The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements (“forward-looking statements”) that involve risks and uncertainties. For this purpose, any statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may be deemed to be forward-looking statements. When used in this Quarterly Report on Form 10-Q and in documents incorporated by reference herein, forward-looking statements include, without limitation, statements regarding our expectations, beliefs or intentions that are signified by terminology such as “subject to,” “believes,” “anticipates,” “plans,” “expects,” “intends,” “estimates,” “may,” “will,” “should,” “can,” the negatives thereof, variations thereon and similar expressions. Such forward-looking statements reflect the Company’s current views with respect to future events, based on what the Company believes are reasonable assumptions; however, such statements are subject to certain risks and uncertainties. Our actual results may differ materially from those anticipated in any forward-looking statements due to known and unknown risks, uncertainties and other factors. The section entitled “Risk Factors” set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, and similar discussions in our other Securities and Exchange Commission filings, including the section entitled “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q relating primarily to the Sale, the Plan of Dissolution, the Winding Up and related matters, discuss some of the important risk factors that may affect our business, results of operations, financial condition and other matters. Risks include, but are not limited to:
|
·
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The fact that substantially all of Heelys’ net sales are generated by one product;
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|
·
|
Heelys’ intellectual property may not restrict competing products that infringe on its patents from being sold;
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|
·
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continued changes in fashion trends and consumer preferences and general economic conditions;
|
|
·
|
Heelys’ dependence on its relationships with retail customers and independent distributors with whom Heelys does not have long term contracts;
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|
·
|
Heelys outsources all of its manufacturing to, and relies on, a limited number of independent manufacturers;
|
|
·
|
Heelys’ distribution model and recent moves in select markets to takeover distribution of its products directly to customers contains inherent risks;
|
|
·
|
Heelys is subject to the risks of conducting business internationally;
|
|
·
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Foreign exchange rate fluctuations could harm the Company’s results of operations;
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|
·
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Heelys has expanded its product offering to mass merchants which may affect its brand image and reputation;
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|
·
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Heelys may not be able to successfully introduce new product categories;
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|
·
|
The Sale, even if approved by the Stockholders, may not be completed;
|
|
·
|
The timing and amount of distributions to Stockholders cannot be predicted with certainty;
|
|
·
|
Any estimate of the amount available for distribution to Stockholders could be reduced if the Company’s expectations regarding operating expenses, employee retention, costs of satisfying or discharging liabilities and winding up costs are inaccurate;
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|
·
|
Any estimate of the amount available for distribution to Stockholders is based on a number of assumptions, including with respect to administrative and professional expenses incurred in connection with the Sale and the Winding Up, some or all of which may be inaccurate;
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|
·
|
Any delay in the closing of the Sale will decrease the funds available for distribution, because the Company will continue to be subject to ongoing operating expenses;
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|
·
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The Company may face lawsuits or other claims and it may take time and Company resources to defend or settle any such lawsuits or claims;
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·
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Fluctuations in the exchange rate between the U.S. dollar and the foreign currencies of the Company’s subsidiaries may affect the funds available for distribution to Stockholders;
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|
·
|
Stockholders could approve the Plan of Dissolution but vote against the Sale, thereby making the Sale impossible and adding great uncertainty as to the ability to make any distribution to Stockholders;
|
|
·
|
Stockholders could approve the Sale but not our Name Change, which may result in our ability to close the Sale.
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|
·
|
The occurrence of certain events, changes or other circumstance could give rise to the termination of the Asset Purchase Agreement, which would result in the Sale not being consummated;
|
|
·
|
The Company may receive a Superior Proposal (as defined in the Asset Purchase Agreement), the Asset Purchase Agreement may be terminated in connection with the Company’s pursuit of such alternative transaction, and that alternative transaction may not be consummated;
|
|
·
|
The Sale process may disrupt current plans and operations and we may face difficulties in employee retention;
|
|
·
|
The process of voluntarily winding up a public company involves significant uncertainties that affect both the amount that can be distributed to Stockholders and the time to complete the Winding Up;
|
|
·
|
The Company may not receive any competing transaction proposals or Superior Proposals because of the termination fee payable to the Buyer;
|
|
·
|
Stockholders will not be able to buy or sell shares of common stock after we file our Certificate of Dissolution with the Delaware Secretary of State;
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|
·
|
If the common stock were delisted from the The Nasdaq Capital Market but the Certificate of Dissolution is not filed, our Stockholders may find it difficult to dispose of their shares of our common stock;
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|
·
|
If we decide to use a liquidating trust, as permitted by the Plan of Dissolution, interests of our Stockholders in such a trust may not be transferable;
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|
·
|
Stockholders may not be able to recognize a loss for federal income tax purposes until they receive a final distribution from the Company, which may be three or more years after the Company’s dissolution;
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|
·
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Our directors and executive officers may have interests that are different from, or in addition to, those of Stockholders generally;
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|
·
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We will continue to incur the expenses of complying with public company reporting requirements until we deregister our shares of common stock under Section 12(b), and suspend our periodic reporting obligations under Section 15(d), of the Exchange Act;
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|
·
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The Board may at any time turn management of the Winding Up over to a third party, and some or all of our directors may resign from the Board at that time;
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|
·
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If we fail to create an adequate contingency reserve for payment of our expenses and liabilities, each Stockholder who receives liquidating distributions could be held liable for payment to our creditors of his or her pro rata share of amounts owed to creditors in excess of the contingency reserve, up to the amount actually distributed to such Stockholder in the dissolution;
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|
·
|
If our contingent reserves are insufficient to satisfy our liabilities, creditors could assert claims against us seeking to prevent distributions or against our Stockholders to the extent of distributions they receive;
|
|
·
|
Tax treatment of any liquidating distributions may vary from Stockholder to Stockholder; and
|
|
·
|
The other risks set forth in the discussion of risk factors set forth in
Item 1A
of Part II of this Quarterly Report on Form 10-Q
.
|
Stockholders are urged to consider these risks, uncertainties and factors carefully in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those in the forward-looking statements. The Company disclaims any intention or obligation to update or review any forward-looking statements or information, whether as a result of new information, future events or otherwise. The Company undertakes no obligation to comment on analyses, expectations or statements made by third-parties in respect of the Company, its operations and operating results, the Sale, the Plan of Dissolution or the Winding Up. In addition, the following discussion should be read in conjunction with the information presented in our audited consolidated financial statements and related notes contained in our Annual Report on Form 10-K for the year ended December 31, 2011 and, with respect to the Sale, the Plan of Dissolution and the Winding Up, in our forthcoming proxy statement with respect to such matters and related matters.
