Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (12-24-07 03:09 AM)

The Daily Magic Formula Stock for 12/24/2007 is Heelys Inc. According to the Magic Formula Investing Web Site, the ebit yield is 79% and the EBIT ROIC is >100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.


BUSINESS OVERVIEW

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act,” and we intend such forward-looking statements to be subject to the safe harbors created thereby. These statements relate to future events or our financial performance. When used in this document and in documents incorporated by reference, forward-looking statements include, without limitation, statements regarding financial forecasts or projections, and our expectations, beliefs, intentions or future strategies that are signified by terminology such as “subject to,” “believes,” “anticipates,” “plans,” “expects,” “intends,” “estimates,” “may,” “will,” “should,” “can,” the negatives thereof, variations thereon, similar expressions or by discussions of strategy. All forward-looking statements are based upon our current expectations and various assumptions. We believe there is a reasonable basis for our expectations and assumptions, but they are inherently uncertain, we may not realize our expectations and our assumptions may not prove correct. Actual results could differ materially from those described or implied by such forward-looking statements. Consequently, forward-looking statements should be regarded solely as our current plans, estimates and beliefs. You should not place undue reliance on forward-looking statements. We cannot guarantee future results, events, performance or achievements. We do not have any obligation and do not intend to update, republish or revise forward-looking statements to reflect future events or circumstances or to reflect the occurrences of unanticipated events.

Throughout this report, references to the “Company,” “we,” and “our” refer to Heelys, Inc. and its consolidated subsidiaries, unless the context indicates otherwise.

Overview

We are a designer, marketer and distributor of innovative, action sports-inspired products under the HEELYS brand targeted to the youth market. Our 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 skating by shifting weight to the heel. Users can transform HEELYS-wheeled footwear into street footwear by removing the wheel. Our distinctive product offering has driven our growth, and we believe that our HEELYS brand is becoming synonymous with an increasingly popular lifestyle activity. We believe that the growing exposure of our HEELYS brand will allow us to selectively introduce additional product categories in the future by taking advantage of our expertise in product development and sourcing, strong retail relationships and knowledge of our target consumer.

We were initially incorporated as Heeling, Inc. in Nevada in 2000 and were reincorporated in Delaware in August 2006 and changed our name to Heelys, Inc. Through our general and limited partner interests, we own 100% of Heeling Sports Limited, a Texas limited partnership, which was formed in May 2000.

We are subject to the informational requirements of the Exchange Act, and, accordingly, file reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). We maintain a website on the World Wide Web at www.heelys.com. We make available, free of charge through our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits thereto, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after the reports are electronically filed with, or furnished to the SEC. Our reports that are filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov , that contains material regarding issuers that file electronically with the SEC . You may also obtain copies of any of our reports filed with, or furnished to, the SEC, free of charge, at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549.

Information regarding the operation of the Public Reference Room may be obtained by calling the Securities and Exchange Commission at 1-800-SEC-0330.

Our Business

We currently offer HEELYS-wheeled footwear in a wide variety of styles and colors at domestic retail price points ranging from $59.99 to $99.99 depending upon performance features, comfort and materials. HEELYS-wheeled footwear is protected by numerous patents and trademarks, enabling us to capture the emerging demand for our unique offering in the United States and other countries where we can enforce our patents. In 2006, approximately 98% of our net sales was derived from the sale of our HEELYS-wheeled footwear. We also sell branded accessories, such as replacement wheels, helmets and other protective gear, and a limited variety of apparel items.

We sell our products through distribution channels that merchandise our products in a manner that we believe enhances and protects our HEELYS brand image. Domestically, our products can be purchased from full-line sporting goods retailers such as The Sports Authority, Modell’s and Dick’s Sporting Goods; specialty apparel and footwear retailers, such as Journeys and The Finish Line; and select department stores, such as Nordstrom and Mervyn’s. Our products can also be purchased from select online retailers such as Zappos.com. In 2006, 85.7% of our net sales were derived from retailers in the United States. Internationally, our products are sold to independent distributors with exclusive rights to specified international territories.

Initial Public Offering of Our Common Stock and Use of Proceeds

On December 7, 2006, a registration statement (File No. 333-137046) relating to our initial public offering of our common stock was declared effective by the SEC. In this offering we sold a total of 3,125,000 shares of our common stock and selling stockholders sold 4,263,750 shares of our common stock, which included 963,750 shares resulting from the exercise of the underwriters’ over-allotment option. All common stock registered under the registration statement were sold at a price to the public of $21.00 per share. We did not receive any proceeds from the selling stockholders’ sale of their shares. The offering closed on December 13, 2006. Bear, Stearns & Co., Inc., Wachovia Capital Markets, LLC, J.P. Morgan Securities Inc. and CIBC World Markets Corp. acted as managing underwriters.

The gross proceeds from the shares of common stock sold by us were $65.6 million. The net proceeds to us from the offering were approximately $58.8 million, after deducting an aggregate of $4.6 million in underwriting discounts and commissions and $2.2 million in other expenses incurred in connection with the offering. We used $8.5 million of these proceeds to repay amounts outstanding under our revolving credit facility and $8.5 million for working capital purposes. We intend to use the remaining proceeds to fund infrastructure improvements, including expanding and upgrading our information technology systems; hire new employees; for marketing and advertising programs; product development; working capital needs; and other general corporate purposes.

Target Market

The growth and longstanding popularity of skateboarding, inline skating, roller skating and scooter riding in the United States reflect consumers’ interest in wheeled sports activities. For example, skateboarding and inline skating have remained a part of youth culture for more than 40 and 25 years, respectively. Our HEELYS-wheeled footwear, which we believe has broad patent protection relative to other wheeled sports products, appeals to many of these same consumers. While the market for HEELYS-wheeled footwear has grown significantly since our first product was introduced in 2000, we believe this market continues to have growth potential.

Our products appeal to a broad range of young, active consumers around the world who enjoy wheeled sports activities. Our primary market is six to fourteen year-old boys and girls, an age group in the

United States that the U.S. Census Bureau estimated to be 36.4 million people in 2005 and projected to grow to 38.2 million people by 2015. Based on our sales of more than 5.2 million pairs of HEELYS-wheeled footwear in the United States during 2006, we believe that our target market offers significant growth potential for both HEELYS-wheeled footwear and future product introductions. In addition, we believe we benefit from greater repeat purchases by our consumers relative to other wheeled sports products, driven by the natural replacement cycle of children’s footwear and the new styles that we offer each season.

