods presented, are immaterial. The actual cost of resolving environmental issues may be higher than that reserved primarily due to diÇculty in estimating such costs and potential changes in the status of government regulations. Liquidity and Capital Resources Principal sources of liquidity for the Company are operating cash Öows generated primarily from its segments and various sources of borrowings, primarily from banks. The capital structure of the Company is comprised principally of an asset-backed securitization program, borrowings from banks, senior notes, and the equity of its stockholders. The ability of the Company to generate suÇcient cash Öow from operations and to be able to access certain capital markets, including banks, is critical for the Company to meet its obligations as they become due. Based on current earnings projections and prevailing market conditions, both for customer demand and various capital markets, the Company believes that over the next twelve months it will have suÇcient liquidity and availability under its Ñnancing arrangements to fund its operations as currently planned and its anticipated capital investment and proÑt improvement initiatives, to repay borrowings as currently scheduled, and to pay the same quarterly stockholder dividends in such amounts in 2003 as were paid in 2002. The Company expects to reduce outstanding borrowings by at least $30.0 million and to invest between $38.0 and $42.0 million in new tooling, machinery and equipment during Ñscal 2003. If management's expectations regarding current earnings projections and cash Öow or the forecasted reduction in outstanding borrowings are not realized, the Company may be required to modify its planned business activities or restructure a portion of its existing debt on potentially less favorable terms. 16 Cash Flow The Company continues to generate substantial cash Öow from operations. In 2002, the Company generated $146.8 million in cash Öow from operations compared to $183.7 million and $53.9 million reported in 2001 and 2000, respectively. Operating earnings in each segment and improved working capital management were the primary contributors to the Company's cash Öow from operations in 2002, partially oÅset by the payment of approximately $7.0 million for spin-oÅ related expenses. In addition, the Company generated $8.4 million in cash in 2002 from the sale of certain non-core assets. Total cash Öow generated from operations plus these additional proceeds totaled $155.2 million in 2002. The Company used its cash Öow in 2002 primarily to fund capital expenditures, quarterly dividend payments, and activity with NSI prior to the Distribution, to acquire American Electric Lighting and to reduce debt. The Company believes that achieving the proper returns on its invested capital is a key factor in driving stockholder value. Toward that objective, management continued to focus its eÅorts in 2002 on improving the returns earned on its invested capital by redeploying under-performing, non-core assets and making additional investments in areas where the Company can maximize its earnings potential. This included expenditures on tooling, machinery, and equipment for internal expansion as well as an acquisition of a business in a strategic market. As part of this eÅort, the Company spent $33.5 million in 2002 for new tooling, machinery and equipment. Over the last three years, the Company has invested a total of $144.0 million for new plant, equipment and tooling primarily to improve productivity and product quality, increase manufacturing eÇciencies and enhance its customer service capabilities in each segment. The Company believes that these investments, which have exceeded depreciation expense by an average of 9.6 percent annually in the three-year period ended August 31, 2002, will enhance its operations and Ñnancial performance in 2003 and beyond. As part of the Company's eÅort to broaden and diversify its customer base and the end markets it serves, Acuity Lighting Group acquired certain assets and assumed certain liabilities of American Electric Lighting in October 2001. The total cash paid was approximately $24.8 million. American Electric Lighting manufactures and distributes lighting Ñxtures for use by utilities and transportation departments to light outdoor areas, streets and sidewalks. The activities of American Electric Lighting are included in the results of operations of the Company since the date of acquisition. Working capital management was a key element in generating the Company's cash Öow from operations in 2002. Consolidated working capital at August 31, 2002 was $160.2 million compared to $117.0 million at August 31, 2001, an increase of $43.2 million. Consolidated working capital at August 31, 2000 was $155.4 million. The increase in working capital in 2002 compared to 2001 was primarily due to the increased working capital required to operate American Electric Lighting and the change in classiÑcation of certain debt from current to long-term resulting from a modiÑcation in the terms of the Company's Revolving Credit Facility, partially oÅset by greater accounts payable and accrued liabilities, including income taxes. More importantly, operating working capital (deÑned as accounts receivable, net, plus inventory, minus accounts payable) declined $21.3 million (5.3 percent) to $378.0 million at August 31, 2002 from the end of 2001 and $99.6 million (20.9 percent) from the end of 2000. The decline in operating working capital was primarily due to higher accounts payable resulting from more favorable terms negotiated with certain suppliers, partially oÅset by the increase in accounts receivable, primarily at American Electric Lighting for shipments made after the acquisition date in October 2001, and extended dating terms typical in the home improvement channel in both segments. The Company continued to further penetrate the home improvement market as part of its diversiÑcation eÅort to expand into other channels of distribution. Operating working capital as a percentage of net sales at the end of 2002 was 19.2 percent, compared to 20.1 percent and 23.6 percent in 2001 and 2000, respectively. Despite the weak economic environment in 2002 and the diÇculty in enhancing margins, the Company did manage to generate a signiÑcant amount of free cash Öow, which was used to reduce outstanding debt as more fully described below. At August 31, 2002, the current ratio of the Company was 1.37 compared to 1.26 at the end of 2001. The Company's consolidated cash position was $2.7 million at August 31, 2002 compared to $8.0 million at August 31, 2001. The Company's excess cash balances were used to reduce the outstanding debt under its credit facility in order to lower its overall interest expense. 17 Contractual Obligations The following table summarizes the Company's contractual obligations at August 31, 2002 (in thousands): Total Long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $411,376 129,200 Short-term secured borrowings* ÏÏÏÏÏÏ 2,545 Notes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 62,951 Operating leases ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,207 Unconditional purchase obligationsÏÏÏÏ Less than One Year $ 746 129,200 2,545 14,252 3,207 Payments Due by Period 1 to 3 Years 4 to 5 Years After 5 Years $21,970 Ì Ì 18,972 Ì $17,973 Ì Ì 7,894 Ì $370,687 Ì Ì 21,833 Ì Total ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $609,279 $149,950 $40,942 $25,867 $392,520 * In May 2001, NSI entered into a three-year agreement (""Receivables Facility'') to borrow, on an ongoing basis, up to $150.0 million secured by undivided interests in a deÑned pool of trade accounts receivable of ALG and ASP. EÅective November 30, 2001, Acuity Brands assumed all of the outstanding borrowings and other obligations under the Receivables Facility. Borrowings under the Receivables Facility are subject to the annual renewal of a supporting line of credit. The Company expects to renew the supporting line of credit during Ñscal 2003. Capitalization Total debt outstanding of $543.1 million at August 31, 2002 declined $100.6 million (15.6 percent) from the date of the Spin-oÅ, November 30, 2001, and $65.7 million (10.8 percent) from August 31, 2001. The decrease was due primarily to the strong cash Öow from operations, partially oÅset by capital expenditures, the acquisition of American Electric Lighting and the payment of dividends. In April 2002, the Company entered into a new Revolving Credit Facility with its banks, which signiÑcantly improved its Ñnancial Öexibility. The new Revolving Credit Facility consists of two components. The Ñrst component is a $105 million revolving credit facility to be used for general corporate purposes and is due April 2005. Borrowings under this facility at August 31, 2002 were $40.0 million. The second component is a 364-day, $105 million facility to fund general corporate purposes, primarily working capital requirements. At August 31, 2002, there were no borrowings drawn on this facility. Total availability under the Company's Revolving Credit Facility was $146.3 million at August 31, 2002. See Note 4 of the Notes to Consolidated Financial Statements for additional information regarding restrictions contained in the Revolving Credit Facility. Total debt outstanding at August 31, 2002 was $543.1 million compared to $643.7 million and $608.8 million at November 30, 2001 and August 31, 2001, respectively. During Ñscal 2002, the Company's consolidated stockholders' equity increased $18.7 million to $402.0 million at August 31, 2002. The Company's debt to total capital ratio was 58 percent at August 31, 2002, down from approximately 63 percent at November 30, 2001. Dividends The Company paid quarterly common stock dividends of $0.15 per share in each of the last three quarters of 2002. Total dividends paid were $18.6 million in 2002. Prior to November 30, 2001, the Company was a subsidiary of NSI, as more fully described above, and did not pay dividends separately to stockholders of NSI. 18 Results of Operations Consolidated Results Fiscal 2002 can best be characterized as managing well to modestly mitigate the eÅects of a diÇcult economic environment. While many economists were predicting a soft landing for the economy, with a rebound expected in the second half of the Company's Ñscal year, it became evident early on that this was not going to be the case, particularly in the Company's largest market, the non-residential, commercial construction industry. The impact on Acuity Brands of this weak economic environment was lower shipments of products to customers in many of its key sales channels in both segments and severe price competition for remaining orders, primarily in the commercial construction market. This, along with rising costs in non-discretionary areas such as insurance, made expanding proÑtability very diÇcult. As a consequence, management initiated programs to adapt to these changing market conditions by focusing on other levers to drive Ñnancial performance, including generating additional revenues from new products and channels of distribution, implementing various proÑt improvement and cost containment programs to limit spending and improve manufacturing eÇciencies and generating free cash Öow through better working capital utilization. These concerted actions allowed the Company to generate substantial cash Öow in 2002 and modest earnings while continuing to serve its vast customer base. Overall, consolidated net sales were $1.97 billion in 2002, compared with $1.98 billion and $2.02 billion reported in 2001 and 2000, respectively. For the year ended August 31, 2002, the Company reported net income of $52.0 million, compared to $40.5 million and $83.7 million earned in 2001 and 2000, respectively. Earnings per share were $1.26 in 2002, compared to $0.99 reported in 2001. Excluding the results from the divestiture of certain foreign operations of ASP in Ñscal 2001 and the acquisition of American Electric Lighting in early Ñscal 2002, net sales would have been $1.91 billion in 2002, $1.96 billion in 2001 and $2.0 billion in 2000. Similarly, excluding the pretax impact of $3.2 million in gains on the sale of assets and $0.9 million for the reversal of certain restructuring expenses, net income in 2002 would have been $49.5 million, or $1.20 per share. In 2001, net income would have been $66.7 million, or $1.63 per share, excluding the pretax impact of the $15.3 million loss from the divested operations at ASP, $4.1 million for restructuring and impairment charges, $3.1 million for the termination of a purchase obligation, and $12.1 million in discontinued amortization expense from the adoption of SFAS No. 142. Net income in 2000 would have been $95.6 million excluding the impact of the divested foreign operations and amortization expense noted above. Please refer to Notes 2 and 7 of the Notes to Consolidated Financial Statements, which more fully describes the discontinuation of amortization of goodwill and certain intangibles, the acquisition of American Electric Lighting, and the divestiture of the foreign operations of ASP. Excluding the acquisition of American Electric and the divesture of the foreign operations noted above, net sales at Acuity Brands decreased approximately three percent in 2002 when compared to 2001. The decline occurred primarily at ALG and was partially oÅset by a modest increase at ASP. The decline was primarily due to soft demand and lower selling prices at ALG for certain types of Ñxtures for industrial and oÇce applications, partially oÅset by an increase in sales through the retail channel at both ALG and ASP. Consolidated net sales in 2001 declined approximately two percent when compared to 2000 primarily due to a decline in general economic conditions and a slowing in construction spending, particularly in the fourth quarter of Ñscal 2001. Consolidated operating proÑt was down 13.9 percent in 2002 to $120.1 million (6.1 percent of net sales) from $139.6 million (7.0 percent of net sales) reported in 2001. Operating proÑt was $179.9 million (8.9 percent of net sales) in 2000. The decline in operating proÑt in 2002 was primarily a result of the lost contribution margin on the lower sales noted above, including price erosion experienced in certain key lighting Ñxture markets, and higher spending for non-discretionary items, partially oÅset by various proÑt improvement and cost containment programs and lower corporate expenses. Consolidated gross proÑt margins declined to 40.7 percent of net sales in 2002 from 42.4 percent and 42.3 percent reported in 2001 and 2000, respectively. The decline in gross proÑt margins occurred primarily at ALG due to the impact of signiÑcant price competition noted above, partially oÅset by lower costs and expenses due to various proÑt 19 improvement initiatives and cost containment programs implemented in 2002. Gross proÑt margins remained essentially Öat at ASP over the three-year period. Operating expenses at Acuity Brands in 2002 were $683.4 million (34.6 percent of sales) compared to $701.8 million (35.4 percent of sales) in 2001 and $676.2 million (33.4 percent of sales) in 2000. Excluding amortization expense, operating expenses as a percentage of sales in 2002 remained essentially the same as 2001. BeneÑts of cost containment programs throughout the Company were primarily oÅset by increases in non-discretionary spending. Other income (expense) for Acuity Brands is made up primarily of interest expense and other miscellaneous, non-operating activity including the gain or loss on the sale of assets, certain restructuring charges and gains or losses on foreign currency transactions. Interest expense, net was $40.7 million, $48.8 million and $43.3 million in 2002, 2001 and 2000, respectively. Interest expense, net was down 16.6 percent in 2002 compared to 2001 primarily because of reduced levels of debt outstanding throughout the period and lower interest rates for much of 2002. Interest expense, net increased slightly in 2001 compared to 2000 primarily because of greater debt levels to fund working capital investments. In 2002, the Company generated a pretax gain of $3.2 million on the sale of certain non-core assets. In 2001, the Company incurred other expenses associated with non-operating activities totaling a pretax loss of $21.6 million, primarily for the loss associated with the disposal of certain foreign assets at ASP and restructuring and other charges related to non-operating activities of the Company. The eÅective tax rate reported by the Company was 37.2 percent, 41.4 percent and 38.1 percent in 2002, 2001 and 2000, respectively. The decline in the tax rate was primarily the result of the legal entity restructuring that occurred in connection with the Spin-oÅ and the elimination of amortization of goodwill. Acuity Lighting Group Acuity Lighting Group reported net sales of approximately $1.47 billion, $1.47 billion, and $1.52 billion for the years ending August 31, 2002, 2001, and 2000, respectively. Excluding revenues contributed from the acquisition of American Electric Lighting in October 2001, net sales would have decreased 4.1 percent during 2002. The decline in net sales during 2002 was due primarily to lower shipments to certain commercial and industrial markets and reduced selling prices for certain key products due to intense price competition for available orders. Net sales decreased during Ñscal 2001 compared to Ñscal 2000 primarily due to general economic conditions and a slowing in construction spending, particularly in the fourth quarter of Ñscal 2001. Operating proÑt was down 24.6 percent in 2002 to $89.6 million from $118.8 million reported in 2001. Operating proÑt was $144.4 million in 2000. The decline in operating proÑt in 2002 was primarily the result of the lost contribution on the lower sales noted above due principally to product mix changes and price erosion experienced in certain lighting Ñxture markets, higher spending for non-discretionary items such as medical and property insurance, and greater investments in certain sales and marketing programs. This decline was partially oÅset by proÑt improvement initiatives and cost