NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Net Earnings Per Common Share NOTE 1– DESCRIPTION OF BUSINESS NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The Estée Lauder Companies Inc. manufactures, markets and sells skin care, makeup, fragrance and hair care prod- ucts around the world. Products are marketed under the following brand names: Estée Lauder, Clinique, Aramis, Prescriptives, Origins, M . A . C, Bobbi Brown, La Mer, jane, Aveda, Stila, Jo Malone, Bumble and bumble and Darphin. The Estée Lauder Companies Inc. is also the global licensee of the Tommy Hilfiger, Donna Karan, kate spade and Michael Kors brands for fragrances and cosmetics. significant intercompany balances and transactions have been eliminated. Certain amounts in the consolidated financial state- ments of prior years have been reclassified to conform to current year presentation for comparative purposes. Net earnings per common share (“basic EPS”) is com- puted by dividing net earnings, after deducting preferred stock dividends on the Company’s $6.50 Cumulative Redeemable Preferred Stock, by the weighted average number of common shares outstanding and contingently issuable shares (which satisfy certain conditions). Net earnings per common share assuming dilution (“diluted EPS”) is computed by reflecting potential dilution from the exercise of stock options. Areconciliation between the numerators and denomi- nators of the basic and diluted EPS computations is  as follows: The accompanying consolidated financial statements include the accounts of The Estée Lauder Companies Inc. and its subsidiaries (collectively, the “Company”). All As of June 30, 2003, 2002 and 2001, options to purchase 13.6 million, 12.1 million and 10.5 million shares, respec- tively, of Class A Common Stock were not included in the computation of diluted EPS because the exercise prices of those options were greater than the average market price of the common stock and their inclusion would be anti-dilutive. The options were still outstanding at the end of the applicable periods. Cash and cash equivalents include $76.2 million and $104.6 million of short-term time deposits at June 30, 2003 and 2002, respectively. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Accounts receivable is stated net of the allowance  for doubtful accounts and customer deductions of $31.8 million and $30.6 million as of June 30, 2003 and 2002, respectively. THEEST{E LAUDER COMPANIES INC. 59 Accounts Receivable Cash and Cash Equivalents YEAR ENDED JUNE 30 2003 2002 2001 (In millions, except per share data) Numerator: Net earnings before accounting change $319.8 $212.5 $307.4 Preferred stock dividends (23.4) (23.4) (23.4) Net earnings attributable to common stock before accounting change 296.4 189.1 284.0 Cumulative effect of a change in accounting principle, net of tax — (20.6) (2.2) Net earnings attributable to common stock $296.4 $168.5 $281.8 Denominator: Weighted average common shares outstanding — Basic 232.6 238.2 238.4 Effect of dilutive securities: Stock options 2.1 2.9 3.8 Weighted average common shares outstanding — Diluted 234.7 241.1 242.2 Basic net earnings per common share:  Net earnings before accounting change $ 1.27 $ .79 $ 1.19 Cumulative effect of a change in accounting principle, net of tax — (.08) (.01) Net earnings $ 1.27 $ .71 $ 1.18 Diluted net earnings per common share: Net earnings before accounting change $ 1.26 $ .78 $ 1.17 Cumulative effect of a change in accounting principle, net of tax — (.08) (.01) Net earnings $ 1.26 $ .70 $ 1.16