Heelys, Inc. Reports 2009 Second Quarter Financial Results and Announces Proposed Litigation Settlements

Year-over-Year Quarterly Comparisons

Net sales for the second quarter of 2009 were $12.4 million compared to net sales of $18.2 million in the corresponding period a year ago. Gross profit was $3.6 million, or 28.9%, compared to gross profit of $4.2 million, or 23.0%, in the second quarter of 2008. Selling, general and administrative expenses were $4.0 million compared to $5.1 million in the second quarter of last year. Litigation settlements and related costs were $3.1 million for the second quarter of 2009 compared to $0.2 million for the same quarter of 2008. These costs are related to the lawsuits filed in the latter part of 2007 and early part of 2008 in connection with the Company's initial public offering. The Company has reached proposed settlements with regards to these lawsuits and has accrued approximately $3.6 million as of June 30, 2009, as discussed more fully below. The Company reported a net loss of $1.6 million, or ($0.06) per fully diluted share versus a net loss of $0.4 million, or ($0.01) per fully diluted share in the second quarter of 2008.

Sequential Quarterly Comparisons

Net sales for the second quarter of 2009 were $12.4 million compared to net sales of $9.2 million in the first quarter of 2009. Gross profit was $3.6 million, or 28.9%, compared to $2.9 million, or 30.8%, for the first quarter of this year. Selling, general and administrative expenses were $4.0 million compared to $4.5 million in the first quarter of 2009. Litigation settlements and related costs were $3.1 million for the second quarter of 2009 compared to $0.7 million during the first quarter of 2009. The Company reported a net loss of $1.6 million, or ($0.06) per fully diluted share versus a net loss of $1.3 million, or ($0.05) per fully diluted share in the first quarter of this year.

Tom Hansen, chief executive officer of the Company, commented "We continue to evaluate every aspect of our business to make sure that we're operating as efficiently as possible. While things on a macro level seem to be stabilizing, we believe that we must be more precise than ever in our inventory management and hyper aware of our retail partners' needs going forward."

Balance Sheet

As of June 30, 2009, the Company had cash and cash equivalents of $67.1 million compared with $96.8 million as of June 30, 2008 and $68.4 million as of December 31, 2008. Inventory as of June 30, 2009 decreased to $10.6 million versus $19.2 million as of June 30, 2008 and $12.1 million as of December 31, 2008.

Proposed Litigation Settlements

The Company has reached proposed settlements of lawsuits filed in the latter part of 2007 and early part of 2008 in connection with the Company's initial public offering. Pursuant to the proposed settlements, if approved by the court, the Company's insurance policies will fund the majority of the settlement amounts and related legal defense costs. As stated above, the Company has accrued approximately $3.6 million with respect to these settlements as of June 30, 2009.

Conference Call Information

The Company has decided to discontinue earnings calls at this time.

About Heelys, Inc.

Heelys, Inc. designs, markets and distributes innovative, action sports-inspired products under the HEELYS(R) brand targeted to the youth market. The Company's primary product, HEELYS-wheeled footwear, is patented dual purpose footwear that incorporates a stealth, removable wheel in the heel. HEELYS-wheeled footwear allows the user to seamlessly transition from walking or running to rolling by shifting weight to the heel. Users can transform HEELYS-wheeled footwear into street footwear by removing the wheel. HEELYS-wheeled footwear provides users with a unique combination of fun and style that differentiates it from other footwear and wheeled sports products.