containment programs that reduced costs and improved productivity in key factories in 2002. These programs included eÅorts to source materials more eÅectively, streamline production through better integration with suppliers and eliminate costs associated with non-value added activities. Also, ALG expanded its channels of distribution and the types of customers served in 2002. The adoption of a new accounting standard that eliminated amortization of goodwill and certain intangibles contributed approximately $10.0 million to operating proÑt at ALG. Operating proÑt decreased in 2001 primarily due to lower sales, higher excess and obsolete inventory costs, and higher non-discretionary items such as medical and casualty insurance costs. Acuity Specialty Products Net sales at ASP were $497.9 million in 2002, compared with $514.1 million and $508.0 million reported in 2001 and 2000, respectively. Excluding the results from the divestiture of certain foreign operations during 2001, net sales would have been $493.7 million and $481.0 million in 2001 and 2000, respectively. The increase in 2002 net sales was primarily due to continued strength in the retail sector 20 and, to a lesser extent, in certain niche markets. Net sales increased during 2001 primarily as a result of increased sales volumes in both the industrial and institutional and the retail channels. Operating proÑt increased 8.7 percent in 2002 to $44.9 million from $41.3 million reported in 2001. Operating proÑt was $50.1 million in 2000. Excluding the results from the divestiture of certain foreign operations during 2001, operating proÑt would have been $42.0 million and $51.5 million in 2001 and 2000, respectively. The increase in operating proÑt in 2002 was primarily the result of the proÑt contribution on higher volumes, the impact of proÑt improvement programs, and the elimination of approximately $2.1 million of amortization expense. These items were partially oÅset by greater investments in sales initiatives and higher insurance costs. ASP implemented programs such as sourcing initiatives, cost containment programs and aggressive marketing strategies that allowed the segment to produce solid Ñnancial performance while expanding penetration of key market niches and further diversifying the customer base. Unfortunately in 2002, many of those eÅorts merely oÅset the impact of rising costs for insurance programs. Operating proÑt decreased in 2001 primarily due to higher medical costs, additional costs incurred to integrate the specialty products businesses, increased energy costs, and greater investments in the development of specialty channel and national accounts. Corporate Corporate expenses decreased 30.2 percent in 2002 to $14.4 million from $20.6 million reported in 2001. Corporate expenses were $14.6 million in 2000. The decrease in corporate expense in 2002 was primarily due to cost containment programs and the reorganization of the corporate staÅ. Allocated corporate expenses increased in 2001 primarily due to an increase in medical and casualty insurance costs and higher costs related to strategic and operational initiatives. Outlook In 2002, Acuity Brands made progress toward its objective of becoming a broader more diversiÑed organization. Through diversiÑcation and size, management believes that Acuity Brands will be less dependent on the business cycles of a single economy, industry or product and thus able to provide more consistent and sustainable growth in earnings and cash Öow on which to build the Company in the future. Actions taken in 2002 such as the acquisition of American Electric Lighting, implementation of proÑt improvement and cost containment initiatives coupled with a signiÑcant capital investment program over the last three years and an intense debt reduction program, have made Acuity Brands a more diversiÑed company with greater Ñnancial resources. As noted earlier, management intends to continue to focus on the same strategic initiatives in 2003. As the Company concludes 2002 and enters 2003, management remains conÑdent in the long-term potential of Acuity Brands, but extremely cautious of the next twelve months. Management's caution is driven in part by the lack of any real sign of a meaningful recovery or a sustainable improvement in the business climate for the Company's key markets, particularly in North America. While some economists predict that the domestic economy will improve late in the Company's Ñscal 2003, management is preparing for another year of very diÇcult conditions. This includes continued cost increases for insurance and certain raw materials, including steel, and the impact of deÖationary pricing pressures driven by over- capacity and continued weak customer demand in key markets, principally the nonresidential construction market in North America. Therefore, the focus of the organization will remain on improving the products and services provided to customers, becoming more productive and eÇcient, and enhancing proÑtability while continuing to diversify and expand the many end markets and customers served. Additionally, the Company is evaluating various alternatives, some of which it expects to implement in Ñscal 2003, to speciÑcally address the negative impact on proÑt margins of rising costs and pricing pressures. These actions include price increases and other initiatives to enhance price realization throughout the Company. Assuming that economic conditions overall, and more speciÑcally in the Company's key markets, do not deteriorate beyond their already weakened state, management expects earnings in 2003 to be between $1.20 and $1.40 per share. The low end of this range is based on the current economic environment and is essentially Öat with Ñscal 2002 earnings, excluding gains on asset sales and restructuring reversals. Should 21 the economy begin to improve in the second half of Ñscal 2003, however, the Company could potentially deliver earnings per share at the high end of the range. Sales are expected to increase modestly in 2003, based on current market conditions. Risks Relating to the Distribution On November 7, 2001, the board of directors of National Service Industries, Inc. approved the spin- oÅ of its lighting equipment and specialty products businesses into a separate publicly traded company with its own management and board of directors. The spin-oÅ was eÅected on November 30, 2001 through a tax-free distribution of 100 percent of the outstanding shares of common stock of Acuity Brands, at that time a wholly-owned subsidiary of NSI owning and operating the lighting equipment and specialty product businesses. Each NSI stockholder of record as of November 16, 2001, the record date for the Distribution, received one share of Acuity Brands common stock for each share of NSI common stock held at that date. The following risks associated with Acuity Brands relate principally to the Distribution. If any of these risks develops into an actual event, the business, Ñnancial condition or results of operations of Acuity Brands could be materially adversely aÅected. Failure to Qualify as a Tax-Free Transaction Could Result in Substantial Liability NSI and Acuity Brands intend for the Distribution to be tax-free for U.S. Federal income tax purposes. Management of Acuity Brands believes the Distribution was tax-free for U.S. Federal income tax purposes. The Distribution was conditioned upon the receipt by each of NSI and Acuity Brands of opinions from each of King & Spalding, counsel to NSI and Acuity Brands, and Ernst & Young LLP, special tax advisor to NSI and Acuity Brands, that for U.S. Federal income tax purposes the receipt of Acuity Brands Shares by NSI stockholders was tax-free. Neither NSI nor Acuity Brands requested an advance ruling from the Internal Revenue Service as to the tax consequences of the Distribution. The opinions of King & Spalding and Ernst & Young LLP are subject to certain assumptions and the accuracy and completeness of certain factual representations and statements made by NSI and Acuity Brands and certain other data, documentation and other materials that each of King & Spalding and Ernst & Young LLP deemed necessary for purposes of their respective opinions. If these assumptions and factual representations were incorrect or incomplete in a material respect, the conclusions set forth in the opinions may not be correct. These opinions represent the views of King & Spalding and Ernst & Young LLP as to the interpretation of existing tax law and accordingly, such opinions are not binding on the Internal Revenue Service or the courts and no assurance can be given that the Internal Revenue Service or the courts will agree with their opinions. If the Distribution does not qualify for tax-free treatment, a substantial corporate tax would be payable by the consolidated group of which NSI is the common parent measured by the diÅerence between (1) the aggregate fair market value of the Acuity Brands Shares on the Distribution Date and (2) NSI's adjusted tax basis in the Acuity Brands Shares on the Distribution Date. The corporate level tax would be payable by NSI. However, Acuity Brands agreed under certain circumstances to indemnify NSI for all or a portion of this tax liability. This indemniÑcation obligation, if triggered, could have a material adverse eÅect on the results of operations and Ñnancial position of Acuity Brands. In addition, under the applicable treasury regulations, each member of NSI's consolidated group (including Acuity Brands) is severally liable for such tax liability. Furthermore, if the Distribution does not qualify as tax-free, each NSI stockholder who received Acuity Brands Shares in the Distribution would be taxed as if he had received a cash dividend equal to the fair market value of his Acuity Brands Shares on the Distribution Date. Even if the Distribution qualiÑes as tax-free, NSI could nevertheless incur a substantial corporate tax liability under Section 355(e) of the Internal Revenue Code of 1986, as amended (the ""Internal Revenue Code'' or the ""Code''), if NSI or Acuity Brands were to undergo a change in control (whether by acquisition, additional share issuance or otherwise) pursuant to a plan or series of related transactions which include the Distribution. Any transaction, which occurs within the four-year period beginning two 22 years prior to the Distribution, is presumed to be part of a plan or series of related transactions that includes the Distribution unless NSI establishes otherwise. Under certain circumstances, Acuity Brands would be obligated to indemnify NSI for all or a portion of this substantial corporate tax liability under the tax disaÇliation agreement. This indemniÑcation obligation would have a material adverse eÅect on the results of operations and Ñnancial position of Acuity Brands. Creditors of NSI May Challenge the Distribution as a Fraudulent Conveyance On November 7, 2001, the NSI board of directors made a determination, based on information provided by management and Ñnancial experts, that the Distribution was permissible under applicable dividend and solvency laws. There is no certainty, however, that a court would Ñnd the decision of the NSI board to be binding on creditors of NSI and Acuity Brands or that a court would reach the same conclusions as the NSI board in determining whether NSI or Acuity Brands was insolvent at the time of, or after giving eÅect to, the Distribution. If a court in a lawsuit by an unpaid creditor or representative of creditors, such as a trustee in bankruptcy, were to Ñnd that at the time NSI eÅected the Distribution, NSI or Acuity Brands (1) was insolvent; (2) was rendered insolvent by reason of the Distribution; (3) was engaged in a business or transaction for which their respective remaining assets constituted unreasonably small capital; or (4) intended to incur, or believed it would incur, debts beyond its ability to pay as such debts matured, such court may be asked to void the Distribution (in whole or in part) as a fraudulent conveyance and require that the stockholders return the Acuity Brands Shares (in whole or in part) to NSI or require Acuity Brands to fund certain liabilities for the beneÑt of creditors. The measure of insolvency for purposes of the foregoing would vary depending upon the jurisdiction whose law is being applied. Generally, however, NSI or Acuity Brands would be considered insolvent if the fair value of their respective assets were less than the amount of their respective liabilities or if they incurred debt beyond their ability to repay such debt as it matures. Management believes the likelihood that creditors of NSI could successfully challenge the Distribution is remote. Cautionary Statement Regarding Forward-Looking Information This Ñling contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Consequently, actual results may diÅer materially from those indicated by the forward-looking statements. Statements made herein that may be considered forward-looking include statements concerning: (a) major trends shaping the specialty products industry; (b) expectations related to future commodity hedging transactions for raw materials; (c) seasonal factors aÅecting the Company's results of operations; (d) possible future investments in automating equipment in Maquiladora operations to partially oÅset potential increased labor costs; (e) the expected outcome of activities initiated in Ñscal 2002 related to the ability of the Company to deliver on its full potential and provide a platform for future growth opportunities; (f) expectations regarding future liquidity and availability under the Company's Ñnancing arrangements (i) to fund operations, anticipated capital investment, and proÑt improvement initiatives as currently planned; (ii) to repay borrowings as currently scheduled; and (iii) to pay dividends in such amounts in 2003 as were paid in 2002; (g) anticipated beneÑts of investments in property, plant, and equipment; (h) expectations regarding the renewal of the supporting line of credit related to the Receivables Facility during Ñscal 2003; (i) anticipated beneÑts of diversiÑcation and size; (j) future revenue, earnings, capital expenditures, and debt reduction; (k) management intentions related to strategic initiatives and focus in 2003; and (l) the outcome of pending or future legal or regulatory proceedings. A variety of risks and uncertainties could cause the Company's actual results to diÅer materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties include without limitation the following: (a) the uncertainty of general business and economic conditions, including the potential for a more severe slowdown in non-residential construction, changes in interest rates, and Öuctuations in commodity and raw material prices or foreign currency rates; (b) unexpected developments and outcomes in the Company's legal and environmental proceedings; (c) the risk that projected future cash Öows from operations are not realized; (d) the impact of competition; (e) the uncertainty caused by operations in cyclical industries; (f) the risk that underlying assumptions or expectations related to the Distribution 23 prove to be inaccurate or unrealized; (g) the risk that the Distribution fails to qualify as a tax-free transaction; (h) the risk that creditors of NSI may challenge the Distribution as a fraudulent conveyance; (i) the risk of a work stoppage or an increase in organized labor activity; (j) the potential for the Company's growth to be limited by the payment of dividends; and (k) the Company's ability to realize the anticipated beneÑts of initiatives expected to reduce costs, improve proÑts, enhance customer service, increase manufacturing eÇciency, reduce debt, and expand product oÅerings and brands in the market through a variety of channels. Item 7a. Quantitative and Qualitative Disclosures about Market Risk General. Acuity Brands is exposed to market risks that may impact the Consolidated Balance Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash Flows due to changing interest rates and foreign exchange rates. Acuity Brands does not currently participate in any signiÑcant hedging activities, nor does it currently utilize any signiÑcant derivative Ñnancial instruments. The following discussion provides additional information regarding Acuity Brands' market risks. Interest Rates. Interest rate Öuctuations expose Acuity Brands' variable-rate debt to changes in interest expense and cash Öows. Acuity Brands' variable-rate debt, primarily short-term secured borrowings and amounts outstanding under the Company's credit facilities, amounted to $182.9 million and $245.9 million at August 31, 2002 and 2001, respectively. Based on outstanding borrowings at year-end, a 10 percent increase in market interest rates at August 31, 2002 and 2001 would have resulted in additional annual after-tax interest expense of approximately $0.2 million and $0.6 million, respectively. Although a Öuctuation in interest rates would not aÅect interest expense or cash Öows related to the $360.0 million publicly traded notes, Acuity Brands' primary Ñxed-rate debt, a 10 percent increase in market interest rates at August 31, 2002 and 2001 would have decreased the fair value of these notes to approximately $342.0 million and $356.1 million, respectively. See Note 4 of the Notes to Consolidated Financial Statements for additional information regarding the Company's long-term debt. Foreign Exchange Rates. The majority of Acuity Brands' revenue, expense, and capital purchases are transacted in U.S. dollars. Acuity Brands does not believe a 10 percent Öuctuation in average foreign currency rates would have a material eÅect on its consolidated Ñnancial position or results of operations. Acuity Brands does not engage in speculative transactions, nor does Acuity Brands hold or issue Ñnancial instruments for trading purposes. Acuity Brands attempts to reduce its exposure to unfavorable foreign currency translation adjustments through the use of foreign-currency denominated debt agreements. 