## FINANCIAL CONDITION 

## LIQUIDITY AND CAPITAL RESOURCES 

Our principal sources of funds historically have been cash flows from operations and borrowings under commercial paper, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks in the United States and abroad. At June 30, 2003, we had cash and cash equivalents of $364.1 mil- lion compared with $546.9 million at June 30, 2002. 

At June 30, 2003, our outstanding borrowings of $291.4 million included: (i) $257.1 million of 6% Senior Notes due January 2012 consisting of $250.0 million prin- cipal, an unamortized debt discount of $1.0 million, and an $8.1 million adjustment to reflect the fair value of an outstanding interest rate swap; (ii) a 3.0 billion yen term loan (approximately $25.2 million at current exchange rates), which is due in March 2006; (iii) $7.8 million of other short-term borrowings; and (iv) $1.3 million of other long-term borrowings. 

In May 2003, we entered into an interest rate swap agreement with a notional amount of $250.0 million to effectively convert the fixed rate interest on our outstand- ing $250.0 million 6% Senior Notes to variable interest rates based on LIBOR. In the short-term, this will provide us with a lower level of interest expense related to the 6% Senior Notes based on current variable interest rates, however, over the life of the notes, interest expense may be greater than 6% based upon the fluctuations of LIBOR. 

We have a $750.0 million commercial paper program under which we may issue commercial paper in the United States. Our commercial paper is currently rated A-1 by Standard & Poor’s and P-1 by Moody’s. Our long- term credit ratings are A+ by Standard & Poor’s and A1 by Moody’s. At June 30, 2003, we had no commercial paper outstanding. We also have an effective shelf regis- tration statement covering the potential issuance of up to $500.0 million in debt securities. As of June 30, 2003, we had an unused $400.0 million revolving credit facility, expiring on June 28, 2006, and $156.6 million in addi- tional uncommitted credit facilities. 

Our business is seasonal in nature and, accordingly, our working capital needs vary. From time to time, we may enter into investing and financing transactions that require additional funding. To the extent that these needs exceed cash from operations,we could,subject to market condi- tions, issue commercial paper, issue long-term debt secu- rities or borrow under the revolving credit facility. 

The effects of inflation have not been significant to our overall operating results in recent years. Generally, we have been able to introduce new products at higher 

selling prices or increase selling prices sufficiently to offset cost increases, which have been moderate. 

We believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support currently planned business operations and capital expenditures on both a near-term and long-term basis. 

## Cash Flows 

Net cash provided by operating activities was $548.5 million in fiscal 2003 as compared with $518.0 million in fiscal 2002 and $305.4 million in fiscal 2001. The improved operating cash flow primarily reflects increased earnings and seasonal levels of operating assets and liabilities. Operating assets and liabilities reflect an improvement in accounts receivable collections, and a higher level of accounts payable, partially offset by increased inventories in anticipation of product launches in the first half of fiscal 2004 and the impact of acquisi- tions on required inventory levels. The improvement in net cash flows for fiscal 2002 compared to fiscal 2001 was generated primarily by a reduction of inventory. Inventory levels were unseasonably high at the end of fis- cal 2001 and were lowered during fiscal 2002 as part of our effort to keep inventory levels in line with forecasted sales. Operating cash flows were generally not impacted by the fiscal 2002 restructuring as lower net earnings were offset by the non-cash portion of the charge and the increase in other accrued liabilities. 

Net cash used for investing activities was $192.5 mil- lion in fiscal 2003, compared with $217.0 million in fiscal 2002 and $206.3 million in fiscal 2001. Net cash used in investing activities in fiscal 2003 primarily relates to capital expenditures and the acquisition of Darphin and certain Aveda distributors. Net cash used in investing activities during fiscal 2002 and fiscal 2001 relates primarily to capital expenditures. 

Capital expenditures amounted to $163.1 million, $203.2 million and $192.2 million in fiscal 2003, 2002 and 2001, respectively. Spending in all three years primarily reflected the continued upgrade of manufacturing equipment, dies and molds, new store openings, store improvements, counter construction and information technology enhancements. The reduced level of capital expenditures in fiscal 2003 reflects tight control on our spending in light of economic conditions, fewer retail store openings and reduced spending related to lease- hold improvements. 

Cash used for financing activities was $550.4 million, $121.8 million and $63.5 million in fiscal 2003, 2002 and 2001, respectively. The net cash used for financing 