Business Overview
We are a designer, marketer and distributor of innovative, action sports-inspired products primarily 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 rolling by shifting weight to the heel. Users can transform HEELYS-wheeled footwear into street footwear by removing the wheel. We believe our distinctive product offering and our HEELYS brand is synonymous with a popular lifestyle activity. In each of the three and nine months ended September 30, 2012, approximately 91%, of our net sales were derived from the sale of HEELYS-wheeled footwear. In each of the three and nine months ended September 30, 2011, approximately 99% of our net sales were derived from the sale of HEELYS-wheeled footwear. The remainder of our net sales for the three and nine months ended September 30, 2012 was derived primarily from the sale of Blazer Pro and District scooters and accessories, Tony Hawk skateboards, our Nano™ inline footboard and HEELYS’ branded accessories, such as replacement wheels. We began to distribute Blazer Pro and District scooters and accessories and Tony Hawk skateboards in Europe during the third quarter of 2011.
We were initially incorporated as Heeling, Inc. in Nevada in 2000. In August 2006, we reincorporated in Delaware 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. In February 2008, we formed Heeling Sports EMEA SPRL, a Belgian corporation and indirect wholly-owned subsidiary, with offices in Brussels, and branch offices in Germany and France, to manage our operations in Europe, the Middle East and Africa (“EMEA”). In February 2011, we formed Heeling Sports Japan, K.K., a Japanese corporation and indirect wholly-owned subsidiary, with offices in Tokyo, to manage our operations in Japan and to take over the distribution of our products in that country effective March 1, 2011. We began taking steps in the first quarter of 2012 to close our office in Brussels, Belgium and transition our business operations conducted through that office to our French, German and U.S. offices. We completed the restructuring of our EMEA operations, including the closing of our office in Belgium and the transition of business operations to our French, German and U.S. offices, as of June 30, 2012.
In October 2012, we entered into an Asset Purchase Agreement, pursuant to which we agreed to sell substantially all of the assets of the Company, and our Board approved a Plan of Dissolution. For additional information regarding these matters, see the “Recent Events” section of this Item 2 of Part I below.
Financial Overview / Significant Events — Third Quarter of 2012
Domestic net sales increased $398,000, or 17.3%, during the three months ended September 30, 2012, when compared to the same period last year, primarily as result of sales during the three months ended September 30, 2012 of our Sidewalk Sports™ wheeled footwear which we began to sell during the fourth quarter of 2011. The decrease in average sales price per pair is primarily the result of the impact of the sale of our Sidewalk Sports™ wheeled footwear which sells for less than our other wheeled products.
Internationally, our net sales decreased $366,000, or 8.5%, for the three months ended September 30, 2012, when compared to the same period last year, as a result of decreased sales of our HEELYS-wheeled footwear in France, Germany and Italy, offset by sales increases in Japan and with third-party distributors and sales of our third party scooter and skateboard lines in France and Germany.
Consolidated gross profit margin decreased to 32.3% for the three months ended September 30, 2012, from 36.8% for the three months ended September 30, 2011. The decrease in gross profit percentage from the same quarter in the prior year was primarily the result of $238,000 in inventory markdowns of finished goods and materials related to our Nano™ inline footboard and another $67,000 of markdowns of non-current HEELYS-wheeled footwear in the U.S. and Europe. Gross profit margin was also affected by changes in product and customer mix from the prior year, with a larger percentage of global sales coming from lower priced shoes sold at smaller product margins, including $482,000 in sales of our lower margin Sidewalk Sports™ wheeled footwear products during the three months ended September 30, 2012, and certain European retail customers that are provided larger discounts and sales of certain of our slow moving and older inventory styles at discounted prices in Japan and Germany in order to reduce excess inventories.
Cash and cash equivalents and investments decreased $634,000 to $57.8 million as of September 30, 2012, when compared to $58.4 million as of December 31, 2011. This decrease is primarily attributable to the restructuring of our international operations and operating losses for the nine months ended September 30, 2012.
We began taking steps in the first quarter of 2012 to close our office in Brussels, Belgium and transition our business operations conducted through that office to our French, German and U.S. offices. As part of this initiative, the Company eliminated its workforce in Belgium effective as of June 30, 2012. These workforce reductions primarily came from the elimination of certain finance, supply chain and customer service functions. The work performed by these people was absorbed by our employees in France, Germany and the United States. We hired limited personnel to assist with accounting and logistical support in those offices. Financial management and reporting for our Belgian subsidiary was transitioned to our headquarters in the United States. In connection with these initiatives, we recognized $445,000 in severance and one-time termination benefit costs, $96,000 in contract termination costs, $209,000 in other costs related to the restructuring and $34,000 in fixed asset impairment charges. As of September 30, 2012, $351,000 in severance and one-time termination benefits, $44,000 in contract termination costs and $183,000 of other costs related to the restructuring have been paid. The outstanding severance and one-time termination benefits liability ($94,000) will be paid in monthly installments through March 31, 2013. Approximately $37,000 of the outstanding contract termination costs are attributable to the termination of our operating lease for office space in Brussels, Belgium under which the Company must continue to make monthly payments through April 30, 2014. The balance of the outstanding liabilities related to the restructuring are expected to be paid during the fourth quarter of 2012. This initiative was substantially completed on June 30, 2012.
In 2008, the Company entered into agreements with its former distributor in Germany and Austria (German market) and its former distributor in France, Monaco and Andorra (French market) whereby the Company terminated their rights to distribute HEELYS-wheeled footwear in their specified markets allowing the Company, through its Belgian subsidiary, to market its products directly in such countries. In connection with the termination of these distributor agreements the Company recorded goodwill. Goodwill is not amortized but is instead measured for impairment at least annually, or when events, including when a portion of goodwill has been allocated to a business to be disposed of, indicate that impairment might exist. On October 22, 2012, the Company entered into the Asset Purchase Agreeement to, among other things, sell substantially all of its assets. We assessed various qualitative factors, including the aggregate purchase price, the carrying value of the reporting units (domestic and international), the origin of the recorded goodwill and the anticipated allocation of the purchase price, and determined that it was more likely than not that the fair value of the reporting unit at which the goodwill was recorded was less than its carrying amount. As a result, we recorded an impairment charge related to goodwill at September 30, 2012, which is reported as a separate line item on the consolidated statement of operations, for amounts necessary to reduce the carrying value of the asset to fair value. See Note 8 and Note 14 to our condensed consolidated financial statements and the “Recent Events” section of this Item 2 of Part I below for further discussion regarding impairment of goodwill and the Asset Purchase Agreement
.