We believe that our products have become more popular in recent years due to the trend among young people away from traditional team sports and toward individual, action sports. For example, SGMA International, a sporting goods industry trade group, estimated that from 1998 to 2005, U.S. participation in basketball, baseball and soccer declined 24.6%, 16.7% and 6.4%, respectively, while U.S. participation in snowboarding, skateboarding and surfing increased 33.7%, 58.3% and 90.5%, respectively. We believe events such as the X Games, the inclusion of snowboarding medal events in the Winter Olympics and the national recognition of leading boardsport athletes have broadened general awareness and increased the popularity of the action sports youth lifestyle. The trend towards individual, action sports has influenced the styles and performance features of our products and our marketing strategies.

Business Strengths

We attribute our success to the following business strengths:

• Stro ng Brand Recognition. We believe that our brand awareness is a significant competitive strength. We have positioned the HEELYS brand to represent a fun, youthful and active image and we believe it now defines an emerging lifestyle activity with a following among consumers in our target market. According to data collected by NPD, a retail and apparel industry research group, HEELYS-wheeled footwear had a 51.0% market share in retail sales dollars and a 37% market share in units sold for skateboard-related footwear brands for the quarter ended December 31, 2006.

• Appealing, High-Quality Products. We strive to provide high-quality, stylish products. We carefully select our independent manufacturers and diligently monitor their manufacturing process to ensure the quality of their finished goods. To stimulate demand for our products and encourage repeat purchases by consumers, we endeavor to consistently offer a line of wheeled footwear that combines style, comfort and high-quality components including ABEC-rated bearings, specially formulated polyurethane wheels and abrasion-resistant outsoles and upper materials. We have generally introduced more than 20 standard styles each year in an attempt to respond to changing consumer tastes and preferences.

• Focus on Innovation with Intellectual Property Protection. Our innovative HEELYS-wheeled footwear is highly differentiated from other wheeled sports products and athletic footwear. We believe that our patents and pending patent applications enable us to maintain this differentiation. We own more than 80 issued patents and pending patent applications in more than 25 countries, of which more than 55 are related to our HEELYS-wheeled footwear. We also have more than 75 registered trademarks and pending trademark applications in more than 30 countries. We believe that our experience introducing HEELYS-wheeled footwear to the market and our growing brand awareness will allow us to successfully develop and introduce additional products incorporating innovative designs and technologies that appeal to our target consumers.

• In-Depth Understanding of Our Target Market. We employ a grass-roots marketing model that enables us to regularly interact with and maintain an in-depth understanding of our target market. In 2006, our event marketing managers, or “EMMs,” coordinated more than 3,000 in-store clinics and demonstrations, allowing us to communicate our brand message in an interactive, fun environment. In addition, our EMMs use online marketing techniques such as hosting message boards and contributing to skate-oriented chat rooms. We also sponsor “team riders” to showcase HEELYS-wheeled footwear in high-traffic, public areas. Through these multifaceted interactions with our target consumers, we continually refine our understanding of their evolving preferences. We intend to use this insight to develop new HEELYS-wheeled footwear models, strengthen and extend our HEELYS brand and offer additional product categories.

• Compelling Value Proposition for Retail Customers. We believe that our differentiated product offering and brand name represent a compelling value proposition for our retail customers. Our products have historically enabled our retail customers to achieve high sales volumes at or near our suggested retail prices, rapid inventory turns and attractive margins. These results have allowed us to develop strong relationships and expand our product offerings with our retail customers, and add new retail customers.

• Flexible and Efficient Sourcing Model. By outsourcing manufacturing, we eliminate the need to purchase raw materials and limit the amounts we are required to spend on working capital, capital expenditures and overhead. This enables us to focus our resources on developing new products and brand-enhancing activities. We do not have any long-term manufacturing contracts, choosing instead to retain the flexibility to change our manufacturing sources if necessary. We have developed systems and procedures that enable us to actively monitor product quality, control product costs and facilitate timely product delivery.

• Senior Management Team with Deep Industry Experience. Our senior management team, which has overseen our company since its inception, has been instrumental in developing our HEELYS brand, establishing strong relationships with retail customers and international distributors and directing our growth. Our Chief Executive Officer has approximately 30 years of experience in the branded footwear and action sports industries and has held senior level positions at the Rollerblade division of Benetton Group S.p.A. and L.A. Gear. Our Senior Vice President—Global Sales has more than 25 years of sales and marketing experience in the athletic apparel and footwear industries and has held executive level and sales positions at L.A. Gear, Kaepa, Nike, Stride-Rite and Wilson Sporting Goods.

Growth Strategy

We plan to continue growing our net sales and earnings through the following strategies:

• Increase Awareness and Popularity of our HEELYS Brand. We plan to increase the awareness and popularity of our HEELYS brand, which we believe will fuel demand for our products. By conveying our brand message through word-of-mouth, grass-roots and traditional marketing, we seek to strengthen our understanding of and broaden our target market. We believe that enhanced brand awareness will allow us to expand sales of our current products and successfully offer new product categories.

• Broaden Our Relationships with Existing Retail Customers. Many of our retail customers do not initially sell our products in all of their stores, choosing to evaluate consumer acceptance of our products in a limited number of stores. As the demand for our products continues to grow and our relationships with our retail customers develop, we believe that certain of our retail customers will continue to increase the number of stores in which our products are sold and expand the selection of our products that they offer. Based on the success that these retailers have had selling our products, we believe that we will have opportunities to expand our sales with existing retail customers in the future. In addition, we encourage our independent distributors to pursue similar growth strategies with their customers.


• Expand Our Customer Base. We intend to increase our domestic distribution by selectively adding new retail customers. In particular, we believe that there are a number of regions in the United States where our products are under-distributed and we intend to add retailers in these regions to increase our distribution. We believe that international distribution also represents a significant growth opportunity for us. We intend to take advantage of this opportunity by encouraging our existing distributors to expand their market presence and by establishing relationships with distributors in new international markets.