Forward Looking Statements

Certain statements in this press release and oral statements made from time to time by representatives of the Company are "forward-looking statements" for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995, including in particular, statements regarding our guidance, outlook for future events, financial performance, customer demand, growth and profitability. In some cases, you can identify forward-looking statements by terminology such as "subject to," "believes," "anticipates," "plans," "expects," "intends," "estimates," "may," "will," "should," "can," the negatives thereof, variations thereon, similar expressions, or discussions of strategy. All forward-looking statements are based upon management's current expectations and various assumptions, but they are inherently uncertain, and the Company may not realize its expectations and the underlying assumptions may not prove correct. The Company's actual results and the timing of events could differ materially from those described in or implied by the forward-looking statements as a result of risks and uncertainties, including, without limitation, the fact that substantially all of the Company's net sales are generated by one product, continued changes in fashion trends and consumer preferences and general economic conditions, the Company's intellectual property may not restrict competing products that infringe on its patents from being sold, the Company's dependence on independent manufacturers, the Company may not be able to successfully introduce new product categories, the outcome of lawsuits filed against the Company, which could have a material adverse effect on us, and additional factors which are detailed in the Company's filings with the Securities and Exchange Commission, including the Risk Factors contained in the Company's Annual Report on Form 10-K. Investors, potential investors and other readers are urged to consider these factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements made herein are only made as of the date of this press release and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

HEELYS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(amounts in thousands, except for per share data)
                                              Three-month period ended        Six-month period ended
                                              June 30,        June 30,        June 30,        June 30,
                                              2008            2009            2008            2009
Net sales                                     $   18,211      $   12,402      $   31,318      $   21,651
Cost of sales                                     14,016          8,817           24,299          15,215
Gross profit                                      4,195           3,585           7,019           6,436
Selling, general and administrative expenses      5,128           3,970           11,144          8,502
Litigation settlements and related costs          248             3,051           313             3,829
Loss from operations                              (1,181 )        (3,436 )        (4,438 )        (5,895 )
Other (income) expense, net                       (830   )        (590   )        (2,398 )        (485   )
Loss before income taxes                          (351   )        (2,846 )        (2,040 )        (5,410 )
Income tax expense (benefit)                      43              (1,256 )        (599   )        (2,510 )
Net loss                                      $   (394   )    $   (1,590 )    $   (1,441 )    $   (2,900 )
Net loss per share:
Basic                                         $   (0.01  )    $   (0.06  )    $   (0.05  )    $   (0.11  )
Diluted                                       $   (0.01  )    $   (0.06  )    $   (0.05  )    $   (0.11  )
Weighted-average shares:
Basic                                             27,193          27,571          27,134          27,571
Diluted                                           27,193          27,571          27,134          27,571

HEELYS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(amounts in thousands)
                                                         December 31,      June 30,
Assets                                                   2008              2009
Current Assets:
Cash and cash equivalents                                $    68,446       $    67,101
Accounts receivable, net of allowances                        6,594             6,599
Inventories                                                   12,104            10,595
Prepaid and other current assets                              831               1,484
Income taxes receivable                                       268               121
Deferred income tax asset                                     3,572             6,375
Total current assets                                          91,815            92,275
Property and Equipment, net of accumulated depreciation       1,007             1,181
Patents and Trademarks, net of accumulated amortization       310               316
Intangible Assets, net of accumulated amortization            1,412             1,230
Goodwill                                                      1,668             1,663
Deferred Income Tax Asset                                     284               111
Total Assets                                             $    96,496       $    96,776
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable                                         $    1,910        $    3,029
Accrued expenses                                              5,091             7,139
Income taxes payable                                          1,347             1,408
Total current liabilities                                     8,348             11,576
Long Term Liabilities:
Income taxes payable                                          442               431
Deferred income tax liability                                 -                 59
Other long term liabilities                                   1,331             967
Total Liabilities                                             10,121            13,033
Stockholders' Equity:
Common stock                                                  28                28
Additional paid-in capital                                    64,809            65,020
Retained earnings                                             21,657            18,757
Accumulated other comprehensive loss                          (119   )          (62    )
Total stockholders' equity                                    86,375            83,743
Total Liabilities and Stockholders' Equity               $    96,496       $    96,776

SOURCE: Heelys, Inc.

Heelys, Inc. 
Lisa Peterson, 214-390-1831 
Chief Financial Officer