Results of Operations
Net Sales
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net Sales (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HEELYS-Wheeled Footwear
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
2,694
|
|
|
$
|
2,301
|
|
|
$
|
6,642
|
|
|
$
|
6,706
|
|
International
|
|
|
3,404
|
|
|
|
4,238
|
|
|
|
11,360
|
|
|
|
14,139
|
|
|
|
|
6,098
|
|
|
|
6,539
|
|
|
|
18,002
|
|
|
|
20,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
11
|
|
|
|
13
|
|
|
|
46
|
|
|
|
30
|
|
International
|
|
|
567
|
|
|
|
97
|
|
|
|
1,697
|
|
|
|
270
|
|
|
|
|
578
|
|
|
|
110
|
|
|
|
1,743
|
|
|
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight, Sales Discounts/Allowances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
(10
|
)
|
|
|
(17
|
)
|
|
|
(12
|
)
|
|
|
(37
|
)
|
International
|
|
|
(10
|
)
|
|
|
(8
|
)
|
|
|
(52
|
)
|
|
|
(39
|
)
|
|
|
|
(20
|
)
|
|
|
(25
|
)
|
|
|
(64
|
)
|
|
|
(76
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
$
|
6,656
|
|
|
$
|
6,624
|
|
|
$
|
19,681
|
|
|
$
|
21,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales (as % of Consolidated Net Sales)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
40.5
|
%
|
|
|
34.7
|
%
|
|
|
33.9
|
%
|
|
|
31.8
|
%
|
International
|
|
|
59.5
|
%
|
|
|
65.3
|
%
|
|
|
66.1
|
%
|
|
|
68.2
|
%
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Pairs Sold (HEELYS-wheeled footwear)
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
120,000
|
|
|
|
93,000
|
|
|
|
276,000
|
|
|
|
260,000
|
|
International
|
|
|
110,000
|
|
|
|
128,000
|
|
|
|
353,000
|
|
|
|
388,000
|
|
Consolidated
|
|
|
230,000
|
|
|
|
221,000
|
|
|
|
629,000
|
|
|
|
648,000
|
|
Domestically, our net sales increased $398,000, or 17.3%, from $2.3 million for the three months ended September 30, 2011, to $2.7 million for the three months ended September 30, 2012, and remained consistent at $6.7 million for the nine months ended September 30, 2012 and 2011. Unit sales of our HEELYS-wheeled footwear increased 27,000 pairs, or 29.0%, from 93,000 pairs for the three months ended September 30, 2011, to 120,000 pairs for the three months ended September 30, 2012, and increased 16,000 pairs, or 6.2%, from 260,000 pairs for the nine months ended September 30, 2011, to 276,000 pairs for the nine months ended September 30, 2012. The increase in pairs sold is primarily the result of sales during the three and nine months ended September 30, 2012 of our Sidewalk Sports™ wheeled footwear which we began to sell during the fourth quarter of 2011. The decrease in average sales price per pair is primarily the result of the impact of the sale of our Sidewalk Sports™ wheeled footwear which sells for less than our other wheeled products.
Internationally, our net sales decreased $366,000, or 8.5%, and $1.4 million, or 9.5%, to $4.0 million and $13.0 million for the three and nine months ended September 30, 2012, respectively, from $4.3 million and $14.4 million for the three and nine months ended September 30, 2011, respectively. Sales to independent distributors in our non-EMEA markets decreased $186,000 to $155,000 during the three months ended September 30, 2012, from $341,000 during the three months ended September 30, 2011, but increased $126,000 from $521,000 during the nine months ended September 31, 2011, to $647,000 during the nine months ended September 30, 2012. The decrease in sales during the three months ended September 30, 2012, when compared to the same period in the prior year, is primarily due to a decrease in sales to our distributors in Australia and New Zealand. This decrease was offset by sales to new distributors in Panama and Malaysia. Although there was a decrease in sales to our distributors in Australia and New Zealand during the three months ended September 30, 2012, there was a net increase in sales to these distributors during the nine months ended September 30, 2012, when compared to the same period in the prior year. Sales to independent distributors in our EMEA markets increased approximately $262,000 and $144,000, from approximately $779,000 and $2.4 million during the three and nine months ended September 30, 2011, respectively, to approximately $1.0 million and $2.6 million during the three and nine months ended September 30, 2012, respectively, primarily due to an increase in sales to our distributors in the United Kingdom, Russia and Switzerland. Sales in our French market increased approximately $34,000 from approximately $1.0 million during the three months ended September 30, 2011, to approximately $1.1 million during the three months ended September 30, 2012, but decreased approximately $423,000 to approximately $3.3 million during the nine months ended September 30, 2012, from approximately $3.8 million during the nine months ended September 30, 2011, respectively. Sales in our German market decreased approximately $67,000 and $367,000, to approximately $409,000 and $1.5 million during the three and nine months ended September 30, 2012, respectively, from approximately $476,000 and $1.9 million during the three and nine months ended September 30, 2011, respectively. Sales of HEELYS-wheeled footwear decreased approximately $518,000 and $2.3 million in France and Germany, to approximately $903,000 and $3.3 million during the three and nine months ended September 30, 2012, respectively, from approximately $1.4 million and $5.6 million during the three and nine months ended September 30, 2011, respectively. These decreases were offset by sales in France and Germany of Blazer Pro and District scooters and accessories and Tony Hawk skateboards, which accounted for approximately $564,000 and $1.7 million of sales during the three and nine months ended September 30, 2012. We believe retailers in our French and German markets are being cautious when placing orders of HEELYS-wheeled footwear to minimize their inventory levels and inventory related risks resulting from a decrease in consumer demand, which we believe is due to market competition from other wheeled products such as coaster boards. Sales in our Italian market decreased approximately $478,000 and $1.3 million, to approximately $760,000 and $3.6 million during the three and nine months ended September 30, 2012, respectively, from approximately $1.2 million and $4.9 million during the three and nine months ended September 30, 2011, respectively. Net sales in our Japanese market increased $56,000 and $380,000, from $456,000 and $838,000 during the three and nine months ended September 30, 2011, to $512,000 and $1.2 million during the three and nine months ended September 30, 2012, respectively. We took over direct distribution in the Japanese market effective March 1, 2011. During the three months ended March 31, 2011, we did not sell any product to either our former distributor in Japan or direct to retailers. We believe the March 2011 earthquake and related tsunami, nuclear and other disasters in the region impacted consumer buying behavior with reduced discretionary spending and purchases of non-essential items during the first and second quarters of 2011.