• Develop and Selectively Acquire New Products and Brands. Our vision is to become an action-sports lifestyle company, consistently bringing innovative branded products to the global market. We intend to leverage our HEELYS brand and our reputation for innovation, quality, performance and comfort by expanding our apparel and accessories product offerings, entering new product categories and increasing the breadth of HEELYS branded products sold by our existing retail customers. In addition to continually updating our HEELYS-wheeled footwear offering with new colors, materials and textures to keep our style assortment fresh and developing related products and technologies, we believe opportunities exist to acquire complementary brands and products that appeal to our target market.

Products

Our primary product is HEELYS-wheeled footwear, 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 skating by shifting weight to the heel. Users can remove the wheel to transform HEELYS-wheeled footwear into street footwear. HEELYS-wheeled footwear is offered in more than 20 styles, incorporating various comfort and performance features and colors at five retail price points. We traditionally offer a new line of HEELYS-wheeled footwear twice each year for the spring/summer selling season and the back-to-school and holiday selling seasons.

In addition to offering our standard styles, we collaborate with certain of our retail customers to develop HEELYS-wheeled footwear styles that these retail customers have the exclusive rights to sell. This special make-up program enables these customers to differentiate their HEELYS-wheeled footwear product offering and allows us to broaden our product range. These exclusive products are made to order and shipped directly to our retail customers, thereby mitigating our inventory risk. In 2006, special make-up program products represented approximately 23.5% of our net sales.

In the past, we sold less-expensive wheeled footwear under the “Cruz” brand name exclusively to certain of our independent distributors. The Cruz brand represented approximately 17.7% and 3.3% of our net sales in 2004 and 2005, respectively. Although we have not sold any Cruz branded footwear since 2005, we may choose to re-launch this product line in the future.

We also offer a selection of HEELYS branded accessories, including protective gear such as helmets and wrist, elbow and knee guards, heel plugs, wheel bags and replacement wheels and a limited variety of apparel items. We plan to take advantage of growing consumer awareness of our brand name and our strong retail relationships to expand our HEELYS branded accessories offerings. In response to demand from certain of our retail customers, we began to offer HEELYS branded apparel and additional accessories in the third quarter of 2006.

Product Design and Development

We continually update and refine our product offerings in response to evolving consumer preferences. For example, in 2002 we introduced the grind plate for our grind-and-roll HEELYS-wheeled footwear and the two-wheel HEELYS-wheeled footwear, and in 2003 we introduced specific styles for girls and the “sole saver” heel plug, which provides a finished look to the footwear by covering the wheel cavity when the wheel is removed. We believe that introducing new products, performance features and designs allows us to maintain premium price points, encourages repeat purchases and creates incremental consumer demand for our products. We monitor changing consumer trends and identify new product opportunities through close, interactive contact with our target consumers, frequent dialogue between our EMMs, and our retail customers and input from our sponsored “team riders” who are paid to use and promote our products.

Our product development efforts include both incremental improvements to our existing products and entirely new technologies and product categories. Incremental improvements to our existing products include introducing new styles, improving the materials used in our wheels and designing lighter shoes with greater durability and enhanced comfort and performance features.

Our product design and development process is rigorous and highly collaborative, using input from our sales staff, product development professionals, retail customers, EMMs and consumers. We focus not only on the performance of our products, but also on production cost and efficiency. Prior to hiring our Vice President—Design and Development in October 2006, we outsourced the aesthetic, non-technical aspects of our product design, such as color and style, to independent product designers.

Sales

We carefully control the distribution of our products to protect and enhance our HEELYS brand and maintain our ability to offer our products at premium price points. We sell our products domestically directly to retail customers and internationally through independent distributors. Currently, we do not sell our products to mass merchants or directly to consumers.

Domestic Sales

As of December 31, 2006, our customer base of retail customers in the United States included more than 800 accounts that operated more than 7,400 stores. Based on communications with those customers,


we believe that as of December 31, 2006, our HEELYS-wheeled footwear was offered for sale in more than 5,000 of those stores. These retail customers include a variety of full-line sporting goods retailers, specialty apparel and footwear retailers and select department stores. Our products are also sold through select online retailers. We attempt to choose retail customers who appeal to our target market and who are able and willing to merchandise our products in a manner that we believe is consistent with our brand message and positioning. Big 5 Sporting Goods, Dick’s Sporting Goods, Modell’s, The Sports Authority, Journeys, The Finish Line, Nordstrom, Mervyn’s and Zappos.com are examples of our domestic retail customers. In 2004, 2005 and 2006, our domestic net sales were $13.8 million, $36.6 million and $161.3 million, respectively, representing 64.9%, 83.2% and 85.7% of our total net sales, respectively.

We believe that there are numerous opportunities to expand our domestic distribution. We intend to increase our domestic distribution by expanding the number of stores in which HEELYS-wheeled footwear is sold by existing retail customers and by adding new retail customers. Due to our limited funding at our inception, we focused our marketing resources on specific regions of the country that we believed embraced wheeled sports and innovative products such as HEELYS-wheeled footwear. As the exposure of our products and brand name increased and our financial position improved, we expanded our focus to other regions of the country.

We are committed to providing the highest levels of service to our retail customers. We maintain a national sales force of 19 independent sales representatives, each of whom is assigned an exclusive territory and is compensated on a commission basis, and who together are responsible for substantially all of our domestic sales. We believe that our product line represents a significant percentage of the sales made by these independent sales representatives. Our Senior Vice President—Global Sales, who oversees our independent sales representatives, and our independent sales representatives are supported by our twelve-person sales and customer service department.

International Sales

As of December 31, 2006, we offered our products internationally through more than 29 independent distributors, each of which has exclusive rights to a designated territory. In 2006, our largest international territories by net sales were the United Kingdom, Canada and Ireland. We select our independent distributors based on their relationships with appropriate retailers, their ability to effectively represent the HEELYS brand and their execution of our distribution strategy. In order to maintain a consistent brand image throughout the world, we provide marketing, distribution and product training support to our independent distributors. Each distributor must meet minimum sales goals and is responsible for funding its local marketing campaigns, maintaining its own inventory and providing sufficient sales, distribution and customer service infrastructure. In 2004, 2005 and 2006, our international net sales were $7.5 million, $7.4 million and $26.9 million, respectively, representing 35.1%, 16.8% and 14.3% of our total net sales, respectively. In 2004, Japan accounted for 19.4% of our total net sales. Since 2004, no country other than the United States has accounted for 10% or more of our net sales. We believe that international distribution represents a meaningful growth opportunity for us that we intend to take advantage of by encouraging our existing distributors to expand their market presence and by establishing relationships with distributors in new international markets.