24 Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of ManagementÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Report of Independent Auditors ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Report of Independent Public Accountants ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Balance Sheets as of August 31, 2002 and 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Consolidated Statements of Income for the years ended August 31, 2002, 2001, and 2000 ÏÏÏÏÏÏÏÏ Consolidated Statements of Cash Flows for the years ended August 31, 2002, 2001, and 2000 ÏÏÏÏÏ Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended August 31, 2002, 2001, and 2000 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Notes to Consolidated Financial Statements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Schedule II Ì Valuation and Qualifying Accounts ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Page 26 27 28 29 30 31 32 33 66 25 ACUITY BRANDS, INC. REPORT OF MANAGEMENT The management of Acuity Brands, Inc. is responsible for the integrity and objectivity of the Ñnancial information in this annual report. These Ñnancial statements are prepared in conformity with accounting principles generally accepted in the United States, using informed judgments and estimates where appropriate. The information in other sections of this report is consistent with the Ñnancial statements. The Company maintains a system of internal controls and accounting policies and procedures designed to provide reasonable assurance that assets are safeguarded and transactions are executed and recorded in accordance with management's authorization. The audit committee of the Board of Directors, composed entirely of outside directors, is responsible for monitoring the Company's accounting and reporting practices. The audit committee meets regularly with management, the internal auditors, and the independent auditors to review the work of each and to assure that each performs its responsibilities. Both the internal auditors and Ernst & Young LLP have unrestricted access to the audit committee allowing open discussion, without management's presence, on the quality of Ñnancial reporting and the adequacy of internal accounting controls. JAMES S. BALLOUN Chairman, President, and Chief Executive OÇcer VERNON J. NAGEL Executive Vice President and Chief Financial OÇcer JOHN W. EHRIE Vice President and Controller 26 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Acuity Brands, Inc. We have audited the accompanying consolidated balance sheet of Acuity Brands, Inc. (formerly the National Service Industries, Inc. lighting equipment and specialty products businesses) as of August 31, 2002, and the related consolidated statements of income, stockholders' equity and comprehensive income, and cash Öows for the year then ended. Our audit also included the Ñnancial statement schedule listed in the Index at Item 15(a). These Ñnancial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these Ñnancial statements and schedule based on our audit. The Ñnancial statements and schedule of the National Service Industries, Inc. lighting equipment and specialty products businesses as of August 31, 2001, and for each of the two years in the period ended August 31, 2001, were audited by other auditors who have ceased operations and whose report dated October 12, 2001 expressed an unqualiÑed opinion on those statements and schedule. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An audit also includes assessing the accounting principles used and signiÑcant estimates made by management, as well as evaluating the overall Ñnancial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 2002 Ñnancial statements referred to above present fairly, in all material respects, the consolidated Ñnancial position of Acuity Brands, Inc. at August 31, 2002, and the consolidated results of its operations and its cash Öows for the year then ended in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related Ñnancial statement schedule, when considered in relation to the basic Ñnancial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 2 to the Consolidated Financial Statements, in 2002 the Company ceased amortization of goodwill and other indeÑnite lived intangible assets in accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. ERNST & YOUNG LLP Atlanta, Georgia September 30, 2002, except for the last paragraph of Note 4, as to which the date is October 11, 2002 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS NOTE: This is a copy of a report previously issued by Arthur Andersen LLP, the Company's former independent accountants. The Arthur Andersen LLP report refers to certain Ñnancial information for the year ended August 31, 1999 and certain balance sheet information at August 31, 2000, which are no longer included in the accompanying Ñnancial statements. Arthur Andersen LLP has not reissued this report in connection with the Ñling of this Annual Report on Form 10-K. To National Service Industries, Inc.: We have audited the accompanying combined balance sheets of the National Service Industries, Inc. lighting equipment and chemicals businesses (to be reorganized as Acuity Brands, Inc. Ì Note 1) as of August 31, 2001 and 2000 and the related combined statements of income, parent's equity and comprehensive income, and cash Öows for each of the three years in the period ended August 31, 2001. These combined Ñnancial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these combined Ñnancial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the Ñnancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Ñnancial statements. An audit also includes assessing the accounting principles used and signiÑcant estimates made by management, as well as evaluating the overall Ñnancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined Ñnancial statements referred to above present fairly, in all material respects, the combined Ñnancial position of the National Service Industries, Inc. lighting equipment and chemicals businesses as of August 31, 2001 and 2000 and the results of their operations and their cash Öows for each of the three years in the period ended August 31, 2001 in conformity with accounting principles generally accepted in the United States. Atlanta, Georgia October 12, 2001 ARTHUR ANDERSEN LLP 28 ACUITY BRANDS, INC. CONSOLIDATED BALANCE SHEETS ASSETS Current Assets: Cash and cash equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Receivables, less allowance for doubtful accounts of $8,560 at August 31, 2002 and $8,195 at August 31, 2001ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepayments and other current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Current Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property, Plant, and Equipment, at cost: Land ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Buildings and leasehold improvements ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Machinery and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Property, Plant, and EquipmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less Ì Accumulated depreciation and amortizationÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property, Plant, and Equipment, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Assets: Goodwill ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other long term assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Other Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ August 31, 2002 2001 (In thousands, except share and per-share data) $ 2,694 $ 8,006 322,735 216,942 24,247 24,379 590,997 14,746 162,296 339,198 516,240 275,561 240,679 344,218 133,030 49,030 526,278 296,900 210,783 16,326 27,101 559,116 16,009 161,779 326,160 503,948 255,525 248,423 331,363 137,581 54,092 523,036 Total Assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,357,954 $1,330,575 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current maturities of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Revolving credit facility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Short-term secured borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Notes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts payableÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accrued salaries, commissions, and bonuses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other accrued liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Total Current Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Long-Term Debt, less current maturities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred Income TaxesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Self-Insurance Reserves, less current portion ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Long-Term Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Commitments and Contingencies Stockholders' Equity: NSI investment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Common stock, $0.01 par value, 500,000,000 shares authorized, 41,346,730 shares issued and outstanding ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Paid-in capital ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Retained earnings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Unearned compensation on restricted stock ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accumulated other comprehensive income (loss) items ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 746 Ì 129,200 2,545 161,713 36,459 100,144 430,807 410,630 23,480 16,517 74,568 Ì Ì 414 403,389 21,884 (500) (23,235) $ 357 105,000 105,100 24,666 108,380 36,070 62,494 442,067 373,707 31,759 14,350 85,394 400,296 Ì Ì Ì Ì Ì (16,998) Total Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 401,952 383,298 Total Liabilities and Stockholders' Equity ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,357,954 $1,330,575 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 29 ACUITY BRANDS, INC. CONSOLIDATED STATEMENTS OF INCOME Net sales ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,972,796 1,169,282 Cost of products soldÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Years Ended August 31, 2002 2000 2001 (In thousands, except per-share data) $1,982,700 1,141,353 $2,023,644 1,167,524 Gross ProÑtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Selling and administrative expensesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amortization expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Operating ProÑt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other Expense (Income): Interest expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restructuring and other chargesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loss on sale of businessesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Miscellaneous (income) expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total Other Expense (Income) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Income before Provision for Income Taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for Income Taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 803,514 679,071 4,316 120,127 40,690 (853) Ì (2,546) 37,291 82,836 30,812 841,347 683,793 17,965 139,589 48,797 4,083 14,557 3,000 70,437 69,152 28,649 856,120 657,742 18,441 179,937 43,299 Ì Ì 1,347 44,646 135,291 51,600 Net Income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 52,024 Pro Forma Earnings Per Share (Unaudited): Basic Earnings per Share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.26 Basic Weighted Average Number of Shares OutstandingÏÏÏÏÏÏ 41,286 $ $ 40,503 $ 83,691 0.99 41,068 n/a n/a The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 30 ACUITY BRANDS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Cash Provided by (Used for) Operating Activities: Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Adjustments to reconcile net income to net cash provided by (used for) operating activities: Depreciation and amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Gain on the sale of property, plant, and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Loss on sale of businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Provision for losses on accounts receivable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restructuring and other charges ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Change in assets and liabilities net of eÅect of acquisitions and divestitures Ì Receivables ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Inventories ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Prepayments and other current assetsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Accounts payable and accrued liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Self-insurance reserves and other long-term liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets and liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002 Years Ended August 31, 2001 (In thousands) 2000 $ 52,024 $ 40,503 $ 83,691 49,494 (3,214) Ì 5,445 (853) (31,822) 4,471 (2,920) 1,328 81,058 (13,011) 4,841 62,911 (194) 14,557 4,930 4,083 35,258 23,189 (4,433) (3,948) 5,137 422 1,238 58,485 (156) Ì 2,667 Ì (37,464) (40,054) 321 (3,662) (12,202) 12,038 (9,764) Net Cash Provided by Operating Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 146,841 183,653 53,900 Cash Provided by (Used for) Investing Activities: Purchases of property, plant, and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from the sale of property, plant, and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from the sale of businesses ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Acquisitions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (33,482) 8,358 Ì (24,765) (47,611) 1,837 1,632 Ì (62,913) 1,866 Ì (16,214) Net Cash Used for Investing Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (49,889) (44,142) (77,261) Cash Provided by (Used for) Financing Activities: Net (repayments) borrowings of notes payable ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Issuances (repayments) of commercial paper, net (less than 90 days) ÏÏÏÏÏÏ Issuances of commercial paper (greater than 90 days) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repayments of commercial paper (greater than 90 days) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (Repayments) borrowings from revolving credit facility, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from short-term secured borrowings ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Proceeds from issuances of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Repayments of long-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employee Stock Purchase Plan share issuances ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Dividends ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net activity with NSIÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (22,121) Ì Ì Ì (65,000) 24,100 Ì (2,688) 830 (18,606) (18,632) 4,381 (221,801) 1,370 (15,200) 105,000 105,100 Ì (7,601) Ì Ì 8,814 (87,762) 194,953 (222,750) Ì Ì 199,798 (1,196) Ì Ì (103,386) (69,296) Net Cash (Used for) Provided by Financing Activities ÏÏÏÏÏÏÏÏÏÏÏÏÏ (102,117) (132,137) 22,561 EÅect of Exchange Rate Changes on Cash ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Net Change in Cash and Cash Equivalents ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash and Cash Equivalents at Beginning of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (147) (5,312) 8,006 Cash and Cash Equivalents at End of YearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,694 Supplemental Cash Flow Information: Income taxes paid during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Interest paid during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11,869 41,231 173 7,547 459 8,006 32,659 43,416 $ $ (271) (1,071) 1,530 459 55,302 42,399 $ $ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 31 ACUITY BRANDS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Comprehensive Income NSI Investment Common Stock Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Items Unearned Compensation On Restricted Stock Total $ 441,148 (In thousands, except share and per-share data) $ Ì $ Ì $ $ (9,294) Ì $ Ì $431,854 $83,691 83,691 Ì Balance, September 1, 1999 ÏÏÏÏÏÏÏÏ Comprehensive income: Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive income (loss), net of tax: Foreign currency translation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,448) Minimum pension liability adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Comprehensive income ÏÏÏÏÏÏÏÏ 1 (3,447) $80,244 Net transactions with NSI ÏÏÏÏÏÏÏÏÏ Balance, August 31, 2000 ÏÏÏÏÏÏÏÏÏÏ Comprehensive income: Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive income (loss), net of tax: Foreign currency translation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,374) 503 (2,386) (4,257) $36,246 $52,024 (267) (5,970) (6,237) $45,787 ReclassiÑcation adjustment for translation loss included in net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minimum pension liability adjustment (net of tax of $1,402) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Comprehensive income ÏÏÏÏÏÏÏÏ Net transactions with NSI ÏÏÏÏÏÏÏÏÏ Balance, August 31, 2001 ÏÏÏÏÏÏÏÏÏÏ Allocation of NSI Investment ÏÏÏÏÏÏ Comprehensive income: Net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive income (loss), net of tax: Foreign currency translation adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Minimum pension liability adjustment (net of tax of $3,507) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other comprehensive income (loss)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Comprehensive income ÏÏÏÏÏÏÏÏ Amortization and forfeitures of restricted stock grants ÏÏÏÏÏÏÏÏÏÏÏ Employee Stock Purchase Plan issuances(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cash dividends of $0.45 per share paid on common stock ÏÏÏÏÏÏÏÏÏÏ Net transactions with NSI ÏÏÏÏÏÏÏÏÏ Balance, August 31, 2002 ÏÏÏÏÏÏÏÏÏÏ (1) 102,695 shares. $40,503 40,503 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 400,560 Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì (3,448) 1 Ì (12,741) Ì (2,374) 503 (2,386) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì (16,998) Ì Ì (677) Ì 52,024 Ì Ì Ì Ì 829 Ì Ì Ì Ì (267) (5,970) Ì Ì Ì Ì Ì 177 Ì 83,691 (3,448) 1 (69,296) 442,802 