Gross Profit
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Gross Profit (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
568
|
|
|
$
|
812
|
|
|
$
|
1,943
|
|
|
$
|
2,632
|
|
International
|
|
|
1,580
|
|
|
|
1,626
|
|
|
|
5,645
|
|
|
|
6,725
|
|
Consolidated
|
|
$
|
2,148
|
|
|
$
|
2,438
|
|
|
$
|
7,588
|
|
|
$
|
9,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
21.1
|
%
|
|
|
35.4
|
%
|
|
|
29.1
|
%
|
|
|
39.3
|
%
|
International
|
|
|
39.9
|
%
|
|
|
37.6
|
%
|
|
|
43.4
|
%
|
|
|
46.8
|
%
|
Consolidated
|
|
|
32.3
|
%
|
|
|
36.8
|
%
|
|
|
38.6
|
%
|
|
|
44.4
|
%
|
Gross profit margin on domestic sales decreased to 21.1% and 29.1% for the three and nine months ended September 30, 2012, respectively, from 35.4% and 39.3% for the three and nine months ended September 30, 2011, respectively. The decrease in gross profit margin is primarily the result of a $305,000 adjustment to properly state our inventories at lower of cost or market recorded during the three months ended September 30, 2012. The adjustment consisted of finished goods and materials related to our Nano™ inline footboard and non-current HEELYS-wheeled footwear. Gross profit margin was also affected by sales of our lower margin Sidewalk Sports™ wheeled footwear products.
Internationally, gross profit margin increased to 39.9% for the three months ended September 30, 2012, from 37.6% for the three months ended September 30, 2011, and decreased to 43.4% for the nine months ended September 30, 2012, from 46.8% for the nine months ended September 30, 2011. The decrease in gross profit margin is primarily the result of lower average sales prices in our French market due to product mix, lower average sales prices in our Italian market resulting from changes in customer mix, with greater sales to larger customers who benefit from discount programs, and lower average sales prices in our German and Japanese markets resulting from the sale of certain of our slow moving and older inventory styles at discounted prices in order to reduce our excess inventories.
Selling and Marketing Expense
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Selling & Marketing (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
719
|
|
|
$
|
872
|
|
|
$
|
1,539
|
|
|
$
|
1,852
|
|
International
|
|
|
811
|
|
|
|
954
|
|
|
|
2,957
|
|
|
|
3,536
|
|
Consolidated
|
|
$
|
1,530
|
|
|
$
|
1,826
|
|
|
$
|
4,496
|
|
|
$
|
5,388
|
|
Domestically, selling and marketing expense, excluding commissions and payroll and payroll related expenses, decreased $144,000 and $240,000, to $413,000 and $637,000 for the three and nine months ended September 30, 2012, respectively, from $557,000 and $877,000 for the three and nine months ended September 30, 2011, respectively. Consumer marketing and advertising and related costs decreased $225,000 and $213,000, to $192,000 and $418,000 for the three and nine months ended September 30, 2012, respectively, from $417,000 and $631,000 for the three and nine months ended September 30, 2011, respectively.
Internationally, selling and marketing expense, excluding commissions and payroll and payroll related expenses, decreased $8,000 and $240,000, to $336,000 and $1.1 million for the three and nine months ended September 30, 2012, respectively, from $328,000 and $1.4 million for the three and nine months ended September 30, 2011, respectively. Selling and marketing expense, excluding commissions and payroll and payroll related expenses, attributable to our Japanese operations increased $28,000 and $201,000, from $107,000 and $193,000 for the three and nine months ended September 30, 2011, respectively, to $135,000 and $394,000 for the three and nine months ended September 30, 2012, respectively. The increase in selling and marketing expense, excluding commissions and payroll and payroll related expenses, attributable to our Japanese operations for the nine months ended September 30, 2012, when compared to the same period in the prior year, is primarily attributable to point-of-sale and consumer advertising related costs which increased $112,000, from $139,000 for the nine months ended September 30, 2011, to $251,000 for the nine months ended September 30, 2012, respectively, primarily to support sales of product during Japan’s “Golden Week” holiday period during the second quarter of 2012. The increase in selling and marketing expense, excluding commissions and payroll related expenses, attributable to our Japanese operations was offset by a decrease in selling and marketing expense, excluding commissions and payroll and payroll related expenses, attributable to our EMEA operations, which decreased $34,000 and $443,000, to $168,000 and $703,000 for the three and nine months ended September 30, 2012, respectively, from $202,000 and $1.1 million for the three and nine months ended September 30, 2011, respectively, primarily as a result of a decrease in consumer advertising. Consumer advertising, and related costs, attributable to our EMEA operations decreased $38,000 and $430,000, to $22,000 and $342,000 for the three and nine months ended September 30, 2012, respectively, from $60,000 and $772,000 for the three and nine months ended September 30, 2011, respectively.
Domestically, commissions paid to our independent sales representatives decreased $15,000 and $45,000, to $98,000 and $255,000 for the three and nine months ended September 30, 2012, respectively, from $113,000 and $300,000 for the three and nine months ended September 30, 2011, respectively. Commission expense did not increase in proportion with sales for the three months ended September 30, 2012, primarily as a result of sales of our Sidewalk Sports™ wheeled footwear products to Kmart, which is managed by our internal sales team rather than by commissioned third-party sales representatives. Internationally, commissions paid to our independent sales representatives decreased $107,000 and $327,000, to $193,000 and $826,000 for the three and nine months ended September 30, 2012, respectively, from $300,000 and $1.1 million for the three and nine months ended September 30, 2011, respectively. Commission expense is impacted by increases and decreases in sales as well as changes in product and customer mix due to differing commission rates paid on those sales.
Payroll and payroll related costs attributable to our domestic operations increased $6,000 from $202,000 for the three months ended September 30, 2011, to $208,000 for the three months ended September 30, 2012, but decreased $28,000 to $647,000 for the nine months ended September 30, 2012, from $675,000 for the nine months ended September 30, 2011. The decrease in payroll and payroll related costs attributable to our domestic operations for the nine months ended September 30, 2012, when compared to the same period in the prior year, is primarily due to decreases in accrued incentive compensation offset by an increase in recognized stock based compensation costs attributable to restricted stock units awarded in 2012. Payroll and payroll related costs attributable to our international operations decreased $44,000 and $11,000, to $282,000 and $994,000 for the three and nine months ended September 30, 2012, respectively, from $326,000 and $1.0 million for the three and nine months ended September 30, 2011, respectively, primarily as a result of changes in headcount.