Principal Customers

In 2004, A.G. Corporation in Japan accounted for 19.4% of our net sales and Big 5 Sporting Goods represented 15.8% of our net sales. In 2005, Big 5 Sporting Goods, Journeys and The Sports Authority represented 12.3%, 11.3% and 10.6% of our net sales, respectively. In 2006, Journeys accounted for 12.7% of our net sales. No other retail customer or independent distributor accounted for 10% or more of our net sales in any of these periods.

Marketing

Our marketing strategy is to position our products and the HEELYS brand to represent a lifestyle that includes excitement, individuality and the unique culture of action sports. To promote awareness of our HEELYS brand, we utilize a multi-faceted strategy that includes event marketing activities, television advertising, point-of-purchase, or “POP,” displays and product placement and public relations opportunities. While we fund the cost of these activities domestically, our independent distributors are solely responsible for these costs in their markets.

Event Marketing Activities

We employ a team of six EMMs that enables us to reach consumers at the grass-roots level and help drive foot traffic to our retail customers’ locations. EMMs increase consumer awareness of our products by hosting in-store product clinics and demonstrations, teaching store personnel how to use our products, employing “guerrilla” marketing methods such as arranging for our sponsored “team riders” to skate in high traffic public areas and using online marketing techniques such as hosting message boards and contributing to skate-oriented chat rooms. EMMs educate retail sales personnel on techniques to maximize sell-through of our products and to promote product awareness and safety.

Television Advertising

Television advertisements are an important and highly effective tool for increasing awareness of our brand and products among our target consumers because these advertisements allow us to show consumers HEELYS-wheeled footwear in action. Advertisements air in selected regions of the United States during our primary selling seasons on cable channels such as ABC’s Family Channel, Nickelodeon and The Cartoon Network. As part of our regional television advertising strategy, we feature the name of a local retail customer at the end of our television advertisements. This tactic is intended to drive consumers to specific retail customers and allows us to evaluate the effectiveness of our advertising. We ran our first national cable television advertising campaign in the fourth quarter of 2005. During 2006, we continued utilizing both regional and national television advertising campaigns and expect to continue to follow this approach in the future.

Point-of-Purchase Displays

Certain of our retail customers have committed valuable floor space to POP displays we provide to enhance the presentation of our products. Through the use of these POP displays, we are able to present the HEELYS brand message to consumers in a consistent manner and increase our shelf space in our retail customers’ locations. EMMs ensure that our merchandise is effectively featured using POP displays.

Product Placement

Because HEELYS-wheeled footwear is highly differentiated from other wheeled sports products and other footwear, we often receive requests from television shows, magazines and news organizations to review or highlight our products. While we have not paid for product placement, our products have been featured in numerous television and print spots, including television networks such as CNN and CNBC; television shows such as So You Think You Can Dance , Good Morning America , Radical Sabbatical , Livin’ Large , CSI: Miami and Invent This ; magazines and newspapers such as Time , People , The Wall Street Journal , In Style , Newsweek and Sports Illustrated; and the World Book Encyclopedia and McGraw-Hill school textbooks. HEELYS-wheeled footwear was used in the Miramax film Spy Kids 2 as well as in the Lionsgate film Employee of the Month ; and has been featured in pop artist Usher’s music videos and television specials. We believe that product placement activities enable us to build awareness of our products and our HEELYS brand in a cost-effective manner.

Manufacturing and Sourcing

We do not own or operate any manufacturing facilities and we purchase our products as finished goods from independent manufacturers. We do not have any long-term manufacturing contracts, choosing instead to retain the flexibility to change our manufacturing sources if necessary. We believe that alternate manufacturing sources are available at comparable costs to those we currently experience.

We carefully monitor all aspects of the production of our HEELYS-wheeled footwear, including the development and manufacturing of prototypes, initial production runs and final product manufacturing. We perform an array of inspection procedures at various stages of the production process, including examination and testing of raw materials and components prior to manufacture, work-in-process at various stages of production and finished goods prior to shipment. Historically, our defective return rate has been less than 1.0% of our net sales. We also conduct on-site visits to our manufacturers’ facilities to confirm that they engage in ethical business practices.

Boss Technical Services, our independent sourcing agent, helps us identify and develop relationships with manufacturers of our footwear products and provides quality inspection, testing, logistics and product development and design assistance. We pay for these services on a commission basis. We also hired a Vice President—Sourcing in December 2006 to manage our relationship with Boss Technical Services and our manufacturers.

Bu Kyung Industrial, which is owned by one of the owners of Boss Technical Services, has manufactured HEELYS-wheeled footwear since our inception and until 2006 was responsible for manufacturing substantially all of our HEELYS-wheeled footwear. Due to rapid growth in demand for our HEELYS-wheeled footwear, in 2006 we began using a number of other manufacturers to supply our products. We expect Bu Kyung Industrial to continue to manufacture a significant portion of our footwear products, but we expect to develop relationships with additional manufacturers in order to secure additional capacity and mitigate the risk associated with using a limited number of manufacturers.

Order Fulfillment and Inventory Management

Our products are inspected, bar coded and packaged by our independent manufacturers and transported by container ship typically to Long Beach, California. Our independent manufacturers mark, label and pre-ticket our products for certain of our larger retail customers. For products sold in the United States, after the products clear U.S. customs, we use an independent freight forwarder and customs broker to ship them via rail by container either to our distribution center located in Carrollton, Texas, or directly to our retail customers. In 2006, approximately 81.2% of our products in the United States were shipped directly to our retail customers. Upon receipt at our warehouse, merchandise is inspected and recorded in our management information systems and packaged for delivery. We maintain electronic data interchange, or “EDI,” connections with many of our larger retail customers in order to automate order tracking and inventory management. Substantially all of our products destined for international distribution are sent directly by our independent manufacturers to our independent distributors.

To allow us to better plan our production volume with our manufacturers, we offer our retail customers discount incentives to place advance orders. We typically receive most of our orders, which are not subject to cancellation, three to four months in advance of the scheduled delivery dates. To manage our inventory risk, we regularly monitor available sell-through data and seek input on anticipated consumer demand from our retail customers.

