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.

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