General and Administrative Expense
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
General & Administrative (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
960
|
|
|
$
|
1,067
|
|
|
$
|
2,920
|
|
|
$
|
3,509
|
|
International
|
|
|
2,354
|
|
|
|
1,218
|
|
|
|
5,734
|
|
|
|
3,794
|
|
Unallocated
|
|
|
237
|
|
|
|
272
|
|
|
|
842
|
|
|
|
782
|
|
Consolidated
|
|
$
|
3,551
|
|
|
$
|
2,557
|
|
|
$
|
9,496
|
|
|
$
|
8,085
|
|
Consolidated general and administrative expenses, excluding unallocated costs and goodwill impairment (discussed below), decreased $492,000 and $170,000, to $1.8 million and $7.1 million for the three and nine months ended September 30, 2012, respectively, from $2.3 million and $7.3 million for the three and nine months ended September 30, 2011, respectively.
General and administrative expense for the three and nine months ended September 30, 2012 attributable to our international operations includes $16,000 and $784,000, respectively, in costs incurred in connection with the restructuring of our international operations which we initiated during the first quarter of 2012. These restructuring costs include $445,000 in severance and one-time termination benefit costs ($431,000 of which we recognized during the first quarter of 2012), $96,000 in contract termination costs ($92,000 of which was recognized during the second quarter of 2012), $209,000 in other costs ($81,000 of which we recognized during the first quarter of 2012 and $104,000 during the second quarter of 2012), including, but not limited to, costs to close our office in Belgium, transfer business operations to our French, German and U.S. offices, and repatriate our Vice President, International back to the United States, and $34,000 in fixed asset impairment charges recognized during the first quarter of 2012. These costs are reported as restructuring charges in the statement of operations and are directly attributable to the initiatives we began taking in the first quarter of 2012. See Note 3 to our condensed consolidated financial statements for further discussion regarding these initiatives.
Effective March 31, 2008 and April 30, 2008, respectively, the Company entered into agreements with its former distributor in Germany and Austria (German market) and its former distributor in France, Monaco and Andorra (French market) whereby the Company terminated their rights to distribute HEELYS-wheeled footwear in their specified markets allowing the Company, through its Belgian subsidiary, to market its products directly in such countries. In connection with the termination of these distributor agreements the Company recorded goodwill. Goodwill is not amortized but is instead measured for impairment at least annually, or when events, including when a portion of goodwill has been allocated to a business to be disposed of, indicate that impairment might exist. On October 22, 2012, the Company entered into an agreement to, among other things, sell substantially all of its assets. Management assessed various qualitative factors, including the aggregate purchase price, the carrying value of the reporting units (domestic and international), the origin of the recorded goodwill and the anticipated allocation of the purchase price, and determined that it was more likely than not that the fair value of the reporting unit at which the goodwill was recorded was less than its carrying amount. As a result, the Company recorded an impairment charge related to goodwill in the amount of $1.5 million which is reported as a separate line item on the consolidated statement of operations for amounts necessary to reduce the carrying value of the asset to fair value. See Note 8 and Note 14 to our condensed consolidated financial statements and the “Recent Events” section of this Item 2 of Part I below for further discussion regarding impairment of goodwill and the sale agreement.
Consolidated shipping and handling costs decreased $18,000 to $547,000 for the three months ended September 30, 2012, from $564,000 for the three months ended September 30, 2011, and remained consistent at approximately $1.8 million for the nine months ended September 30, 2012 and 2011. Shipping and handling costs attributable to our domestic operations increased $19,000 and $2,000, to $162,000 and $448,000 for the three and nine months ended September 30, 2012, respectively, from $143,000 and $446,000 for the three and nine months ended September 30, 2011, respectively, primarily due to increased sales. Shipping and handling costs attributable to our EMEA operations decreased $32,000 and $61,000, to $304,000 and $1.1 million for the three and nine months ended September 30, 2012, respectively, from $336,000 and $1.2 million for the three and nine months ended September 30, 2011, respectively, as a result of decreased sales. Shipping and handling costs attributable to our Japanese operations decreased $4,000 to $81,000 for the three months ended September 30, 2012, from $85,000 for the three months ended September 30, 2011, and increased $29,000 from $173,000 for the nine months ended September 30, 2011, to $202,000 for the nine months ended September 30, 2012. The decrease in shipping and handling costs attributable to our Japanese operations for the three months ended September 30, 2012, when compared to the same period in the prior year, is primarily a result of decreased sales. The increase in shipping and handling costs attributable to our Japanese operations for the nine months ended September 30, 2012, when compared to the same period in the prior year, is a result of increased sales. Additionally, during the three months ended June 30, 2011 we incurred costs related to the opening of our Japan operations (and third-party warehouse).
Legal and other fees related to our intellectual property and associated enforcement efforts decreased $68,000 and $148,000, to $69,000 and $269,000 for the three and nine months ended September 30, 2012, respectively, from $137,000 and $417,000 for the three and nine months ended September 30, 2011, respectively, primarily as a result of cost containment efforts by management.
Consolidated payroll and payroll related costs, excluding those employees whose payroll and related costs are included in shipping and handling costs, decreased $175,000 and $204,000, to $628,000 and $2.3 million for the three and nine months ended September 30, 2012, respectively, from $803,000 and $2.6 million for the three and nine months ended September 30, 2011. Payroll and payroll related costs attributed to our domestic employees decreased $2,000 and $112,000, to $496,000 and $1.5 million for the three and nine months ended September 30, 2012, respectively, from $498,000 and $1.7 million for the three and nine months ended September 30, 2011, respectively, primarily due to decreases in accrued incentive compensation. Payroll and payroll related costs attributed to our international operations decreased $173,000 and $92,000, to $132,000 and $800,000 for the three and nine months ended September 30, 2012, respectively, from $305,000 and $892,000 for the three and nine months ended September 30, 2011, respectively, primarily due to the closing of our office in Belgium, effective June 30, 2012, and a decrease in incentive compensation and recognized stock based compensation costs, offset by an increase in headcount primarily as a result of the opening of our office in Japan during the latter part of the first quarter of 2011.
Unallocated costs are those costs that are directly attributable to operating as a public company, as well as professional fees incurred at the consolidated level, including fees for tax, accounting and other consulting and professional services.