CEO BACKGROUND

Michael G. Staffaroni , 50, serves as our Chief Executive Officer, President and Director. His biography is contained in the section of this Proxy Statement entitled “Election of Directors.”
Patrick F. Hamner , 51, serves as our Chairman of the Board and Director. His biography is contained in the section of this Proxy Statement entitled “Election of Directors.”
Roger R. Adams, 52, serves as our Director of Research and Development and Director. His biography is contained in the section of this Proxy Statement entitled “Election of Directors.”
Michael W. Hessong , 41, has served as our Chief Financial Officer since December 2000 and as our Vice President—Finance, Treasurer and Secretary since May 2006. Mr. Hessong served as Vice President—Finance of the Marketing Continuum, a promotional marketing company, from May 1998 to December 2000. He also served as Vice President—Finance of Firstcom Music, a licensor of production music, from August 1997 to May 1998, and was the Controller and Director of Operations for Jokari/US, Inc., a consumer product company from May 1993 to August 1997. Mr. Hessong is a licensed certified public accountant in the State of Texas and received a Bachelor of Science in accounting from Oklahoma State University.
Charles D. Beery, 55, has served as our Senior Vice President—Global Sales since March 2001. Mr. Beery has over 25 years of athletic footwear and marketing experience. He has held executive level and sales positions at L.A. Gear, Nike, Stride-Rite, Kaepa and Wilson Sporting Goods. Mr. Beery received a Bachelor of Science in physical education from Texas Tech University.
James S. Peliotes, 40, has served as our Vice President—Marketing since October 2006. Mr. Peliotes has over 17 years of experience with consumer products companies. From August 2002 through September 2006, Mr. Peliotes served as a Business Unit Manager for Easton-Bell Sports, a sports products company. From July 2000 through July 2002, Mr. Peliotes served as a Director of Brand Management for Diageo, a liquor manufacturer. From August 1989 through June 2000, Mr. Peliotes served in various marketing and product manager positions at Kimberly-Clark Corporation, a worldwide consumer products company. Mr. Peliotes has a Bachelor of Arts from Lakeland College and a Master of Business Administration from the University of Nevada, Las Vegas.
Robert W. Byrne, 42, has served as our Vice President—Design and Development since October 2006. Mr. Byrne has almost 20 years experience in product design and development. Before joining us, Mr. Byrne worked from August 1998 through May 2005 as a product designer and developer at Skechers USA, Inc., an international footwear company. From December 1993 through August 1998, Mr. Byrne served as Vice President at Edge Quest, a research and development footwear company, and from May 1989 through December 1993, he was in product design and development at L.A. Gear, an athletic footwear company. Mr. Byrne received a Bachelor of Arts in Art Communication from Roanoke College.
William D. Albers, 51, has served as our Vice President—Sourcing since December 2006. Mr. Albers has over 24 years of experience in sourcing, manufacturing, and technologies development in the footwear industry. Before joining us, Mr. Albers was Director of Development at Pony International from June 2004 to December 2006 and Director of Development for Nautica Footwear from 2002 through 2006. From May 2001 through July 2002, Mr. Albers served as West Coast Sales Manager for Polymer Dynamics, Inc. From June 1999 through May 2001, Mr. Albers served as Senior Development Manager of Soft Goods Accessories at Specialized Bicycle Components. Mr. Albers has a Bachelor of Science in Health and Physical Education from George Mason University.

SHARE OWNERSHIP

Michael G. Staffaroni owns 4.14 % , Patrick F. Hamner owns 1.98 %, Roger R. Adams owns 18.07 %, Richard E. Middlekauff owns 9 %, Samuel B. Ligon owns , 1.14%, William R. Thomas owns 34.45 %, Jeffrey G. Peterson owns 34.45, James T. Kindley 2000 shares beneficially owned, Michael W. Hessong owns 1.37%, Charles D. Beery owns 1.72 %

