By and  on August 11, 2005

NEW YORK — Tommy Hilfiger Corp. let out a sigh of relief Wednesday.

The company said it has resolved the 11-month investigation by the U.S. Attorney's Office for the Southern District of New York and will not be prosecuted. But it will end up paying additional federal income taxes and interest of $18.1 million.

The government inquiry has found that criminal tax charges are not warranted in connection with the buying office commission rate paid by Hilfiger's U.S. subsidiaries for the fiscal years 1990 to 2004, and will close its investigation.

Additionally, the U.S. Attorney's Office has agreed that it will not criminally prosecute Tommy Hilfiger U.S.A. Inc., or the parent or affiliates for any offenses relating to underpayment of Hong Kong taxes as a result of activities attributed to Tommy Hilfiger (Eastern Hemisphere) Limited.

As part of the agreement, Tommy Hilfiger U.S.A. will file amended U.S. federal income tax returns for the fiscal years ended March 31, 2001, through 2004, reflecting a reduced buying office commission rate for those four years. As a result, Hilfiger U.S.A. will pay roughly $15.4 million in additional federal income taxes and $2.7 million in interest for the four years, taking into account the effect of changes in other tax attributes, including net operating loss carry forwards. The effect of adjusting the buying office commission rate for the period between 2001 and 2004 will result in a tax provision in fiscal 2005 of about $12 million, the company said, after taking into account previously established reserves for the U.S. Attorney Office probe and other investigations totaling $45 million to $55 million.

"We have worked hard for nearly a year to cooperate fully with the U.S. Attorney's Office, and we are pleased that it has determined to close its investigation," said David Dyer, president and chief executive officer of Hilfiger, in a statement. He was unavailable to comment beyond the statement.

Shares of Tommy Hilfiger Corp. closed Wednesday down 0.2 percent to $13.58. The company revealed the settlement after the closing bell. Within minutes, after-market activity on the stock exploded, trading it up 7.5 percent to $14.60 by 5:45 p.m.

Another stipulation of the agreement is that Hilfiger U.S.A. must adopt and implement the recommendations of the special committee of the company's board of directors and an effective ethics and compliance program. It must also provide information to the Hong Kong Inland Revenue Department for it to evaluate whether Hilfiger Ltd. or its Hong Kong subsidiary owes any Hong Kong taxes to the IRD. Hilfiger has agreed to provide the U.S. Attorney's Office with information for the next three years so that it can monitor Hilfiger U.S.A.'s compliance with the agreement.In May, Hilfiger initiated discussions with the IRD regarding the potential Hong Kong profits tax liability of Hilfiger Ltd. The company made a settlement offer to the IRD to resolve the issue, but the IRD didn't accept it, and these discussions are ongoing. Consequently, Hilfiger can't predict the timing or outcome of its settlement discussions with the IRD, nor can there be assurances the resolution will not have a material effect on the company.

In June, Hilfiger revealed it expects to record net provisions of about $30 million to $40 million (taking into account $15 million of preexisting tax reserves) to deal with the U.S. Attorney's investigation, the IRD matter and other tax probes.

Over the past year, former and current Hilfiger executives received grand jury subpoenas, and the company was subpoenaed to produce documents from as far back as 1990. Tommy Hilfiger, honorary chairman and principal designer, as well as Joel Horowitz, non-executive chairman, and former co-chairmen Silas Chou and Lawrence Stroll were all named targets in several shareholder lawsuits. Although undoubtedly a distraction, the firm cooperated with the investigation and responded by bringing in some star power, namely former Manhattan U.S. Attorney Mary Jo White as legal counsel. She is now a partner at the law firm of Debevoise & Plimpton and known for her pursuit of organized crime and liability cases as a U.S. Attorney from 1993 to 2002.

In a separate press release Wednesday, Tommy Hilfiger Corp. said preliminary first-quarter results show a narrower net loss on lower sales. It did not disclose what the loss would be, but said net revenue will be about $319 million, down 3 percent from $329 million in the same period last year.

"The company normally incurs a loss in the first fiscal quarter due to seasonal shipping and sales patterns in Europe," Hilfiger said in its financial update. "As previously disclosed, the company continues to analyze whether a restatement or other adjustments will be required in connection with the tax matters, lease accounting and other out-of-period adjustments....More detailed comparative earnings information for the quarter is not available at this time."

The company is expecting to file three quarterly reports as well as its annual report in September.Regarding the preliminary first-quarter results, Dyer said in a statement that it was "slightly better than our expectations."

"The quarter's results reflected continued strength in Europe, with double-digit revenue gains in both the wholesale and retail components," he said.

"We are also pleased with the performance of our U.S. company stores, where key item programs and improved inventory management resulted in positive comparable sales and solid margin gains for the third consecutive quarter. Overall, business in the U.S. wholesale segment remains challenged and we continue to strive for improved profitability through product initiatives and cost reductions."

The company said U.S. wholesale revenue for the first quarter dropped 29.4 percent to $115 million from $163 million in the year-ago period.

"Approximately $12 million of this reduction is attributed to the company's exit of the Young Men's Jeans and H Hilfiger wholesale businesses during fiscal 2005," the company said in the statement. "Additionally, lower volume in men's wear, women's wear and children's wear resulted from decreased orders from the company's major customers and a reduction in the number of department store doors through which the company's products are distributed."

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