Other (Income) Expense, net
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Other (Income) Expense (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest (income) expense, net
|
|
$
|
(54
|
)
|
|
$
|
(55
|
)
|
|
$
|
(172
|
)
|
|
$
|
(217
|
)
|
Other (income) expense, net
|
|
|
-
|
|
|
|
(396
|
)
|
|
|
5
|
|
|
|
(405
|
)
|
Exchange (gain) loss, net
|
|
|
(57
|
)
|
|
|
(115
|
)
|
|
|
(21
|
)
|
|
|
(119
|
)
|
Consolidated
|
|
$
|
(111
|
)
|
|
$
|
(566
|
)
|
|
$
|
(188
|
)
|
|
$
|
(741
|
)
|
The decrease in interest income (expense), net is primarily the result of a decrease in interest income. Other income is the result of settlements of patent and trademark litigation. Litigation settlement payments related to intellectual property legal matters (whether received by the Company or paid by the Company) are reported as other income (expense). During the third quarter of 2011, we settled a potential patent and trademark lawsuit, in the Company’s favor, in the amount of $375,000. Legal fees related to intellectual property matters and associated enforcement are included in general and administrative expenses. Gains/losses resulting from foreign currency transactions are mainly attributable to intercompany loans due to our U.S. entity from our Belgian and Japanese entities which must be repaid in U.S. dollar.
Income Taxes
We recognized an income tax benefit of $425,000 and $586,000 for the three and nine months ended September 30, 2012, respectively, representing effective income tax rates of 15.1% and 9.4%, respectively, compared to income tax expense of $85,000 and $245,000 for the three and nine months ended September 30, 2011, respectively, representing effective income tax rates of (6.2)% and (7.3)%. Our effective rate differs from the statutory federal rate of 35% primarily due to domestic operating losses and operating losses in our Japanese operations for which no tax benefits have been recognized and foreign taxes at rates other than 35%, as well as for certain other items, such as state and local taxes and non-deductible expenses. While we did not record the benefit of losses from our domestic and Japanese operations for the three or nine months ended September 30, 2012, profits and losses in our European operations resulted in a net income tax benefit of approximately $10,000 for the nine months ended September 30, 2012. Additionally, the Company recorded a net tax benefit of approximately $576,000 related to discrete items, consisting of approximately $461,000 of tax benefit related to the goodwill impairment recorded during the three months ended September 30, 2012 and $132,000 of tax benefit related to certain tax losses arising from the Company’s restructuring; offset by approximately $17,000 in additional tax expense related to prior year items. We operate in multiple jurisdictions and our business is impacted by seasonality which causes variability in the consolidated effective tax rate during the year. We continually review our assertion regarding the valuation allowance, which includes an analysis of multiple factors, including projections, reversal of deferred tax liabilities and tax planning strategies.
Liquidity and Capital Resources
Our primary cash need is for working capital, which we generally fund with cash flows from operating activities, and may be impacted by fluctuations in demand for our products, investments in our infrastructure and expenditures on marketing and advertising. At September 30, 2012, we had a total of $28.2 million in cash and cash equivalents and $29.5 million in investments. Our investments will mature during the next 12 months and include investments in various debt securities. See Note 6 to our condensed consolidated financial statements for a discussion of our investments.
Cash used in operating activities for the nine months ended September 30, 2012 was $636,000, compared to cash used in operating activities of $4.3 million for the same period last year. Cash flows from operating activities are comprised of net loss recognized for the period adjusted for non-cash items and changes in operating assets and liabilities.
The decrease in accounts receivable is primarily due to a decrease in sales and timing. The decrease in inventories is primarily the result of sales during the current year offset by managed inventory purchases to maintain appropriate inventory levels. The net decreases in accounts payable and accrued liabilities are primarily due to payments during the period for inventory purchase related liabilities outstanding as of December 31, 2011.
We began taking steps in the first quarter of 2012 to close our office in Brussels, Belgium and transition the business operations conducted through that office to our French, German and U.S. offices. In connection with these initiatives, we recognized $445,000 in severance and one-time termination benefit costs, $96,000 in contract termination costs, $209,000 in other costs related to the restructuring, including, but not limited to, costs to close our office in Belgium, transfer business operations to our German, French and U.S. offices, and repatriate our Vice President, International back to the United States, and $34,000 in fixed asset impairment charges. These costs are reported as restructuring charges in the statement of operations. As of September 30, 2012, $351,000 in severance and one-time termination benefits, $44,000 in contract termination costs and $183,000 of other costs related to the restructuring have been paid; $94,000 in severance and one-time termination benefits, $52,000 in contract termination costs and $13,000 of other costs related to the restructuring are included in accrued liabilities and $13,000 of other costs are included in accounts payable. The outstanding severance and one-time termination benefits liability will be paid in monthly installments through March 31, 2013, and approximately $37,000 of the outstanding contract termination costs are attributable to the termination of our operating lease for office space in Brussels, Belgium under which the Company must continue to make monthly payments through April 30, 2014. The balance of the outstanding contract termination costs and other costs related to the restructuring are expected to be paid during the fourth quarter of 2012. This initiative was substantially completed on June 30, 2012.
Cash used in operating activities for the nine months ended September 30, 2011 was primarily the result of inventory we purchased during the first quarter of 2011 from Privee AG, our former independent distributor in Japan, to be used to fulfill sales in our Japanese market, as well as the purchase of inventories in the United States, Belgium and Japan for the holiday season. Increases in accounts payable and accrued liabilities were primarily due to inventory purchases.
Our cash flows from changes in operating assets and liabilities are subject to seasonality.
As of September 30, 2012, we had open purchase commitments of $1.0 million for the purchase of inventory. These commitments are expected to be settled during the fourth quarter of 2012.
Net cash provided by (used in) investing activities for the nine months ended September 30, 2012 and 2011 is primarily the result of investment activity of our excess cash.
Cash used in financing activities for the nine months ended September 30, 2012 and 2011, was for payments of previously acquired goodwill and intangibles associated with the termination of agreements with our former independent distributors in the German and French markets in 2008. As of September 30, 2012, we have outstanding liabilities of $187,000 due to our former independent distributor in the German market, $92,000 of which are recorded as current liabilities and are expected to be settled during the next 12 months. All liabilities due to our former independent distributor in the French market have been settled.
We believe our cash flows from operating activities, together with the cash on hand (including cash equivalents) and investments, will be sufficient to meet our liquidity needs and capital expenditure requirements for at least the next 12 months.
Contractual Obligations and Commercial Commitments
There were no material changes in our contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011.
In June 2012, Heeling Sports EMEA gave notice that it would be terminating its operating lease for office space in Brussels, Belgium, effective April 30, 2014, which is the end of current lease term. This lease was entered into effective May 1, 2008 for a nine year term with the option to terminate the lease at the end of each three year period. Heeling Sports EMEA did not terminate this lease at the end of the first three year period. The Company will make monthly payments under the lease through April 30, 2014. The aggregate amount of monthly payments to be made under the lease was approximately $47,000, and the Company has recorded this amount as a contract termination cost as part of the Company’s restructuring of its international operations. As of September 30, 2012, we have outstanding liabilities of $37,000 related to this lease.