COMPENSATION

Base Salary
In determining base salary levels, the Compensation Committee considers the difficulty and scope of the job, the competitive market pay levels among companies with which we compete for talent and the executive’s performance. To determine the competitive market pay levels, the Compensation Committee considers several factors, including peer company performance and individual pay levels at those peer companies and the executives’ experience and performance.
The base salaries for our Named Executive Officers for 2006 were largely determined on the judgment of the Compensation Committee taking into account the factors described above. The base salaries for 2006 were calculated using a percentage increase over 2005 base salaries.
Mr. Hessong has served as our Chief Financial Officer since December 2000 and as our Vice President—Finance, Treasurer and Secretary since May 2006. As a result of this increase in position and responsibility, Mr. Hessong’s annual base salary was increased from $150,000 to $175,000, effective May 15, 2006. This increase was recommended by our executive management team and approved by the Compensation Committee. In addition to the expected increase in responsibilities resulting from Mr. Hessong’s changed position within our company, there was an increase in his responsibilities resulting from the decision to pursue an initial public offering of our common stock as well as the anticipated increase in the number of employees that would directly report to Mr. Hessong.
Effective January 1, 2007, the annual base salaries for all of our Named Executive Officers, with the exception of Mr. Adams, were increased. Mr. Staffaroni’s annual base salary increased from $238,000 to $400,000; Mr. Hessong’s increased from $175,000 to $231,000; Mr. Hamner’s increased from $210,000 to $231,000; and Mr. Beery’s increased from $139,236 to $250,000. In determining the adjusted annual base salary levels, the Compensation Committee considered all of the factors described above. In determining competitive market pay levels the Compensation Committee reviewed an analysis, prepared by our Chairman of the Board, which compared the 2005 compensation being paid to executive officers at eight peer public companies. Consideration was also given to a compensation study prepared by Watson Wyatt. Finally, the Compensation Committee took into consideration the past performance of the Named Executive Officers, the increase in responsibilities resulting from the Company’s initial public offering in December 2006 and the growth and financial performance experienced by the Company in 2006.
The amount of base salary paid to our Named Executive Officers for 2006 is shown in the Summary Compensation Table on page 24.
Performance-Based Incentive Cash Bonus
The incentive cash bonus is intended to reward behavior and results that assist in meeting the Company’s business, strategic and financial goals. Performance criteria are set annually and may include Company business objectives, Company earnings or other financial criteria applicable to the executive, the Company or both.
For 2006, there where three components to the performance-based incentive bonus: (1) 50% of the total bonus opportunity was based on the achievement of earnings versus budget (earnings being measured by EBITDA (earnings before interest, taxes depreciation and amortization)); (2) successful management of inventory levels, cash needs, and legal expenses; and (3) individual performance versus annual objectives. The maximum bonus amount that may have been earned ranged from 40% to 100% of base salary. In 2006, each of the Named Executive Officers were awarded the maximum amount. The amount of bonus paid to our Named Executive Officers is shown in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table on page 24.
Effective January 1, 2007, the Compensation Committee approved the Heelys, Inc. Annual Incentive Plan (the “Incentive Bonus Plan”). The Incentive Bonus Plan was established to (i) offer selected employees, including executive officers of the Company, an opportunity to participate in the growth and financial success of the Company, (ii) provide the Company an opportunity to attract and retain the best available personnel for positions of substantial responsibility, (iii) provide incentives by means of performance-related incentives to achieve short-term performance goals, and (iv) promote the growth and success of the business of the Company by aligning the financial interests of selected employees with that of the other stockholders of the Company. The Incentive Bonus Plan provides for the grant of annual performance bonuses and discretionary bonuses.
An annual performance bonus is an award that is paid solely on account of the attainment of one or more specific performance targets in relation to one or more performance goals. A performance goal is the business criteria (and related factors) selected by our Compensation Committee to measure the level of performance of the Company during the performance period.
The Incentive Bonus Plan has been designed with the intent to eliminate or minimize the need for the award of a discretionary bonus. The Compensation Committee recognizes, however, that unusual circumstances may occur that prevent payment of appropriate awards to a few key eligible employees. In recognition of truly extraordinary performance, occasional discretionary bonus awards may be appropriate and granted by the Compensation Committee. A discretionary bonus is primarily intended to provide a means of redressing inequities in annual performance bonus award determinations or to reward exemplary performance on a very limited basis. The awarding of a discretionary bonus is made entirely at the discretion of the Compensation Committee.
The Incentive Bonus Plan is administered by the Compensation Committee, which has the authority to interpret the Incentive Bonus Plan and to make all determinations specified in or permitted by the Incentive Bonus Plan or deemed necessary or desirable for its administration. The Compensation Committee may, in its sole discretion, and subject to the provisions of the Incentive Bonus Plan, from time to time delegate any or all of its authority to administer the Incentive Bonus Plan to any other person, persons or committee as it deems necessary or appropriate for the proper administration of the Incentive Bonus Plan, except that no such delegation shall be made in the case of awards intended to be qualified under Section 162(m) of the Internal Revenue Code or awards held by employees who are subject to the reporting requirements of Section 16(a) of the Exchange Act.
For 2007, there are currently 12 employees, including our Named Executive Officers, who are eligible for a performance-based bonus. The Compensation Committee or, if authorized, the Company’s Chief Executive Officer, may determine from time to time to revise or expand the employees eligible for an award under the Incentive Bonus Plan.
The Compensation Committee is responsible for establishing (i) the performance goals that will apply to that performance period; (ii) with respect to each such performance goal, the specific performance factors and targets related to each participant and, if achieved, the targeted amount of the participant’s annual performance bonus and such other applicable terms of the annual performance bonus as may be required; and (iii) the criteria for computing the amount that will be paid with respect to each level of attained performance.
The Compensation Committee also sets the minimum level of performance, based on objective factors and criteria, that must be attained during the performance period before any performance goal is deemed to be attained and any annual performance bonus will be earned and become payable and the percentage of the annual performance bonus that will be earned and become payable upon attainment of various levels of performance that equal or exceed the minimum required level.
The Compensation Committee may, in its discretion, select performance goals and specific performance factors and targets (absolute or relative to the performance of one or more peer companies or an index of peer companies) that are set forth in the Incentive Bonus Plan and that they believe measure the performance of the Company or one or more business units or divisions of the Company.
The Compensation Committee has established the performance goals for the 2007 performance period by reference to the growth in diluted earnings per share, (as determined in accordance with generally accepted accounting principles), for the fiscal year ended December 31, 2007 over diluted earnings per share for the fiscal year ended December 31, 2006. Diluted earnings per share for the fiscal year ended December 31, 2006 was $1.16. The following schedule details the performance goals (growth in diluted earnings per share) and the potential payments (performance-based cash incentive bonus) for the 2007 performance period for our Named Executive Officers.



MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a designer, marketer and distributor of innovative, action sports-inspired products under the HEELYS brand targeted to the youth market. Our 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 skating by shifting weight to the heel. Users can transform HEELYS-wheeled footwear into street footwear by removing the wheel. In 2006, approximately 98% of our net sales was derived from the sale of our HEELYS-wheeled footwear. We also sell branded accessories such as replacement wheels, helmets and other protective gear, and a limited variety of apparel items.

We introduced HEELYS-wheeled footwear in 2000, and for several years our domestic sales were concentrated with one large, national specialty retailer. Although we initially focused on driving our domestic sales growth, we also established relationships with an independent distributor in each of Japan, South Korea and Southeast Asia. As a result, the sources of our net sales were largely concentrated and we were susceptible to customer-specific and region-specific factors, including competition from counterfeit, knockoff and infringing products in international markets. This concentration caused variability in our results of operations. Since that time, we have diversified our retail customer base in the United States and expanded our international distribution channels to mitigate this concentration. Since 2003, our domestic net sales have increased rapidly. We believe that this increase has resulted primarily from the growing acceptance of HEELYS-wheeled footwear by consumers, increasing recognition of our HEELYS brand name and expanding distribution of HEELYS-wheeled footwear to existing and new retail customers. We believe that our grass-roots marketing programs, quality products and relationships with our retail customers have contributed to this growing demand. Continued growth of our net sales will depend on consumer demand for HEELYS-wheeled footwear and our ability to satisfy this demand. A number of factors may impact consumer demand for our products, including:

• the effectiveness of our marketing strategies;

• our ability to effectively distribute our products;

• our ability to design products that appeal to our target consumers;

• our ability to protect our intellectual property rights;

• general economic conditions, particularly changes in consumer discretionary spending patterns; and

• changes in the popularity of and participation rates in wheeled sports activities.