40,503 (2,374) 503 (2,386) (95,750) 383,298 Ì 52,024 (267) (5,970) 177 830 Ì Ì (69,296) 455,543 Ì Ì Ì (95,750) 400,296 (400,296) Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì Ì 413 Ì Ì Ì Ì 1 Ì Ì Ì Ì Ì $414 Ì (18,606) (11,534) $403,389 $ 21,884 2,000 Ì Ì $(23,235) $ Ì Ì $(500) (18,606) (9,534) $401,952 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 32 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except share and per-share data and as indicated) Note 1: Spin-oÅ and Basis of Presentation On November 7, 2001, the board of directors of National Service Industries, Inc. (""NSI'') approved the spin-oÅ of its lighting equipment and specialty products businesses into a separate publicly traded company with its own management and board of directors. The spin-oÅ was eÅected on November 30, 2001 through a tax-free distribution (""Distribution'' or ""Spin-oÅ'') of 100 percent of the outstanding shares of common stock of Acuity Brands, Inc. (""Acuity Brands'' or the ""Company'') at that time a wholly-owned subsidiary of NSI owning and operating the lighting equipment and specialty products businesses. Each NSI stockholder of record as of November 16, 2001, the record date for the Distribution, received one share of Acuity Brands common stock for each share of NSI common stock held at that date. These Consolidated Financial Statements include the accounts of the NSI businesses that comprised its lighting equipment and specialty products businesses and an allocation of corporate accounts. The lighting equipment segment produces a full range of indoor and outdoor lighting Ñxtures for commercial and institutional, industrial and residential applications for markets throughout the United States, Canada, Mexico, and overseas. The specialty products segment produces maintenance, sanitation, and water treatment products for customers throughout the United States, Canada, and Western Europe. The Consolidated Financial Statements have been prepared on the historical cost basis in accordance with accounting principles generally accepted in the United States and present the Ñnancial position, results of operations, and cash Öows of Acuity Brands and its wholly-owned subsidiaries, including Acuity Lighting Group (""ALG'') and Acuity Specialty Products Group (""ASP''). For periods prior to December 1, 2001, these Ñnancial statements were derived from the historical Ñnancial statements of NSI. Acuity Brands was allocated certain corporate assets, liabilities, and expenses of NSI during periods prior to December 1, 2001 based on an estimate of the proportion of such amounts allocable to Acuity Brands, utilizing such factors as total revenues, employee headcount, and other relevant factors. The Company believes these allocations were made on a reasonable basis. The Company believes all amounts allocated to Acuity Brands are a reasonable representation of the costs that would have been incurred if Acuity Brands had performed these functions as a stand-alone company. The Consolidated Financial Statements reÖect an allocation of debt and related interest expense, as further described in Note 4. In conjunction with the Spin-oÅ, Acuity Brands and NSI entered into various agreements that addressed the allocation of assets and liabilities and deÑned the Company's relationship with NSI after the Distribution, including a distribution agreement, a tax disaÇliation agreement, an employee beneÑts agreement, a transition services agreement, a lease agreement, and a put option agreement. The lease agreement and the put option agreement expired prior to May 31, 2002. Under the tax disaÇliation agreement, Acuity Brands will indemnify NSI for certain taxes and liabilities that may arise related to the Distribution. The agreement also sets out each party's rights and obligations with respect to deÑciencies and refunds, if any, of federal, state, local, or foreign taxes for periods before and after the Distribution. The transition services agreement provides that NSI and Acuity Brands will provide each other services in such areas as information management and technology, employee beneÑts administration, payroll, Ñnancial accounting and reporting, claims administration and reporting, legal, and other areas where NSI and Acuity Brands may need transitional assistance and support. Management believes the amounts paid or received associated with these services under the transition services agreement are representative of the fair value of the services provided. In addition, under the transition services agreement, the Company has committed to provide collateral associated with various property and casualty insurance programs of NSI. See Note 6 Commitments and Contingencies for a discussion of NSI's standby letters of credit. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. Note 2: Summary of SigniÑcant Accounting Policies Principles of Consolidation The Consolidated Financial Statements include the accounts of Acuity Brands and its wholly-owned subsidiaries after elimination of signiÑcant intercompany transactions and accounts. Revenue Recognition and Product Warranty Acuity Brands records revenues as products are shipped and title passes. A provision for estimated returns, allowances, and warranty costs is recorded when products are shipped based on historical experience. Use of Estimates The preparation of Ñnancial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions, which include estimates of NSI costs allocated to Acuity Brands, that aÅect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Ñnancial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could diÅer from those estimates. Cash and Cash Equivalents Cash in excess of daily requirements is invested in time deposits and marketable securities and is included in the accompanying balance sheets at fair value. Acuity Brands considers time deposits and marketable securities purchased with an original maturity of three months or less to be cash equivalents. Concentrations of Credit Risk Concentrations of credit risk with respect to receivables, which are unsecured, are limited due to the wide variety of customers and markets using Acuity Brands' products, as well as their dispersion across many diÅerent geographic areas. As a result, as of August 31, 2002 and 2001, Acuity Brands does not consider itself to have any signiÑcant concentrations of credit risk. ReclassiÑcations Certain prior period amounts have been reclassiÑed to conform to current year presentation. Inventories Inventories are valued at the lower of cost (on a Ñrst-in, Ñrst-out basis) or market and consist of the following: Raw materials and suppliesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 97,036 19,884 Work in progress ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 108,659 Finished goods ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 87,932 13,365 124,112 August 31, 2002 2001 Less: reserves ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 225,579 (8,637) 225,409 (14,626) $216,942 $210,783 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. Goodwill and Other Intangibles In July 2001, the Financial Accounting Standards Board (""FASB'') issued Statement of Financial Accounting Standards (""SFAS'') No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 prospectively prohibits the pooling of interests method of accounting for business combinations initiated after June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill that existed at June 30, 2001 and establishes a new method for testing goodwill for impairment on an annual basis (or an interim basis if an event occurs that might reduce the fair value of a reporting unit below its carrying value). Any goodwill resulting from acquisitions completed after June 30, 2001 will not be amortized. SFAS No. 142 also requires that an identiÑable intangible asset which is determined to have an indeÑnite useful economic life not be amortized, but be separately tested for impairment using a fair value based approach. The Company adopted SFAS No. 142 eÅective September 1, 2001 resulting in a decrease in amortization expense of approximately $12.1 million during the year ended August 31, 2002 when compared to the year ended August 31, 2001. Summarized information for the Company's acquired intangible assets is as follows: August 31, 2002 August 31, 2001 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Amortized intangible assets: Trade names and trademarks ÏÏÏÏÏÏ Distribution networkÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,030 53,000 17,076 $ (1,347) (5,448) (8,295) TotalÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $83,106 $(15,090) Unamortized intangible assets: Trade names ÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $65,014 $ (912) (3,681) (6,889) $(11,482) $13,030 53,000 20,470 $86,500 $62,563 The Company amortizes trade names with deÑnite lives, trademarks, and the distribution network over their estimated useful lives of 30 years. Other amortized intangible assets consist primarily of patented technology and restrictive covenant agreements, which are amortized over their estimated useful lives of 12 years and 3 years, respectively. The Company recorded amortization expense of $4,316 and $5,863 related to intangible assets with deÑnite lives during Ñscal 2002 and Ñscal 2001, respectively. Projected amortization expense is approximately $3.2 million in each of the next Ñve years. The changes in the carrying amount of goodwill during the period are summarized as follows: ALG ASP Total Balance as of August 31, 2001 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $301,350 9,263 2,692 798 Goodwill acquired during the year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ SFAS No. 141/142 adoption reclassiÑcationÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $30,013 Ì Ì 102 $331,363 9,263 2,692 900 Balance as of August 31, 2002 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $314,103 $30,115 $344,218 Acuity Lighting Group and Acuity Specialty Products Group each tested goodwill and intangible assets with indeÑnite useful lives for impairment during Ñscal 2002, as required by SFAS No. 142, utilizing a combination of valuation techniques including the expected present value of future cash Öows, a market multiple approach, and a comparable transaction approach. This analysis did not result in an impairment during Ñscal 2002. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. Prior to the adoption of SFAS No. 142, $3,460 of goodwill associated with a 1969 acquisition was not amortized. Remaining amounts of goodwill ($327,903 at August 31, 2001) were amortized over estimated useful lives ranging from 10 years to 40 years. Had the Company accounted for goodwill and intangibles with indeÑnite useful lives consistent with the provisions of SFAS No. 142 in prior periods, the Company's net income would have been aÅected as follows: Year Ended August 31, 2001 2000 2002 Reported net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $52,024 Ì Add back: Goodwill amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Add back: Trade name amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $40,503 9,891 990 $83,691 10,088 990 Adjusted net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $52,024 $51,384 $94,769 Basic earnings per share*: Reported net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Add back: Goodwill amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Add back: Trade name amortization ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1.26 Ì Ì $ 0.99 0.24 0.03 Adjusted net incomeÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.26 $ 1.26 * Earnings per share for the years ended August 31, 2002 and 2001 are pro forma. See Note 5 for additional information. The Company is required to test its goodwill and intangibles with indeÑnite useful lives for impairment on a periodic basis, which could have an adverse eÅect on the Company's Consolidated Financial Statements if these assets are deemed impaired. Other Long Term Assets Other long-term assets consisted of the following (in thousands): August 31, 2002 2001 Long term investments(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $28,677 12,693 Prepaid pension costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,580 Intangible pension assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,165 Note receivable, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,385 Debt issue costs ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,530 Miscellaneous ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $34,287 14,330 1,795 Ì 2,832 848 $49,030 $54,092 (1) Long Term Investments Ì The Company maintains certain investments that generate returns that oÅset changes in certain liabilities related to deferred compensation arrangements. The investments primarily consist of marketable equity securities and Ñxed income securities, are stated at fair value and are classiÑed as trading in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Realized and unrealized gains and losses are included in the Consolidated Statements of Income and generally oÅset the change in the deferred compensation liability. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. Other Long Term Liabilities Other long-term liabilities consisted of the following (in thousands): August 31, 2002 2001 Accrued pension liabilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15,622 56,380 Postretirement beneÑts other than pensions(1) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 970 Nonemployee director stock unit plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 497 Postemployment beneÑt obligation(2)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Ì Long term incentive plan ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,099 Miscellaneous ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $10,570 64,381 2,538 446 6,421 1,038 $74,568 $85,394 (1) Postretirement BeneÑts Other Than Pensions Ì The Company maintains several non-qualiÑed retirement plans for the beneÑt of eligible employees, primarily deferred compensation plans. The deferred compensation plans provide for elective deferrals of an eligible employee's compensation and, in some cases, for matching contributions by the Company. In addition, one plan provides for an automatic contribution by the Company of three percent of an eligible employee's compensation. Deferred compensation associated with these plans, together with the Company's contributions and accumulated earnings, is distributable in cash pursuant to the terms of the plans, either after speciÑed periods of time or after retirement. (2) Postemployment BeneÑt Obligation Ì SFAS No. 112, Employers' Accounting for Postemployment BeneÑts, requires the accrual of the estimated cost of beneÑts provided by an employer to former or inactive employees after employment but before retirement. Acuity Brands' accrual relates primarily to the liability for life insurance coverage for certain eligible employees. Earnings Per Share Earnings per share data has not been presented since the businesses that comprise Acuity Brands were wholly-owned subsidiaries of NSI, or businesses thereof, during a portion of or for all of the periods presented and were recapitalized as part of the Distribution. Pro Forma Earnings Per Share (Unaudited) Pro forma basic earnings per share is calculated as net income divided by the pro forma weighted average number of common shares outstanding. Pro forma weighted average shares outstanding has been computed by applying the distribution ratio of one share of Acuity Brands common stock to the historical NSI weighted average shares outstanding for the same period presented. Pro forma earnings per share information is unaudited and has been presented for the years ended August 31, 2002 and 2001 only. Shipping and Handling Fees and Costs In September 2000, the Emerging Issues Task Force issued EITF 00-10, Accounting for Shipping and Handling Fees and Costs. EITF 00-10 requires shipping and handling fees billed to customers to be classiÑed as revenue and shipping and handling costs to be either classiÑed as cost of sales or disclosed in the notes to the Ñnancial statements. The Company includes shipping and handling fees billed to customers in Net sales. Shipping and handling costs associated with inbound freight are generally recorded in Cost of products sold. Other shipping and handling costs are included in Selling and administrative 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. expenses and totaled $114.1 million, $114.6 million, and $114.7 million in Ñscal 2002, 2001, and 2000, respectively. Depreciation For Ñnancial reporting purposes, depreciation is determined principally on a straight-line basis using estimated useful lives of plant and equipment (20 to 40 years for buildings and 3 to 15 years for machinery and equipment) while accelerated depreciation methods are used for income tax purposes. Leasehold improvements are amortized over the life of the lease or the useful life of the improvement whichever is shorter. Research and Development Research and development costs are expensed as incurred. Research and development expenses amounted to $22.0 million, $15.6 million, and $17.2 million during Ñscal years 2002, 2001, and 2000, respectively. Foreign Currency Translation The functional currency for the foreign operations of Acuity Brands is the local currency in most cases. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in eÅect at the balance sheet dates and for revenue and expense accounts using a weighted average exchange rate during the year. The gains or losses resulting from the translation are included in Accumulated Other Comprehensive Income (Loss) Items in the Consolidated Statements of Stockholders' Equity and Comprehensive Income and are excluded from net income. Gains or losses resulting from foreign currency transactions are included in Miscellaneous (income) expense, net in the Consolidated Statements of Income and were insigniÑcant in Ñscal years 2002, 2001, and 2000. Interest Expense, Net Interest expense, net, is comprised primarily of interest expense on long-term debt, revolving credit facility borrowings, and short-term secured borrowings partially oÅset by interest income on cash and cash equivalents. The following table summarizes the components of interest expense, net: Years Ended August 31, 2001 2002 2000 Interest expenseÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $41,196 (506) Interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $49,421 $43,638 (624) (339) Interest expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $40,690 $48,797 $43,299 Miscellaneous (Income) Expense, net Miscellaneous (income) expense, net, is comprised primarily of gains or losses resulting from the sale of Ñxed assets and gains or losses on foreign currency transactions. Additionally, during 2001, Miscellaneous (income) expense, net, includes a charge of approximately $3.1 million related to the early termination of a purchase contract. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. Accounting Standards Adopted in Fiscal 2002 As mentioned above, Acuity Brands adopted SFAS No. 141 and SFAS No. 142 in the Ñrst quarter of Ñscal 2002. Accounting Standards Yet to Be Adopted In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to be Disposed Of and supersedes the provisions of Accounting Principles Board Opinion No. 30, Reporting the Results of Operations Ì Reporting the EÅects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions with regard to reporting the eÅects of a disposal of a segment of a business. SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and signiÑcantly changes the criteria required to classify an asset as held-for-sale. Under SFAS No. 144, more dispositions will qualify for discontinued operations treatment in the income statement and expected future operating losses from discontinued operations will be displayed in discontinued operations in the period in which the losses are incurred. SFAS No. 144 is eÅective for all Ñscal years beginning after December 15, 2001. Acuity Brands will adopt this statement eÅective September 1, 2002. Adoption of this statement will not have a signiÑcant eÅect on the Company's consolidated results of operations or Ñnancial position. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses Ñnancial accounting and reporting for costs associated with exit or disposal activities and nulliÑes Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination BeneÑts and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). The principal diÅerence between SFAS No. 146 and Issue No. 94-3 relates to its requirements for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue No. 94-3, a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. A fundamental conclusion reached by the FASB in SFAS No. 146 is that an entity's commitment to a plan, by itself, does not create a present obligation to others that meets the deÑnition of a liability. Therefore, SFAS No. 146 eliminates the deÑnition and requirements for recognition of exit costs in Issue No. 94-3. SFAS No. 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is eÅective for exit or disposal activities that are initiated after December 31, 2002. Acuity Brands will adopt SFAS No. 146 eÅective September 1, 2002. Adoption of this statement will not have a signiÑcant eÅect on the Company's consolidated results of operations or Ñnancial position. Note 3: Pension and ProÑt Sharing Plans Acuity Brands has several pension plans covering certain hourly and salaried employees. BeneÑts paid under these plans are based generally on employees' years of service and/or compensation during the Ñnal years of employment. Acuity Brands makes annual contributions to the plans to the extent indicated by actuarial valuations. Plan assets are invested primarily in equity and Ñxed income securities. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. The following tables reÖect the status of Acuity Brands' pension plans at August 31, 2002 and 2001: August 31, 2002 2001 Change in BeneÑt Obligation: BeneÑt obligation at beginning of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 87,222 3,437 Service costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 6,534 Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (952) CurtailmentÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,972 Actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (5,911) BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,362 Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 77,590 2,553 6,270 Ì 5,095 (3,699) (587) BeneÑt obligation at end of year ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 94,664 $ 87,222 Change in Plan Assets: Fair value of plan assets at beginning of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 83,489 Actual return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employer contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Employee contributions ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ BeneÑts paid ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (3,878) 4,828 226 (5,911) 408 $ 86,917 46 1,138 229 (3,699) (1,142) Fair value of plan assets at end of yearÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 79,162 $ 83,489 Funded Status: Funded status ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $(15,502) 25,768 Unrecognized actuarial loss ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (503) Unrecognized transition asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2,153 Unrecognized prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (3,733) 11,164 (629) 2,541 Prepaid pension expense ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11,916 $ 9,343 Amounts Recognized in the Consolidated Balance Sheets Consist of: Prepaid beneÑt cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 12,693 (15,622) Accrued beneÑt liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 1,580 Intangible assetÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 13,265 Accumulated other comprehensive lossÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 14,330 (10,570) 1,795 3,788 Net amount recognized at year-endÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 11,916 $ 9,343 The projected beneÑt obligation, accumulated beneÑt obligation, and fair value of plan assets for deÑned beneÑt pension plans with both projected and accumulated beneÑt obligations in excess of plan assets were $51.6 million, $48.8 million, and $34.1 million, respectively, as of August 31, 2002, and $28.7 million, $27.4 million, and $17.4 million, respectively, as of August 31, 2001. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. Components of net periodic pension cost for the Ñscal years ended August 31, 2002, 2001, and 2000 included the following: 2002 2001 2000 Service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 3,437 6,534 Interest cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (7,600) Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 434 Amortization of prior service cost ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (126) Amortization of transitional asset ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 205 Recognized actuarial loss (gain)ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,553 6,270 (8,038) 418 (140) (18) $ 2,877 5,851 (7,511) 386 (148) 53 Net periodic pension costÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,884 $ 1,045 $ 1,508 Weighted average assumptions in Ñscal year 2002 and 2001 included the following: 2002 2001 Discount rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected return on plan assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Rate of compensation increase ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 7.2% 7.7% 9.3% 9.3% 4.9% 5.0% It is Acuity Brands' policy to adjust, on an annual basis, the discount rate used to determine the projected beneÑt obligation to approximate rates on high-quality, long-term obligations. Acuity Brands also has proÑt sharing and 401(k) plans to which both employees and the Company make contributions. The cost to Acuity Brands for these plans was $5.0 million in 2002, $4.3 million in 2001, and $4.7 million in 2000. EÅective February 2002, participants in all of the Company's proÑt sharing and 401(k) plans were permitted to direct the investments of all funds in their respective plan, thereby eliminating the nonparticipant-directed funds. Employer matching amounts are allocated in accordance with the participants' investment elections for elective deferrals. At August 31, 2002, assets of the 401(k) plans included shares of the Company's common stock with a market value of approximately $7.3 million, which represented approximately three percent of the total fair market value of assets in the Company's 401(k) plans. Note 4: Long-Term Debt and Lines of Credit As part of the distribution agreement between NSI and Acuity Brands, all but approximately $5.0 million of NSI's total consolidated outstanding debt was assumed by Acuity Brands or reÑnanced with new borrowings by Acuity Brands. Accordingly, for purposes of the historical presentation of the Company's Ñnancial position as of August 31, 2001, all but $5.0 million of NSI's total consolidated outstanding debt has been presented as obligations of Acuity Brands. For purposes of the historical presentation of the results of operations of Acuity Brands, the Company has reÖected interest expense related to the debt allocated to it. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. Long-term debt at August 31, 2002 and 2001, consisted of the following: 3-Year Revolving Credit Facility ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 40,000 6% notes due February 2009 with an eÅective interest rate of 6.04%, net $ Ì of unamortized discount of $268 in 2002 and $310 in 2001 ÏÏÏÏÏÏÏÏÏÏÏ 159,732 159,690 2002 2001 8.375% notes due August 2010 with an eÅective interest rate of 8.398%, net of unamortized discount of $195 in 2002 and $219 in 2001ÏÏÏÏÏÏÏÏ Other notes, payable in installments to 2021 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Less Ì Amounts payable within one year included in current liabilities ÏÏ 199,805 11,839 411,376 746 199,781 14,593 374,064 357 $410,630 $373,707 Future annual principal payments of long-term debt are as follows: Fiscal Year 2003 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2004 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2005 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2006 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2007 ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Thereafter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Amount $ 746 1,211 20,759 17,973 Ì 370,687 $411,376 In May 2001, NSI entered into a three-year agreement (""Receivables Facility'') to borrow, on an ongoing basis, up to $150.0 million secured by undivided interests in a deÑned pool of trade accounts receivable of ALG and ASP. Borrowings under the Receivables Facility are subject to the annual renewal of a supporting line of credit. EÅective November 30, 2001, Acuity Brands assumed all of the outstanding borrowings and other obligations under the Receivables Facility. Net trade accounts receivable pledged as security for borrowings under the Receivables Facility totaled $239.1 million at August 31, 2002. Borrowings at August 31, 2002 and 2001 under the Receivables Facility totaled $129.2 million and $105.1 million, respectively, and are included in Short-term secured borrowings in the accompanying Consolidated Balance Sheets. Interest rates under the Receivables Facility vary with commercial paper rates plus an applicable margin. The interest rate was 1.80 percent and 3.90 percent at August 31, 2002 and 2001, respectively. During Ñscal 2002, Acuity Brands entered into a new Ñnancing agreement (""Revolving Credit Facility''), which replaced the Company's $240.0 million, 364-day committed credit facility which was due to mature in October 2002. This Revolving Credit Facility, which has two components, allows for borrowings of up to $210.0 million. The Ñrst component is a 364-day committed credit facility of $105.0 million, which is scheduled to mature in April 2003. The second component is a three-year credit facility of $105.0 million and is scheduled to mature in April 2005. At August 31, 2002, the Company had $40.0 million in outstanding borrowings under the three-year component of the Revolving Credit Facility, which are classiÑed as long-term in the accompanying Consolidated Balance Sheets. The interest rate on outstanding borrowings was 3.05 percent at August 31, 2002. At August 31, 2002, $23.7 million in letters of credit related to both the Company's and NSI's property and casualty insurance programs was outstanding under the Revolving Credit Facility. See Note 6 Commitments and Contingencies for a discussion of NSI's standby letters of credit. These letters of credit decrease the amount of credit available 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. under the Revolving Credit Facility. Outstanding borrowings under the Company's credit facility at August 31, 2001 were $105.0 million at an interest rate of 4.1 percent. Additional borrowings of $11.7 million were outstanding under NSI's uncommitted bank lines at August 31, 2001 at an interest rate of 5.0 percent. The Revolving Credit Facility contains Ñnancial covenants calculated quarterly including a leverage ratio of total indebtedness at the end of each quarter to EBITDA for the trailing four quarters and an interest coverage ratio. Interest rates under the Revolving Credit Facility are based on LIBOR plus a margin that is based on the Company's credit rating for unsecured long-term public debt and its leverage ratio. Acuity Brands pays an annual fee on the commitment based on the Company's credit rating for unsecured long-term public debt. The Company was in compliance with all covenants contained in its credit agreement for each quarter end in 2002. The Company's Receivables Facility and Revolving Credit Facility each contain ""Material Adverse EÅect'' provisions. Generally, if the Company were to experience an event causing a material adverse eÅect on the Company's Ñnancial condition, operations, or properties, as deÑned in the agreements, additional future borrowings under either facility may be denied. None of the Company's existing debt instruments include provisions that would require an acceleration of repayments based solely on changes in the Company's credit ratings. At August 31, 2002, the Company had total availability under its Revolving Credit Facility of $146.3 million. Acuity Brands also had uncommitted foreign bank lines of credit totaling $4.5 million at August 31, 2002. Outstanding borrowings under the foreign bank lines at August 31, 2002 were $2.5 million, at a weighted-average interest rate of 4.19 percent. At August 31, 2001, outstanding borrowings under NSI's foreign bank lines were $13.0 million, at a weighted-average interest rate of 4.90 percent. At August 31, 2002, the Company had an additional $11.7 million in letters of credit outstanding that provide back-up support for the Company's industrial revenue bonds. These letters of credit do not reduce the amount of credit available under the Revolving Credit Facility. In January 1999, NSI issued $160.0 million in ten-year publicly traded notes bearing a coupon rate of 6.0 percent. In August 2000, NSI issued $200.0 million in ten-year publicly traded notes bearing a coupon rate of 8.375 percent. Pursuant to a supplemental indenture executed in contemplation of the Distribution, Acuity Brands and its principal operating subsidiaries have become the obligors of the notes, and NSI, eÅective as of the Distribution, was relieved of all obligations with respect to the notes. The fair values of the $160.0 million and $200.0 million notes, based on quoted market prices, were approximately $148.4 million and $208.1 million, respectively, at August 31, 2002. Excluding the $160.0 million and $200.0 million notes, long-term debt recorded in the accompanying Consolidated Balance Sheets approximates fair value based on the borrowing rates currently available to Acuity Brands for bank loans with similar terms and average maturities. In October 2002, Acuity Brands entered into a new loan agreement (""Term Loan''), secured by certain land and buildings of the Company. Proceeds from the Term Loan were used to reduce borrowings under the Revolving Credit Facility and to provide the Company additional liquidity. The Term Loan contains Ñnancial covenants similar to the Company's credit facility including a leverage ratio of total indebtedness to EBITDA and an interest coverage ratio. Interest rates under the Term Loan are based on one-month LIBOR plus a margin. The principal payment table above reÖects future annual principal payments associated with the Term Loan. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. Note 5: Common Stock and Related Matters NSI's Investment Upon completion of the Distribution on November 30, 2001, Acuity Brands became an independent Company owned by the NSI shareholders of record as of November 16, 2001. Prior to November 30, 2001, Acuity Brands (previously and temporarily named L & C Spinco, Inc.) and the subsidiaries comprising the lighting equipment and specialty products businesses were wholly-owned by NSI. Accordingly, prior to November 30, 2001, stockholders' equity was comprised of NSI's investment in these subsidiaries. Beginning on November 30, 2001 stockholders' equity reÖected the outstanding stock, paid-in capital, and other stockholders' equity items of Acuity Brands and its wholly owned subsidiaries. Stockholder Protection Rights Agreement Prior to the Spin-oÅ, the Company's board of directors adopted a Stockholder Protection Rights Agreement (the ""Rights Agreement''). The Rights Agreement contains provisions that are intended to protect the Company's stockholders in the event of an unsolicited oÅer to acquire the Company, including oÅers that do not treat all stockholders equally and other coercive, unfair, or inadequate takeover bids and practices that could impair the ability of the Company's board of directors to fully represent stockholders' interests. Pursuant to the Rights Agreement, the Company's board of directors declared a dividend of one ""Right'' for each outstanding share of the Company's common stock as of November 16, 2001. The Rights will be represented by, and trade together with, the Company's common stock until and unless certain events occur, including the acquisition of 15% or more of the Company's common stock by a person or group of aÇliated or associated persons (with certain exceptions, ""Acquiring Persons''). Unless previously redeemed by the Company's board of directors, upon the occurrence of one of the speciÑed triggering events, each Right that is not held by an Acquiring Person will entitle its holder to purchase one share of common stock or, under certain circumstances, additional shares of common stock at a discounted price. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company's board of directors. Thus, the Rights are intended to encourage persons who may seek to acquire control of the Company to initiate such an acquisition through negotiation with the board of directors. Preferred Stock The Company has 50,000,000 shares of preferred stock authorized, 5,000,000 of which have been reserved for issuance under the Stockholder Protection Rights Agreement. No shares of preferred stock had been issued at August 31, 2002 and 2001. Earnings per Share Pro forma basic earnings per share is calculated as net income divided by the pro forma weighted average number of common shares outstanding. Pro forma weighted average shares outstanding has been computed by applying the distribution ratio of one share of Acuity Brands common stock to the historical NSI weighted average shares outstanding for the same period presented. Public trading of Acuity Brands stock did not commence until December 3, 2001 (other than on a when-issued basis); therefore, no historical market share prices exist for the calculation of the potential dilutive eÅect of stock options for periods prior to the second quarter of Ñscal 2002. As a result, pro forma diluted earnings per share are not presented. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. The following table calculates pro forma basic earnings per common share for the years ended August 31, 2002 and 2001: Pro Forma basic earnings per common share: Net income (in thousands) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $52,024 41,286 Basic weighted average shares outstanding (in thousands)ÏÏÏÏÏÏÏÏÏÏÏÏÏ $40,503 41,068 Basic earnings per common share ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1.26 $ 0.99 Years Ended August 31, 2002 2001 Stock-Based Compensation Pursuant to the employee beneÑts agreement, NSI stock options held by employees of Acuity Brands were converted to, and replaced by, Acuity Brands stock options at the time of the Distribution. Acuity Brands multiplied the number of shares purchasable under each converted stock option by a ratio determined at the time of the Distribution, based on the respective trading prices of NSI and Acuity Brands shares, and divided the exercise price per share of each option by the same ratio. Fractional shares were rounded down to the nearest whole number of shares. All other terms of the converted stock options remain the same as those in eÅect immediately prior to the Distribution. Accordingly, no compensation expense resulted from the replacement of the options. EÅective November 30, 2001, Acuity Brands adopted the Acuity Brands, Inc. Long-Term Incentive Plan (the ""Plan'') for the beneÑt of oÇcers and other key management personnel (""Participants''). An aggregate of 8.1 million shares are authorized for issuance under the Plan. Stock options generally become exercisable over a three or four-year period from the date of grant. The Plan also provides for the issuance of performance-based and restricted stock awards. Aspiration Achievement Incentive Awards may be earned and issued to Participants based on a level of achievement of performance over a multi-year performance cycle. Amounts (credited) charged to compensation expense for 2002, 2001, and 2000 were approximately $(1.1 million), $0.7 million, and $6.7 million, respectively. No Aspiration Achievement Incentive Awards are currently outstanding, except with respect to the performance cycle ended August 31, 2002. At August 31, 2002, 218,180 shares of Acuity Brands common stock were subject to restricted stock awards held by the Company's oÇcers and other key employees. Under the awards, restricted shares are granted in 20 percent increments when the Company's stock price equals or exceeds certain stock price targets for thirty consecutive calendar days (the vesting start date) and vest ratably in four equal annual installments beginning one year from the vesting start date. At the time of the Distribution and in accordance with the employee beneÑts agreement, each employee of Acuity Brands holding outstanding shares of NSI restricted stock received a dividend of one Acuity Brands restricted share for each NSI restricted share held. Acuity Brands restricted shares received as a dividend on NSI restricted stock are subject to the same restrictions and terms, including vesting provisions of the NSI restricted stock. Compensation expense of $0.2 million was recognized in the Consolidated Financial Statements during Ñscal 2002 for the restricted stock awards. Restricted share awards that had not reached a vesting start date, and their related stock price targets, were converted to Acuity Brands restricted share awards in the same manner as stock options. Shares that have not reached a vesting start date expire Ñve years from the date of the grant. All other terms of the converted grants remain the same as those in eÅect immediately prior to the Distribution. In November 2001, the Company's board of directors approved the Acuity Brands, Inc. 2001 Nonemployee Directors' Stock Option Plan, under which 300,000 shares are authorized for issuance. The 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. stock options granted under this plan become exercisable one year from the date of grant. During Ñscal 2002, options for 50,000 shares were granted under this plan. Under all stock option plans, the options generally expire 10 years from the date of grant and have an exercise price equal to the fair market value of the Company's stock on the date of grant. At August 31, 2002, shares available for grant under all plans were 1,063,489, less 22,566 shares required for the payment of outstanding Aspiration Achievement Incentive Awards. Stock option transactions for the stock option plans and stock option agreements during the year ended August 31, 2002 were as follows: Outstanding Exercisable Number of Shares Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price Outstanding at August 31, 2001 Ì Ì Ì Ì NSI options converted at the Spin-oÅ ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Granted ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ ExercisedÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Cancelled ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,278,325 3,004,051 (1,053) (200,025) Outstanding at August 31, 2002 7,081,298 $22.97 $13.84 $16.50 $16.38 $19.15 Range of option exercise prices: $10.00 Ó $15.00 2,712,343 $25.25 (average life Ó 9.3 years) ÏÏÏ 2,900,928 $13.80 35,554 $13.80 $15.01 Ó $20.00 (average life Ó 8.1 years) ÏÏÏ 1,755,900 $16.61 606,954 $16.70 $20.01 Ó $25.00 (average life Ó 5.5 years) ÏÏÏ 1,094,189 $23.11 843,589 $22.96 $25.01 Ó $30.00 (average life Ó 4.6 years) ÏÏÏ 826,540 $28.59 723,750 $28.43 $30.01 Ó $40.00 (average life Ó 4.4 years) ÏÏÏ 503,741 $35.63 502,496 $35.64 The Company accounts for the employee and director plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. Additionally, Acuity Brands has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation expense has been recognized for these stock option plans in the Consolidated Financial Statements. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards during Ñscal year 2002, consistent with the provisions of SFAS No. 123, the Company's net income and pro forma earnings per share would have been reduced to the following pro forma amounts: 2002 Pro Forma Information: Net income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Basic earnings per shareÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $49,282 1.19 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. The pro forma eÅect of applying SFAS No. 123 may not be representative of the eÅect on reported net income in future years because options vest over several years and additional awards are generally made each year. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model. The weighted-average grant-date fair value of options was $3.98. The following weighted average assumptions were used to estimate fair value: Dividend yield ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected volatilityÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Risk-free interest rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Expected life of options ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Turnover rateÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002 4.3% 34.0% 5.2% 10 years 5.0% Employee Stock Purchase Plan In November 2001, Acuity Brands adopted the Acuity Brands, Inc. Employee Stock Purchase Plan for the beneÑt of eligible employees. Under the plan, employees may purchase, through payroll deduction, the Company's common stock at a 15 percent discount. Shares are purchased quarterly at 85 percent of the lower of the fair market value of the Company's common stock on the Ñrst business day of the quarterly plan period or the last business day of the quarterly plan period. There were 1,500,000 shares of the Company's common stock reserved for purchase under the plan, of which 1,397,305 shares remain available for purchase under the plan. Employees may participate at their discretion. Management neither encourages nor discourages employee participation. Note 6: Commitments and Contingencies Self-Insurance It is the current policy of Acuity Brands to self insure, up to certain limits, for certain insurable risks consisting primarily of physical loss to property; business interruptions resulting from such loss; and workers' compensation, comprehensive general, and auto liability. Insurance coverage is obtained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. Based on an independent actuary's estimate of the aggregate liability for claims incurred, a provision for claims under the self-insured program is recorded and revised annually. The Company is also self-insured for the majority of its medical beneÑts plans. The Company estimates its aggregate liability for claims incurred by applying a lag factor to the Company's historical claims and administrative cost experience. The appropriateness of the Company's lag factor is evaluated and revised annually, if necessary. Leases Acuity Brands leases certain of its buildings and equipment under noncancelable lease agreements. Minimum lease payments under noncancelable leases for years subsequent to August 31, 2002, are as follows: 2003 Ó $14.3 million; 2004 Ó $11.5 million; 2005 Ó $7.4 million; 2006 Ó $4.5 million; 2007 Ó $3.3 million; after 2007 Ó $21.8 million. Total rent expense was $17.8 million in 2002, $12.3 million in 2001, and $14.5 million in 2000. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. Collective Bargaining Agreements Approximately 40 percent of the Company's total work force is covered by collective bargaining agreements. Collective bargaining agreements representing approximately 24 percent of the Company's work force will expire within one year. Litigation Acuity Brands is subject to various legal claims arising in the normal course of business, including patent infringement and product liability claims. Based on information currently available, it is the opinion of management that the ultimate resolution of pending and threatened legal proceedings will not have a material adverse eÅect on the Ñnancial condition or results of operations of Acuity Brands. However, in the event of unexpected future developments, it is possible that the ultimate resolution of such matters, if unfavorable, could have a material adverse eÅect on the future Ñnancial results of Acuity Brands. Acuity Brands establishes reserves for legal claims when payments associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher than the amounts reserved for such claims. Genlyte Thomas Group LLC (""Genlyte Thomas'') Ñled suit on March 29, 2000, in the United States District Court, Western District of Kentucky, alleging that certain Lithonia Lighting products infringe a patent related to a frame for recessed lighting Ñxtures and that the infringement is willful. The Company believes that it has valid defenses to the lawsuit and is vigorously defending the asserted allegations. SpeciÑcally, the Company has received a formal opinion from independent patent counsel that the patent is invalid and unenforceable. In discovery, which recently has been substantially completed, Genlyte Thomas submitted an expert report on its damages claim asserting that Genlyte Thomas has sustained approximately $20 million in damages. Any damages awarded at trial may be increased by the court by up to three times if willful infringement is found. The Company has reserved the expected defense costs for this litigation. Extensive pre-trial motions have been Ñled and it is expected that the case, if it proceeds to trial, will not be heard until late 2003. Environmental Matters The operations of the Company are subject to comprehensive laws and regulations relating to the generation, storage, handling, transportation, and disposal of hazardous substances and solid and hazardous wastes and to the remediation of contaminated sites. Permits and environmental controls are required for certain of the Company's operations to limit air and water pollution, and these permits are subject to modiÑcation, renewal, and revocation by issuing authorities. Acuity Brands believes that it is in substantial compliance with all material environmental laws, regulations, and permits. On an ongoing basis, Acuity Brands incurs capital and operating costs relating to environmental compliance. Environmental laws and regulations have generally become stricter in recent years, and the cost of responding to future changes may be substantial. Acuity Brands establishes reserves for known environmental claims when payments associated with the claims become probable and the costs can be reasonably estimated. The environmental reserves of Acuity Brands, for all periods presented in the Consolidated Financial Statements, are immaterial. The actual cost of environmental issues may be higher than that reserved due to diÇculty in estimating such costs and potential changes in the status of government regulations. Certain environmental laws can impose liability regardless of fault. The federal Superfund law is an example of such an environmental law. However, management believes that the liability under Superfund is mitigated by the presence of other parties who will share in the costs associated with the clean up of sites. The extent of liability is determined on a case-by-case basis taking into account many factors, 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. including the number of other parties whose status or activities also subjects them to liability regardless of fault. Acuity Brands is currently a party to, or otherwise involved in, legal proceedings in connection with state and federal Superfund sites. Based on information currently available, the Company believes its liability is immaterial at each of the currently active sites which it does not own where it has been named as a responsible party or a potentially responsible party (""PRP'') due to its limited involvement at the site and/or the number of viable PRPs. For example, the preliminary allocation among 48 PRPs at the Crymes LandÑll site in Georgia indicates that Acuity Brands' liability is not signiÑcant, and there are more than 1,000 PRPs at the M&J Solvents site in Georgia. For property that Acuity Brands owns on Seaboard Industrial Boulevard in Atlanta, Georgia, the Company has conducted an investigation on its properties and adjoining properties and submitted a Compliance Status Report (""CSR'') to the State of Georgia Environmental Protection Division (""EPD'') pursuant to the Georgia Hazardous Site Response Act. Until the EPD approves the CSR and Acuity Brands evaluates the necessity for and scope of any appropriate corrective action, Acuity Brands will not be able to determine whether corrective action will be required and what the costs of such action will be. Standby Letters of Credit In conjunction with the separation of their businesses, Acuity Brands and NSI entered into various agreements that addressed the allocation of assets and liabilities and that deÑned the future relationships between Acuity Brands and NSI after the Distribution, including a transition services agreement. In addition to other services described in the agreement, the transition services agreement provides that Acuity Brands will, for a fee, provide collateral associated with various property and casualty insurance programs of NSI not to exceed the following amounts: Period Beginning September 1, 2002 November 1, 2002 November 1, 2003 November 1, 2004 Ending October 31, 2002 October 31, 2003 October 31, 2004 October 31, 2005 Letters of Credit $10.4 million $ 8.0 million $ 5.0 million $ 2.0 million Standby letters of credit provided to state regulatory authorities to support self-insurance programs for property and casualty liabilities decrease the amount of credit available on revolving credit facilities. At August 31, 2002, $10.4 million on the Revolving Credit Facility of Acuity Brands related to these standby letters of credit was unavailable for use by Acuity Brands. The management of Acuity Brands believes it has suÇcient capacity under its Revolving Credit Facility to accommodate this requirement under the transition services agreement. In the event NSI is unable to fulÑll its obligations under certain of its property and casualty programs, the standby letters of credit could be drawn upon and