Seasonality
Similar to other vendors of footwear products, sales of our products are subject to seasonality. There are three major buying seasons in footwear: spring/summer, back-to-school and holiday. We offer two primary lines: spring/summer and a combined back-to-school/holiday line. A few new styles will typically be added for the holiday season. Shipments for spring/summer take place during the first quarter and early weeks of the second quarter; shipments for back-to-school generally begin in June and finish in late August; and shipments for the holiday season begin in October and finish in early December. Historically, we have experienced greater revenues in the second half of the year than those in the first half due to a concentration of shopping around the back-to-school and holiday seasons.
Vulnerability Due to Customer Concentration / Geographical Concentration
Oxylane Group accounted for 7% and 9% of our net sales for the three and nine months ended September 30, 2012, respectively, and 11% and 13% for the three and nine months ended September 30, 2011, respectively. Oxylane Group is a French sporting goods retail chain operating under the name Decathlon. Sales to Alegria Corp Ltd, our independent distributor in Russia, accounted for 12% and 10% of our net sales for the three and nine months ended September 30, 2012, respectively, and 8% for both the three and nine months ended September 30, 2011. No other retail customer or independent distributor accounted for 10% or more of our net sales for the three or nine months ended September 30, 2012 and 2011.
Sales in the Company’s Italian market accounted for 12% and 18% of consolidated net sales for the three and nine months ended September 30, 2012, respectively, and 19% and 23% of consolidated net sales for the three and nine months ended September 30, 2011, respectively. Sales in the Company’s French market accounted for 14% and 16% of consolidated net sales for the three and nine months ended September 30, 2012, respectively, and 15% and 18% of consolidated net sales for the three and nine months ended September 30, 2011, respectively. Sales in the Company’s German market accounted for 4% and 7% of consolidated net sales for the three and nine months ended September 30, 2012, respectively, and 7% and 9% of consolidated net sales for the three and nine months ended September 30, 2011, respectively. Sales to the Company’s independent distributor in Russia accounted for 12% and 10% of consolidated net sales for the three and nine months ended September 30, 2012, respectively, and 8% of consolidated net sales for both the three and nine months ended September 30, 2011. No other country, other than the United States, accounted for 10% or more of the Company’s consolidated net sales for the three and nine months ended September 30, 2012 and 2011.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements for a discussion of recent accounting pronouncements.
Recent Events
Asset Purchase Agreement
On October 22, 2012, the Company entered into an Asset Purchase Agreement, by and among The Evergreen Group Ventures, LLC, a Delaware limited liability company (“Buyer Parent”), and TEG Bronco Acquisition Company, LLC, a Delaware limited liability company (“Buyer” and, together with Buyer Parent, the “Buyer Parties”), on the one hand, and the Company, Heeling Sports Limited, a Texas limited partnership (“Heelys Texas”), Heeling Sports EMEA SPRL, a Belgian corporation (“Heelys EMEA”), and Heeling Sports Japan, K.K., a Japanese corporation (“Heelys Japan” and, together with the Company, Heelys Texas, and Heelys EMEA, the “Seller Parties”), on the other hand (the “Asset Purchase Agreement”). A copy of the Asset Purchase Agreement is attached hereto as Exhibit 10.1 and incorporated herein by reference.
Pursuant to the terms and provisions of the Asset Purchase Agreement, the Seller Parties will sell to the Buyer Parties substantially all of their assets and the Buyer Parties will assume certain of the Seller Parties’ liabilities (the “Sale”).
Capitalized terms used but not defined in this “Recent Events” section or elsewhere in this Quarterly Report on Form 10-Q have the meanings given them in the Asset Purchase Agreement.
Purchase Price
The aggregate Purchase Price for the purchased assets under the Asset Purchase Agreement will be $13,900,000 in cash, plus the assumption of certain specified liabilities, all subject to an adjustment based upon the Working Capital of the Seller Parties as of the Closing Date. If the Working Capital is less than the Working Capital Target ($11,450,000), the Purchase Price will be decreased dollar for dollar. If the Working Capital is more than $11,600,000, the Purchase Price will be increased dollar for dollar. An annex to the Asset Purchase Agreement provides a mechanism to value certain items in our inventory that Buyer believes should be valued at less than what the Company has reflected on its books and records. If the Company is unable to sell any of that inventory prior to the closing of the Sale, the impact to Working Capital would be a reduction in the Purchase Price of approximately $900,000. It is estimated currently that if the closing of the Sale were to occur as of December 21, 2012 our Working Capital would be between $9.64 million and $10.05 million, which would result in the Purchase Price being decreased by between $1.40 million and $1.81 million ($11.45 million minus $9.64 million and $10.05 million, respectively) to between $12.09 million and $12.50 million. The mechanics of these adjustments to the Purchase Price are more specifically described in the Asset Purchase Agreement.
If the Stockholders approve the Sale and the Plan of Dissolution (as defined below), subject to the calculation of the Working Capital, any adjustment to the Purchase Price, the satisfaction of the liabilities of the Company and its subsidiaries pursuant to the Plan of Dissolution and certain assumptions, the Company currently estimates that the net proceeds available for distribution to the Stockholders after the satisfaction of the Company and its subsidiaries’ liabilities and the completion of the Winding Up will be between $62.5 million and $66.5 million in the aggregate, or approximately $2.23 to $2.37 per share of the Company’s common stock (based on the number of outstanding shares of the Company’s common stock on the date hereof plus the additional shares of the Company’s common stock to be issued upon vesting of certain restricted stock units awards as a result of the Sale). The Company anticipates (on the same basis) that approximately $2.00 per share of the Company’s common stock will be distributed to Stockholders in an initial distribution within 30 days after the Company’s filing of a Certificate of Dissolution with the Delaware Secretary of State, followed by one or more additional distributions to the Stockholders, subject to the amount of a contingency reserve and the Company’s obligation under the Asset Purchase Agreement to maintain, until the Working Capital Adjustment is finalized, funds sufficient to pay all liabilities of the Seller Parties that are not being assumed by the Buyer Parties when they become due, plus immediately available funds equal to at least $5 million, and other actions to be taken pursuant to the Plan of Dissolution.