We intend to continue to diversify our product offering with new HEELYS-wheeled footwear models, product categories and accessories in order to benefit from the increasing recognition of our HEELYS brand and the growing market for action sports-inspired products. Designing, marketing and distributing new products will require us to devote additional resources to product development, marketing and operations. These additional resources may include hiring new employees to support our growth in these areas and increasing amounts allocated to product advertising and promotion. Each of these additional resource commitments will increase our selling, general and administrative expenses. Because the selling price and unit cost of new products may differ from those of our existing products, sales of these new products may also impact our gross margin. In addition, we may seek to selectively acquire products and companies that offer products that are complementary to ours.

General

Net Sales

Net sales represent primarily sales of HEELYS-wheeled footwear, less an estimated reserve for sales returns, allowances and discounts. A small portion of our net sales are derived from the sale of accessories such as replacement wheels, helmets and other protective gear, and a limited variety of apparel items. Amounts billed to domestic customers for shipping and handling are included in net sales.

We sell our products through distribution channels that merchandise our products in a manner that we believe enhances and protects our HEELYS brand image. Domestically, our products can be found in full-line sporting goods retailers, specialty apparel and footwear retailers and select department stores and online retailers. As of December 31, 2006, our customer base of retail customers in the United States included more than 800 accounts that operated more than 7,400 stores. Based on communications with these customers, we believe that as of December 31, 2006, our HEELYS-wheeled footwear was offered for sale in more than 5,000 of these stores. In 2006, 85.7% of our net sales were derived from domestic retail customers. Internationally, our products are sold to 29 independent distributors with exclusive rights to specified territories. Our three largest international territories in 2006, by net sales, were the United Kingdom, Canada and Ireland. Sales to our independent distributors are denominated in U.S. dollars.

Cost of Sales and Gross Profit

Cost of sales consists primarily of the cost to purchase finished products from our independent manufacturers. Cost of sales also includes commissions paid to our independent sourcing agent, inbound and outbound freight, warehousing expenses, tooling depreciation, royalty expenses related to licensed intellectual property and an inventory reserve for shrinkage and write-downs.

We source all of our products and accessories from manufacturers located in China, Indonesia and South Korea. Our product costs are largely driven by the prices we negotiate with our independent manufacturers. Each season, we negotiate a unit price for each model of HEELYS-wheeled footwear. Factors that influence these prices include raw materials and labor costs and foreign exchange rates. We pay our independent sourcing agent a commission equal to a specified percentage of our per unit cost, with the percentage decreasing when our annual purchases exceed a predetermined unit volume threshold. We believe that our sourcing model allows us to minimize our capital investment, retain the production flexibility, cost-effectiveness and scalability inherent in the use of independent manufacturers and focus our resources on developing new products and enhancing our HEELYS brand image.

We have generally avoided selling our products at close-out prices due to strong demand. Should demand for our products slow, we may discount our products to reduce our inventory, which may cause our gross profit as a percentage of net sales, or gross margin, to decline. Our gross margin is affected by our sourcing and distribution costs, our product mix and our ability to avoid excess inventory by accurately forecasting demand for our products. The unit prices that we charge our domestic retail customers are generally higher than what we charge our independent distributors for similar products, because our independent distributors are responsible for distribution and marketing costs relating to our products. The gross margin for products sold to our domestic retail customers and independent distributors are similar, however, due to higher shipping costs and standard customer discounts and allowances related to domestic sales.

Selling, General and Administrative Expenses

Selling, general and administrative expenses consist of wages and related payroll and employee benefit costs, sales and marketing expenses, advertising costs, travel and insurance expenses, product development costs, costs to enforce our intellectual property rights, depreciation, amortization, professional fees and facility expenses. Our selling, general and administrative expenses have increased annually as we have increased our marketing expenses and expanded our infrastructure to support our sales growth. In addition, our product liability insurance premiums have increased as our net sales have increased. We expect that our selling, general and administrative expenses will continue to increase in future periods as we continue to hire additional personnel, develop our infrastructure, increase our brand recognition through marketing, secure and enforce our intellectual property rights and incur additional expenses associated with operating as a public company, including compliance with the Sarbanes-Oxley Act of 2002.

As a result of adopting Financial Accounting Standards Board, or FASB, No. 123(R), Share-Based Payment (Revised 2004), on January 1, 2006, we incurred approximately $375,000, net of tax, in non-cash stock-based compensation expense during 2006. The amount of compensation expense recognized will depend upon numerous factors and estimates, including the number and vesting period of option grants, the publicly traded price of our common stock, the estimated volatility of our common stock price, estimates of the timing and volume of exercises and forfeitures of the options and fluctuations in future interest and income tax rates.

Income Taxes

We operate through Heeling Sports Limited, a Texas limited partnership, and, accordingly, have not incurred significant amounts of Texas franchise taxes. Texas recently passed legislation amending its franchise tax law. As a result, effective January 1, 2007, we expect our effective tax rate to increase by up to 0.5%.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview
We are a designer, marketer and distributor of innovative, action sports-inspired products under the HEELYS brand targeted to the youth market. Our 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 skating by shifting weight to the heel. Users can transform HEELYS-wheeled footwear into street footwear by removing the wheel. For the three and nine months ended September 30, 2006, approximately 99% of our net sales were derived from the sale of our HEELYS-wheeled footwear. For the three and nine months ended September 30, 2007, approximately 98% of our net sales were derived from the sale of our HEELYS-wheeled footwear. We also sell branded accessories such as replacement wheels, helmets and other protective gear, and a limited variety of apparel items.
We introduced HEELYS-wheeled footwear in 2000, and for several years our domestic sales were concentrated with one large, national specialty retailer. Although we initially focused on driving our domestic sales growth, we also established relationships with an independent distributor in each of Japan, South Korea and Southeast Asia. As a result, the sources of our net sales were largely concentrated and we were susceptible to customer-specific and region-specific factors, including competition from counterfeit, knockoff and infringing products in international markets. This concentration caused variability in our results of operations. Since that time, we have diversified our retail customer base in the United States and expanded our international distribution channels to mitigate this concentration.
Continued growth of our net sales will depend on consumer demand for HEELYS-wheeled footwear and our ability to satisfy this demand. A number of factors may impact consumer demand for our products, including:
• the effectiveness of our marketing strategies;
• our ability to effectively distribute our products;
• our ability to design products that appeal to our target consumers;
• our ability to protect our intellectual property rights;
• general economic conditions, particularly changes in consumer discretionary spending patterns; and
• changes in the popularity of and participation rates in wheeled sports activities.
We intend to continue to diversify our product offering with new HEELYS-wheeled footwear models, product categories and accessories in order to benefit from the increasing recognition of our HEELYS brand and the growing market for action sports-inspired products. Designing, marketing and distributing new products will require us to devote additional resources to product development, marketing and operations. These additional resources may include hiring new employees to support our growth in these areas and increasing amounts allocated to product advertising and promotion. Each of these additional resource commitments will increase our selling, general and administrative expenses. Because the selling price and unit cost of new products may differ from those of our existing products, sales of these new products may also impact our gross margin. In addition, we may seek to selectively acquire products and companies that offer products that are complementary to ours.