Acuity Brands would be required to fund the drawn amount. In such event, NSI would be obligated to reimburse Acuity Brands for such amounts. The management of Acuity Brands believes it is unlikely that these letters of credit will be drawn upon. Risks and Uncertainties Related to the Distribution On November 7, 2001, the NSI board of directors made a determination, based on information provided by management and Ñnancial experts, that the Distribution was permissible under applicable dividend and solvency laws. There is no certainty, however, that a court would Ñnd the decision of the NSI board to be binding on creditors of NSI and Acuity or that a court would reach the same conclusions as the NSI board in determining whether NSI or Acuity was solvent and adequately capitalized at the 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. time of, or after giving eÅect to, the Distribution. If a court in a lawsuit by an unpaid creditor or representative of creditors, such as a trustee in bankruptcy, were to Ñnd that at the time NSI eÅected the Distribution, NSI or Acuity (1) was insolvent; (2) was rendered insolvent by reason of the Distribution; (3) was engaged in a business or transaction for which their respective remaining assets constituted unreasonably small capital; or (4) intended to incur, or believed it would incur, debts beyond its ability to pay as such debts matured, such court may be asked to void the Distribution (in whole or in part) as a fraudulent conveyance and require that the stockholders return the Acuity Brands shares (in whole or in part) to NSI or require Acuity Brands to fund certain liabilities for the beneÑt of creditors. The measure of insolvency for purposes of the foregoing will vary depending upon the jurisdiction whose law is being applied. Generally, however, NSI or Acuity Brands would be considered insolvent if the fair value of their respective assets was less than the amount of their respective liabilities or if either incurred debt beyond its ability to repay such debt as it matures. Management believes the likelihood that creditors of NSI could successfully challenge the Distribution is remote. Note 7: Acquisitions and Dispositions In October 2001, Acuity Brands acquired certain assets and assumed certain liabilities of the American Electric Lighting» and Dark-to-Light» product lines of the Thomas & Betts Corporation for approximately $24.8 million in cash. The activities of American Electric Lighting are included in the results of operations of the Company since the date of acquisition. The allocation of the purchase price resulted in goodwill of approximately $9.3 million. Additionally, the Company recorded $2.5 million related to the trade names American Electric Lighting» and Dark-to-Light». The Company will not amortize these trade names, as the Company believes the useful lives are indeÑnite. The Company believes that the acquisition will provide the lighting equipment segment with greater presence in the utility and transportation infrastructure markets and will add breadth to the current utility oÅerings in high-end decorative street and area lighting of Acuity Brands. The allocation of the purchase price was as follows: Current assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Property, plant, and equipment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ GoodwillÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2002 $11,601 8,493 2,451 9,263 (7,043) $24,765 Acquisition spending in 2000 totaled $16.2 million and related to the cash-out of remaining Holophane Corporation (""Holophane'') shares. NSI purchased Holophane in July 1999 for approximately $470.8 million. Of the total purchase price, $454.6 million was paid during Ñscal 1999 and $16.2 million was paid during Ñscal 2000. During Ñscal 2001, as part of an initiative to refocus the overseas operations of the specialty products segment, Acuity Brands sold its Australian subsidiary resulting in a pretax loss of $5.6 million. In addition, Acuity Brands sold its French operations, as well as certain trademarks and formulas for a pretax loss of $9.0 million. The combined pretax loss of $14.6 million is included in Loss on sale of businesses in the Consolidated Statements of Income. Note 8: Restructuring Expense and Other Charges In the Ñrst quarter of Ñscal 2000, the lighting equipment segment recorded a $1.0 million pretax charge for closing a manufacturing facility in California. This charge represented termination beneÑts for 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. 341 hourly employees and was recorded in Cost of products sold in the 2000 Consolidated Statements of Income. All amounts accrued were paid during Ñscal 2000 with no signiÑcant revisions to either the number of terminated employees or the amount of beneÑts initially accrued. During Ñscal 2001, the lighting equipment segment incurred severance charges of $1.6 million for the termination of 116 manufacturing and salaried employees, all of whom were terminated prior to the end of the Ñscal year. Additionally, the specialty products segment recorded $0.7 million of severance costs related to the termination of 18 manufacturing and salaried employees, all of whom were terminated prior to the end of the Ñscal year. Unrelated to the severance charges, the lighting equipment and specialty products segments disposed of certain Ñxed assets, resulting in losses of $1.4 million and $0.4 million, respectively. The resulting losses were included in the Consolidated Statements of Income under the caption Restructuring and other charges. During Ñscal 2002, management realized lower than anticipated costs associated with severance charges in the lighting equipment segment. Accordingly, the related reserve was reversed and $0.9 million in income was recorded and is included in Restructuring and other charges in the Consolidated Statements of Income. Note 9: Income Taxes Prior to the Distribution, Acuity Brands was included in the consolidated federal income tax return of NSI. Acuity Brands' provision for income taxes in the accompanying statements of income reÖects Federal, state, and foreign income taxes calculated using the separate return basis. Acuity Brands accounts for income taxes using the asset and liability approach as prescribed by SFAS No. 109, Accounting for Income Taxes. This approach requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the Ñnancial statements or tax returns. Using the enacted tax rates in eÅect for the year in which the diÅerences are expected to reverse, deferred tax liabilities and assets are determined based on the diÅerences between the Ñnancial reporting and the tax basis of an asset or liability. The provision for income taxes consists of the following components: Years Ended August 31, 2001 2002 2000 Provision for current Federal taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $23,509 2,225 Provision for current state taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4,189 Provision for current foreign taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 889 Provision for deferred taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $29,171 1,744 5,058 (7,324) $40,527 2,134 4,657 4,282 Total provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $30,812 $28,649 $51,600 A reconciliation from the Federal statutory rate to the total provision for income taxes is as follows: Years Ended August 31, 2001 2000 2002 Federal income tax computed at statutory rate ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $28,993 1,657 State income tax, net of Federal income tax beneÑt ÏÏÏÏÏÏÏÏÏÏÏ 162 Foreign and other, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $24,203 1,342 3,104 $47,352 3,518 730 Total provision for income taxes ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $30,812 $28,649 $51,600 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. Components of the net deferred income tax (asset) liability at August 31, 2002 and 2001 include: Deferred Income Tax Liabilities: Depreciation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Pension ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Intangibles ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Total deferred income tax liabilities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred Income Tax Assets: Self-insurance ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Pension ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Deferred compensation ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Foreign tax lossesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Restructuring and other accruals not yet deductible ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ Other assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ August 31, 2002 2001 1,745 Ì 47,900 718 50,363 $11,583 4,468 48,614 2,613 67,278 (9,991) (4,060) (25,245) (959) (10,025) (850) (6,898) Ì (23,025) (969) (12,804) (8,149) Total deferred income tax assets ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (51,130) (51,845) Net deferred income tax (asset) liability ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ (767) $15,433 At August 31, 2002, Acuity Brands had foreign net operating loss carryforwards of $2.8 million that can be carried forward indeÑnitely. Note 10: Quarterly Financial Data (Unaudited) Sales Gross ProÑt Income Before Taxes Net Income Basic Earnings Per Share* Pro Forma Basic Earnings Per Share* Diluted Earnings Per Share* 2002 1st Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2nd Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3rd Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4th Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2001 1st Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 2nd Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3rd Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 4th Quarter ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $481,691 468,245 507,576 515,284 $502,646 471,283 503,132 505,639 $196,510 189,982 208,392 208,630 $216,288 200,685 216,090 208,284 $18,600 17,033 23,506 23,697 $22,512 21,802 14,174 10,664 $11,534 10,558 14,571 15,361 $13,507 13,081 7,516 6,399 n/a $0.26 0.35 0.37 n/a n/a n/a n/a $0.28 n/a n/a n/a $0.33 0.32 0.18 0.16 n/a $0.26 0.35 0.37 n/a n/a n/a n/a * Earnings per share for the periods prior to second quarter Ñscal 2002 are pro forma. See Note 5 for additional information. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. Note 11: Business Segment Information Sales Operating ProÑt (Loss) Total Assets Depreciation Expense Amortization Expense Capital Expenditures and Acquisitions 2002 ALG ÏÏÏÏÏÏÏÏÏ $1,474,882 497,914 ASPÏÏÏÏÏÏÏÏÏÏ Ì Corporate ÏÏÏÏÏ $ 89,553 44,931 (14,357) $1,100,175 220,165 37,614 $36,323 8,047 808 $1,972,796 $120,127 $1,357,954 $45,178 2001 ALG ÏÏÏÏÏÏÏÏÏ $1,468,558 514,142 ASPÏÏÏÏÏÏÏÏÏÏ Ì Corporate ÏÏÏÏÏ $118,829 41,337 (20,577) $1,082,676 211,579 36,320 $36,197 8,131 618 $1,982,700 $139,589 $1,330,575 $44,946 2000 ALG ÏÏÏÏÏÏÏÏÏ $1,515,652 507,992 ASPÏÏÏÏÏÏÏÏÏÏ Ì Corporate ÏÏÏÏÏ $144,417 50,107 (14,587) $1,142,227 241,645 39,008 $31,792 7,705 547 $2,023,644 $179,937 $1,422,880 $40,044 $ 4,196 120 Ì $ 4,316 $14,861 3,104 Ì $17,965 $14,994 3,447 Ì $18,441 $47,342 10,456 449 $58,247 $37,389 8,912 1,310 $47,611 $68,721 9,946 460 $79,127 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued) ACUITY BRANDS, INC. The geographic distribution of Acuity Brands' net sales, operating proÑt, and long-lived assets is summarized in the following table: 2002 2001 2000 Net Sales (1) United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,749,387 103,061 Canada ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 63,643 European countries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 56,705 Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $1,749,498 105,825 72,568 54,809 $1,786,901 102,821 80,785 53,137 $1,972,796 $1,982,700 $2,023,644 Operating proÑt United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 114,877 822 Canada ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,582 European countries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 846 Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 130,044 5,150 2,315 2,080 $ 169,869 7,058 1,096 1,914 $ 120,127 $ 139,589 $ 179,937 Long-lived assets (2) United States ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 696,447 12,949 Canada ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 22,058 European countries ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 35,503 Other ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 730,590 13,434 18,279 9,156 $ 746,548 15,196 26,041 14,116 $ 766,957 $ 771,459 $ 801,901 (1) Sales are attributed to each country based on the selling location. (2) Long-lived assets include net property, plant, and equipment, goodwill and intangibles, and other long- term assets. 54 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure At a meeting held on April 29, 2002, the Audit Committee of the board of directors of Acuity Brands voted to dismiss Arthur Andersen LLP as its independent accountant eÅective April 30, 2002 and approved the engagement of Ernst & Young LLP as its independent auditor for the Ñscal year ending August 31, 2002. Further information is contained in the Company's Form 8-K Ñled with the Securities and Exchange Commission (the ""Commission'') on April 30, 2002 and is incorporated herein by reference. PART III Item 10. Directors and Executive OÇcers of the Registrant The information required by this item, with respect to directors, is included under the caption Director Nominees for Three-Year Term Expiring at the 2005 Annual Meeting and Directors with Terms Expiring at the 2003 and 2004 Annual Meetings of the Company's proxy statement for the annual meeting of stockholders to be held December 19, 2002, Ñled with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. The information required by this item, with respect to executive oÇcers, is included under the caption Management Ì Executive OÇcers of the Company's proxy statement for the annual meeting of stockholders to be held December 19, 2002, Ñled with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. The information required by this item, with respect to beneÑcial ownership reporting, is included under the caption Section 16(a) BeneÑcial Ownership Reporting Compliance of the Company's proxy statement for the annual meeting of stockholders to be held December 19, 2002, Ñled with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 11. Executive Compensation The information required by this item is included under the captions Compensation of Directors, Other Information Concerning the Board and its Committees, Compensation Committee Interlocks and Insider Participation, Summary Compensation Table, Option Grants in Last Fiscal Year, Aggregated Option Exercises and Fiscal Year-End Option Values, Employment Contracts, Severance Arrangements, and Other Agreements, and Pension and Supplemental Retirement BeneÑts of the Company's proxy statement for the annual meeting of stockholders to be held December 19, 2002, Ñled with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 12. Security Ownership of Certain BeneÑcial Owners and Management and Related Stockholder Matters The information required by this item is included under the captions BeneÑcial Ownership of the Corporation's Securities and Disclosure with Respect to Equity Compensation Plans of the Company's proxy statement for the annual meeting of stockholders to be held December 19, 2002, Ñled with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is included under the caption Certain Relationships and Related Party Transactions of the Company's proxy statement for the annual meeting of stockholders to be held December 19, 2002, Ñled with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 14. Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the reports Ñled or submitted under the Securities Exchange Act is 55 recorded, processed, summarized and reported, within the time periods speciÑed in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports Ñled under the Securities Exchange Act is accumulated and communicated to management, including the principal executive oÇcer and principal Ñnancial oÇcer as appropriate, to allow timely decisions regarding required disclosure. As required by Commission's rules, the Company has evaluated the eÅectiveness of the design and operation of its disclosure controls and procedures within 90 days of the Ñling date of this annual report. This evaluation was carried out under the supervision and with the participation of management, including the principal executive oÇcer and principal Ñnancial oÇcer. Based on this evaluation, these oÇcers have concluded that the design and operation of the Company's disclosure controls and procedures are eÅective. However, the Company is enhancing disclosure controls and procedures during the Ñrst quarter of Ñscal 2003 by formalizing certain policies and procedures, primarily those involving the reporting of Ñnancial results of its businesses. Because all disclosure procedures must rely to some degree on actions to be taken by employees throughout the organization, such as reporting of material events, the Company believes that it cannot fully eliminate risks relating to disclosure requirements. Internal controls, which may be viewed as part of disclosure controls and procedures, are designed to provide reasonable assurances that: (a) transactions are executed in accordance with management's general or speciÑc authorization; (b) transactions are recorded as necessary (i) to permit preparation of Ñnancial statements in conformity with accounting principles generally accepted in the United States or any other criteria applicable to such statements, and (ii) to maintain accountability for assets; (c) access to assets is permitted only in accordance with management's general or speciÑc authorization; and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any diÅerences. There were no signiÑcant changes in internal controls or in other factors that could signiÑcantly aÅect internal controls subsequent to the date they were evaluated. However, during the Company's Ñrst quarter of Ñscal 2003, it began a comprehensive assessment of its internal controls utilizing its internal audit eÅorts. The Company is in the process of reviewing internal controls and other risk areas and changes to the internal control structure could result from that review. Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) The following documents are Ñled as a part of this report: (1) Report of Management Report of Independent Auditors (Ernst & Young LLP) Report of Independent Public Accountants (Arthur Andersen LLP) Consolidated Balance Sheets Ì as of August 31, 2002 and 2001 Consolidated Statements of Income for the years ended August 31, 2002, 2001, and 2000 Consolidated Statements of Stockholders' Equity and Comprehensive Income for the years ended August 31, 2002, 2001, and 2000 Consolidated Statements of Cash Flows for the years ended August 31, 2002, 2001, and 2000 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Schedule II Valuation and Qualifying Accounts Any of schedules I through V not listed above have been omitted because they are not applicable or the required information is included in the consolidated Ñnancial statements or notes thereto. (3) Exhibits Ñled with this report (begins on next page): Copies of exhibits will be furnished to stockholders upon request at a nominal fee. Requests should be sent to Acuity Brands, Inc., Investor Relations Department, 1170 Peachtree Street, N.E., Suite 2400, Atlanta, Georgia 30309. 56 EXHIBIT 2 INDEX TO EXHIBITS Agreement and Plan of Distribution by and between National Service Industries, Inc. and Acuity Brands, Inc., dated as of November 30, 2001. EXHIBIT 3 (a) Restated CertiÑcate of Incorporation of Acuity Brands, Inc. (b) Amended and Restated By-Laws of Acuity Brands, Inc. EXHIBIT 4 (a) Form of CertiÑcate representing Acuity Brands, Inc. Common Stock. (b) Stockholder Protection Rights Agreement, dated as of November 12, 2001, between Acuity Brands, Inc. and Wells Fargo Bank Minnesota, N.A. (c) First Supplemental Indenture, dated as of October 23, 2001, to Indenture dated January 26, 1999, between National Service Industries, Inc., L&C Spinco, Inc., L&C Lighting Group, Inc., The Zep Group, Inc. and SunTrust Bank. (d) Indenture dated as of January 26, 1999. (e) Form of 6% Note due February 1, 2009. (f) Form of 8.375% Note due August 1, 2010. 57 Reference is made to Exhibit 2.1 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 3.1 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 3.2 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 4.1 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 4.2 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.10 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.11 to Amendment No. 2 to the Registration Statement on Form 10, Ñled by L&C Spinco, Inc. on September 6, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.12 to Amendment No. 2 to the Registration Statement on Form 10, Ñled by L&C Spinco, Inc. on September 6, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.13 to Amendment No. 2 to the Registration Statement on Form 10, Ñled by L&C Spinco, Inc. on September 6, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.1 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.2 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 2.1 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.4 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.24 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.9 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.23 to Amendment No. 4 to the Registration Statement on Form 10, Ñled by L&C Spinco, Inc. on October 29, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10(i)A(1) of registrant's Form 10-Q as Ñled with the Commission on April 12, 2002, which is incorporated herein by reference. EXHIBIT 10(i)A (1) Tax DisaÇliation Agreement, dated as of November 30, 2001, by and between National Service Industries, Inc. and Acuity Brands, Inc. (2) Transition Services Agreement, dated as of November 30, 2001, by and between National Service Industries, Inc. and Acuity Brands, Inc. (3) Agreement and Plan of Distribution, dated as of November 30, 2001, by and between National Service Industries, Inc. and Acuity Brands, Inc. (4) Employee BeneÑts Agreement, by and between National Service Industries, Inc. and Acuity Brands, Inc., dated as of November 30, 2001. (5) Put Option Agreement, dated as of November 30, 2001, by and between National Service Industries, Inc. and Acuity Brands, Inc. (6) Lease Agreement, dated as of November 30, 2001, by and between National Service Industries, Inc. and Acuity Brands, Inc. (7) 364-Day Revolving Credit Agreement, dated as of October 3, 2001, among L&C Spinco, Inc., the Subsidiary Borrowers from time to time parties thereto, the Lenders from time to time parties thereto, Bank One, N.A., as Administrative Agent, Wachovia Bank, N.A., as Syndication Agent and SunTrust Bank as Documentation Agent. (8) 364-Day Revolving Credit Agreement dated as of April 8, 2002, among Acuity Brands, Inc., the Subsidiary Borrowers from time to time parties hereto, the Lenders, from time to time parties hereto, Bank One, NA as Administrative Agent, and Wachovia Bank, N.A., as Syndication Agent. 58 (9) Assignment Agreement and Amendment to Increase Aggregate Commitment to 364-Day Revolving Credit Agreement, dated as of May 14, 2002, by and among Bank One, NA and Wachovia Bank, N.A., Dresdner Bank AG New York & Grand Cayman Branches, Acuity Brands, Inc., Acuity Lighting Group, Inc. and Acuity Specialty Products Group, Inc., and Bank One, NA, in its capacity as Administrative Agent. (10) 3-Year Revolving Credit Agreement, dated as of April 8, 2002, among Acuity Brands, Inc., the Subsidiary Borrowers from time to time parties hereto, Bank One, NA as Administrative Agent, and Wachovia Bank, N.A., as Syndication Agent. (11) Assignment Agreement and Amendment to Increase Aggregate Commitment to 3-Year Revolving Credit Agreement, dated as of May 14, 2002, by and among Bank One, NA and Wachovia Bank, N.A., Dresdner Bank AG New York & Grand Cayman Branches, Acuity Brands, Inc., Acuity Lighting Group, Inc. and Acuity Specialty Products Group, Inc., and Bank One, NA, in its capacity as Administrative Agent. (12) Deed to Secure Debt and Security Agreement, dated as of October 11, 2002. Reference is made to Exhibit 10(i)A(1) of registrant's Form 10-Q as Ñled with the Commission on July 12, 2002, which is incorporated herein by reference. Reference is made to Exhibit 10(i)A(2) of registrant's Form 10-Q as Ñled with the Commission on April 12, 2002, which is incorporated herein by reference. Reference is made to Exhibit 10(i)A(2) of registrant's Form 10-Q as Ñled with the Commission on July 12, 2002, which is incorporated herein by reference. Filed with the Securities and Exchange Commission as part of this Form 10-K. (13) Promissory Note, dated as of October 11, 2002. Filed with the Securities and Exchange Commission as part of this Form 10-K. EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements: (1) Acuity Brands, Inc. Long-Term Incentive Plan. (2) Acuity Brands, Inc. 2001 Nonemployee Directors' Stock Option Plan. Reference is made to Exhibit 10.5 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.6 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. 59 (3) Amendment No. 1 to Acuity Brands, Inc. Nonemployee Directors' Stock Option Plan, dated December 20, 2001. (4) Form of IndemniÑcation Agreement. (5) Form of Severance Protection Agreement. (6) Acuity Brands, Inc. Supplemental Deferred Savings Plan. (7) Acuity Brands, Inc. Executives' Deferred Compensation Plan. (8) Acuity Brands, Inc. Senior Management BeneÑt Plan. (9) Acuity Brands, Inc. Nonemployee Director Deferred Stock Unit Plan. (10) Acuity Brands, Inc. Executive BeneÑts Trust. (11) Acuity Brands, Inc. Supplemental Retirement Plan for Executives. (12) Acuity Brands, Inc. Management Compensation and Incentive Plan. (13) Acuity Brands, Inc. BeneÑts Protection Trust. 60 Reference is made to Exhibit 10(iii)A(3) of registrant's Form 10-Q as Ñled with the Commission on January 14, 2002, which is incorporated herein by reference. Reference is made to Exhibit 10.7 to the Registration Statement on Form 10, Ñled by L&C Spinco, Inc. with the Commission on July 3, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.8 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.14 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.15 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.16 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.17 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.18 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.19 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.20 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.21 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. (14) Assumption Letter of Acuity Brands, Inc. with respect to Employment Letter Agreement between National Service Industries, Inc. and James S. Balloun. (15) Employment Letter Agreement between National Service Industries, Inc. and James S. Balloun, dated February 1, 1996. (16) Assumption Letter of Acuity Brands, Inc. with respect to Employment Letter Agreement between National Service Industries, Inc. and Joseph G. Parham, Jr. (17) Employment Letter Agreement between National Service Industries, Inc. and Joseph G. Parham, Jr., dated May 3, 2000. (18) Assumption Letter of Acuity Brands, Inc., with respect to Employment Letter Agreement between National Service Industries, Inc. and James H. Heagle. (19) Employment Letter Agreement between National Service Industries, Inc. and James H. Heagle, dated March 28, 2000. (20) Employment Letter Agreement between Acuity Brands, Inc. and Vernon J. Nagel, dated as of October 30, 2001. (21) Form of Acuity Brands, Inc. Letter regarding Bonuses. EXHIBIT 16 Letter of Arthur Andersen regarding Change in Certifying Accountant. EXHIBIT 21 List of Subsidiaries. EXHIBIT 23 Consent of Independent Auditors. 61 Reference is made to Exhibit 10.22(a)(i) of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10(iii)A(2) of the Form 10-Q of National Service Industries, Inc. for the quarter ended November 30, 1997, which is incorporated herein by reference. Reference is made to Exhibit 10.22(b)(i) of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10(iii)A(2) of the Form 10-Q of National Service Industries, Inc. for the quarter ended May 31, 2000, which is incorporated herein by reference. Reference is made to Exhibit 10.22(c) of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.22(d) to Amendment No. 3 to the Registration Statement on Form 10, Ñled by L&C Spinco, Inc. on September 27, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10(iii)A(20) of registrant's Form 10-Q as Ñled with the Commission on January 14, 2002, which is incorporated herein by reference. Reference is made to Exhibit 10.25 of registrant's Form 8-K as Ñled with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 16 of registrant's Form 8-K/A as Ñled with the Commission on May 1, 2002, which is incorporated herein by reference. Filed with the Securities and Exchange Commission as part of this Form 10-K. Filed with the Securities and Exchange Commission as part of this Form 10-K. EXHIBIT 24 Powers of Attorney. EXHIBIT 99 (1) CertiÑcation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by James S. Balloun. (2) CertiÑcation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Vernon J. Nagel. (b) None. Filed with the Securities and Exchange Commission as part of this Form 10-K. Filed with the Securities and Exchange Commission as part of this Form 10-K. Filed with the Securities and Exchange Commission as part of this Form 10-K. 62 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES ACUITY BRANDS, INC. By: /s/ VERNON J. NAGEL Vernon J. Nagel Executive Vice President and Chief Financial OÇcer Date: November 11, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ JAMES S. BALLOUN James S. Balloun /s/ VERNON J. NAGEL Vernon J. Nagel /s/ JOHN W. EHRIE John W. Ehrie * John L. Clendenin * Peter C. Browning * Neil Williams * L. M. Baker, Jr. * Julia B. North * Ray M. Robinson Chairman, President, and Chief Executive OÇcer and Director November 11, 2002 Executive Vice President and Chief Financial OÇcer November 11, 2002 Vice President and Controller November 11, 2002 Director November 11, 2002 Director November 11, 2002 Director November 11, 2002 Director November 11, 2002 Director November 11, 2002 Director November 11, 2002 Director November 11, 2002 * Earnest W. Deavenport, Jr. By: /s/ KENYON W. MURPHY Kenyon W. Murphy Attorney-in-Fact 63 I, James S. Balloun, certify that: CERTIFICATIONS 1. I have reviewed this annual report on Form 10-K of Acuity Brands, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this annual report, fairly present in all material respects the Ñnancial condition, results of operations and cash Öows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying oÇcers and I are responsible for establishing and maintaining disclosure controls and procedures (as deÑned in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the eÅectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the Ñling date of this annual report (the ""Evaluation Date''); and c) presented in this annual report our conclusions about the eÅectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying oÇcers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all signiÑcant deÑciencies in the design or operation of internal controls which could adversely aÅect the registrant's ability to record, process, summarize and report Ñnancial data and have identiÑed for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a signiÑcant role in the registrant's internal controls; and 6. The registrant's other certifying oÇcers and I have indicated in this annual report whether there were signiÑcant changes in internal controls or in other factors that could signiÑcantly aÅect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to signiÑcant deÑciencies and material weaknesses. Date: November 11, 2002 /s/ JAMES S. BALLOUN James S. Balloun Chairman, President and Chief Executive OÇcer 64 I, Vernon J. Nagel, certify that: 1. I have reviewed this annual report on Form 10-K of Acuity Brands, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the Ñnancial statements, and other Ñnancial information included in this annual report, fairly present in all material respects the Ñnancial condition, results of operations and cash Öows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying oÇcers and I are responsible for establishing and maintaining disclosure controls and procedures (as deÑned in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the eÅectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the Ñling date of this annual report (the ""Evaluation Date''); and c) presented in this annual report our conclusions about the eÅectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying oÇcers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all signiÑcant deÑciencies in the design or operation of internal controls which could adversely aÅect the registrant's ability to record, process, summarize and report Ñnancial data and have identiÑed for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a signiÑcant role in the registrant's internal controls; and 6. The registrant's other certifying oÇcers and I have indicated in this annual report whether there were signiÑcant changes in internal controls or in other factors that could signiÑcantly aÅect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to signiÑcant deÑciencies and material weaknesses. Date: November 11, 2002 /s/ VERNON J. NAGEL Vernon J. Nagel Executive Vice President and Chief Financial OÇcer 65 ACUITY BRANDS, INC. SCHEDULE II Valuation and Qualifying Accounts for the Years Ended August 31, 2002, 2001, and 2000 Balance at Beginning of Year Costs and Expenses Additions Charged to Other Accounts(1) (In thousands) Deductions Balance at End of Year Year Ended August 31, 2002: Reserve for doubtful accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,195 Reserve for estimated warranty costs ÏÏÏÏÏÏÏÏ $ 1,823 5,445 2,787 55 6,209 Reserve for estimated returns and allowances $ 4,079 57,206 Self-insurance reserve(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $17,938 13,007 Reserve for restructuring(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 2,130 (853) Year Ended August 31, 2001: Reserve for doubtful accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 6,570 Reserve for warranty costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,164 4,930 1,806 Reserve for estimated returns and allowances $ 4,006 37,266 Self-insurance reserve(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $13,621 11,254 Reserve for restructuring ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ Ì 2,298 Year Ended August 31, 2000: Reserve for doubtful accountsÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,470 Reserve for warranty costsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 1,086 2,667 1,030 Reserve for estimated returns and allowances $ 4,416 36,736 Self-insurance reserve(2) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $15,158 5,055 5,135 4,156 $ 8,560 $ 6,663 56,968 $ 4,317 9,295 1,277 3,305 1,147 $21,650 $ Ì $ 8,195 $ 1,823 37,193 $ 4,079 6,937 $17,938 168 $ 2,130 Ì Ì Ì Ì Ì Ì Ì Ì 1,927 3,494 $ 6,570 Ì Ì Ì 952 $ 1,164 37,146 $ 4,006 6,592 $13,621 (1) Recoveries credited to the reserve and reserves recorded in acquisitions. (2) Includes reserves for workers' compensation, auto, product, and general liability claims. (3) During Ñscal 2002, management realized lower than anticipated costs associated with severance charges in the lighting equipment segment. Accordingly, the related reserve was reversed and $0.9 million in income was recorded and is included in Restructuring and other charges in the Consolidated Statements of Income. 66 Acuity Brands, Inc. 1170 Peachtree Street, NE Suite 2400 Atlanta, Georgia 30309-7676 (404) 853-1400 www.acuitybrands.com

Continue reading text version or see original annual report in PDF format above