Recent Developments
We have recently experienced challenges related primarily to higher than expected inventory positions of product at many of our domestic accounts, which will have a significant adverse effect on our fourth quarter 2007 results. While weekly unit sales at the store level are generally favorable compared to last year, they are lower than the internal projections of many of our domestic retailers. We believe that this can be attributed to: (1) aggressive sell through expectations of some of our domestic retailers going into the summer months and (2) retail softness in footwear and apparel. Certain of our major retailers have shown reluctance to place significant fourth quarter 2007 orders until their current inventory is reduced to their targeted levels. We have also seen decreased prices on our products at certain of our retailers. These factors have led us to work closely with each of our key retail customers to assist them in managing their inventory and sell-through. This process typically includes providing marketing discretionary funds, rescheduling orders to later dates, accepting cancellations and increasing marketing, promotion and advertising support. We make estimates relating to the net realizable value of our inventories, based on our assumptions about future demand and market conditions. If we estimate that the net realizable value of our inventory may be less than the cost of the inventory recorded on our books we record a reserve against our inventory. This reserve is recorded as a charge to cost of sales. As a result of rescheduled and cancelled orders there has been an increase in our inventory. During the third quarter of 2007, we increased our inventory reserve.
General
Net Sales
Net sales represent primarily sales of HEELYS-wheeled footwear, less an estimated reserve for sales returns, allowances and discounts. A small portion of our net sales is derived from the sale of accessories such as replacement wheels, helmets and other protective gear and a limited variety of apparel items. Amounts billed to domestic customers for shipping and handling are included in net sales.
We sell our products through distribution channels that merchandise our products in a manner that we believe enhances and protects our HEELYS brand image. Domestically, our products can be found in full-line sporting goods retailers, specialty apparel and footwear retailers and select department stores and online retailers. For the nine months ended September 30, 2007, 85.5% of our net sales were derived from domestic retail customers. Internationally, our products are sold to independent distributors with exclusive rights to specified territories. Sales to our independent distributors are denominated in U.S. dollars. No country, other than the United States, accounted for 10% or more of our net sales for the nine months ended September 30, 2007.
In July 2007, we hired a Vice President — International, to oversee our international business, including managing our international distributors.
Cost of Sales and Gross Profit
Cost of sales consists primarily of the cost to purchase finished products from our independent manufacturers. Cost of sales also includes commissions paid to our independent sourcing agent, inbound and outbound freight, warehousing expenses, tooling depreciation, royalty expenses related to licensed intellectual property and an inventory reserve for shrinkage and write-downs.
We source all of our products and accessories from manufacturers located in China, Indonesia and South Korea. Our product costs are largely driven by the prices we negotiate with our independent manufacturers. Each season, we negotiate a unit price for each model of HEELYS-wheeled footwear. Factors that influence these prices include raw materials and labor costs and foreign exchange rates. We pay our independent sourcing agent a commission equal to a specified percentage of our per unit cost, with the percentage decreasing when our annual purchases exceed a predetermined unit volume threshold. We believe that our sourcing model allows us to minimize our capital investment, retain the production flexibility, cost-effectiveness and scalability inherent in the use of independent manufacturers and focus our resources on developing new products and enhancing our HEELYS brand image. In December 2006, we hired a Vice President — Sourcing, to manage our relationship with our independent sourcing agent and manufacturers.
We have generally avoided selling our products at close-out prices due to strong demand. Should demand for our products slow, we may discount our products to reduce our inventory, which may cause our gross profit as a percentage of net sales, or gross margin, to decline. Our gross margin is affected by our sourcing and distribution costs, our product mix and our ability to avoid excess inventory by accurately forecasting demand for our products. The unit prices that we charge our domestic retail customers are generally higher than what we charge our independent distributors for similar products, because our independent distributors are responsible for distribution and marketing costs relating to our products. The gross margin for products sold to our domestic retail customers and independent distributors are similar, however, due to higher shipping costs and standard customer discounts and allowances related to domestic sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of wages and related payroll and employee benefit costs, sales and marketing expenses, advertising costs, travel and insurance expenses, product development costs, costs to enforce our intellectual property rights, depreciation, amortization, professional fees, facility expenses and costs associated with operating as a public company.
We adopted SFAS No. 123(R) effective January 1, 2006. SFAS No. 123(R) requires the measurement of compensation cost of stock-based compensation awards based on the estimated fair value of that award on the date of grant. We recognize this compensation cost using the straight-line method over the period during with the employee is required to provide service in exchange for the award — the requisite service period. No compensation cost is recognized for awards for which the employee does not render the required service. If the requisite service is not provided, all previously recognized compensation cost is reversed. For all awards granted to-date, the requisite service period is the same as the vesting period of the award.
We expect that our selling, general and administrative expenses will continue to increase in future periods as we continue to hire additional personnel, develop our infrastructure, increase our brand recognition through marketing, increase our product development efforts, secure and enforce our intellectual property rights and incur additional expenses associated with operating as a public company, including compliance with the Sarbanes-Oxley Act of 2002.

Income Taxes
We operate through Heeling Sports Limited, a Texas limited partnership, and, accordingly, have not incurred significant amounts of Texas franchise taxes. Texas recently passed legislation amending its franchise tax law. We do not expect this change in the Texas franchise tax law to have a material impact on our effective tax rate.

SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

3143 Views