Representation and Warranties
The Asset Purchase Agreement contains a number of representations and warranties of the Seller Parties to the Buyer Parties relating to, among other things: organization of the Seller Parties; authority of the Seller Parties; conflicts and consents; periodic reporting with the Securities and Exchange Commission and financial statements; the absence of undisclosed liabilities; the absence of certain changes and certain events; material contracts; title to the purchased assets; condition and sufficiency of assets; real property; intellectual property; inventory; accounts receivable; customers and suppliers; insurance; legal proceedings and Governmental Orders; compliance with laws and permits; environmental matters; employee benefit matters; employment matters; taxes; product liability claims; transactions with affiliates; brokers; vote required for the Sale; state anti-takeover statutes; solvency; and voting agreements.
The Asset Purchase Agreement contains a number of representations and warranties of the Buyer Parties to the Seller Parties relating to, among other things: organization of the Buyer Parties; authority of the Buyer Parties; conflicts and consents; brokers; legal proceedings; financing; disclaimers of representations and warranties; and independent investigation.
The representations, warranties and covenants of the Seller Parties contained in the Asset Purchase Agreement have been made solely for the benefit of the Buyer Parties under the Asset Purchase Agreement. The Stockholders are not third-party beneficiaries under the Asset Purchase Agreement. Further, the representations and warranties of the Seller Parties in the Asset Purchase Agreement (a) have been made only for purposes of the Asset Purchase Agreement; (b) are qualified by disclosures made to the Buyer Parties in connection with the Asset Purchase Agreement; and (c) are subject to materiality qualifications contained in the Asset Purchase Agreement which may differ from what may be viewed as material by the Stockholders.
Closing Conditions
The Asset Purchase Agreement contains conditions precedent to the obligations of the Buyer Parties to complete the Sale (each of which may be waived by Buyer at or before Closing), including, without limitation:
|
·
|
the representations and warranties of the Seller Parties in the Asset Purchase Agreement, the other Transaction Documents, and any certificate or other writing delivered pursuant to the Asset Purchase Agreement must be true and correct in all material respects on and as of the date of signing the Asset Purchase Agreement and on the Closing Date (subject to certain exceptions);
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the Seller Parties’ performance in all material respects of their respective agreements, covenants and conditions set forth in the Asset Purchase Agreement and the other Transaction Documents, as applicable, on or before the Closing Date;
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the absence of a Governmental Order making the Sale illegal, or otherwise restraining or prohibiting the consummation of the Sale, or causing the Sale to be rescinded following its completion;
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the Seller Parties receiving all approvals, consents, and waivers that are necessary to consummate the Sale, unless the failure to receive the foregoing (except the approval of the Sale by the Stockholders) would not result in a Material Adverse Effect or materially adversely affect the Seller Parties’ ability to perform their respective obligations under the Asset Purchase Agreement;
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the absence of a Material Adverse Effect;
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the delivery of the signatures, certificates, instruments and other deliverables by the Seller Parties that are contemplated by the Asset Purchase Agreement; and
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the absence of Encumbrances relating to the purchased assets, other than certain specified Permitted Encumbrances.
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The Asset Purchase Agreement contains conditions precedent to the obligations of the Seller Parties to complete the Sale (each of which may be waived by Heelys Parent at or before Closing), including, without limitation:
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the representations and warranties of the Buyer Parties in the Asset Purchase Agreement, the other Transaction Documents, and any certificate or other writing delivered pursuant to the Asset Purchase Agreement must be true and correct in all material respects on and as of the date of signing the Asset Purchase Agreement and on the Closing Date (subject to certain exceptions);
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the Buyer Parties’ performance in all material respects of their respective agreements, covenants and conditions set forth in the Asset Purchase Agreement and the other Transaction Documents, as applicable, on or before the Closing Date;
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the absence of a Governmental Order making the Sale illegal, or otherwise restraining or prohibiting the consummation of the Sale, or causing the Sale to be rescinded following its completion;
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the delivery of the signatures, certificates, instruments and other deliverables by the Buyer Parties that are contemplated by the Asset Purchase Agreement;
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the approval of the Sale by the holders of a majority of the Company’s outstanding shares of common stock; and
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the delivery of the signatures, certificates, instruments, and other deliverables by the Buyer Parties that are contemplated by the Asset Purchase Agreement.
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Covenants
The Asset Purchase Agreement contains numerous covenants of the Seller Parties and the Buyer Parties during the period up to and including the Closing Date. The covenants that are specific to the Seller Parties generally relate to, among other things: the conduct of the Seller Parties’ business operations before the Closing; providing the Buyer Parties with access to, and deliveries of, certain information; holding the Meeting and soliciting proxies to the Stockholders to obtain the approval of the Sale by the Stockholders; notifications to Buyer of certain events; certain employee matters; keeping certain information concerning the Seller Parties’ business and other matters confidential; non-solicitation of persons who are offered employment by the Buyer Parties; and the Seller Parties’ termination of certain intercompany contracts relating to licensing of intellectual property and distribution.
The Asset Purchase Agreement contains additional covenants of the Seller Parties and the Buyer Parties relating to, among other things: making notices to, and obtaining consents, authorizations, orders, and approvals from, Governmental Authorities in connection with the Sale; using commercial reasonable efforts to take such actions as are necessary to expeditiously satisfy the closing conditions of the parties; making public announcements of the Asset Purchase Agreement and the Sale; payment of Taxes and fees incurred in connection with the Asset Purchase Agreement and the other Transaction Documents; access to retained books and records; the execution and delivery of certain documents and the taking of certain actions to effect the Sale; and remitting certain accounts receivable to the other parties from and after the Closing.
Under the Asset Purchase Agreement, the Company must maintain for a period of time available funds sufficient to pay all liabilities of the Seller Parties that are not being assumed by the Buyer Parties when they become due, plus immediately available funds equal to at least $5 million. The Company must additionally file with or furnish to the Securities and Exchange Commission, on a timely basis, all required registration statements, certifications, reports (including annual, quarterly and periodic reports) and proxy statements.
Go-Shop; No-Shop
For the 30-day period after the date of the Asset Purchase Agreement, the Seller Parties are permitted to initiate, solicit, and encourage inquiries, proposals, or offers that could constitute an alternative transaction proposal (or engage in other efforts or attempts that could lead to an alternative transaction proposal), including by way of providing access to non-public information pursuant to (but only pursuant to) one or more confidentiality agreements that meet certain requirements set forth in the Asset Purchase Agreement.
After the expiration of such go-shop period, the Seller Parties must cease all such activities, and, until the Closing Date, must not solicit, initiate, or knowingly facilitate or encourage (including by way of furnishing non-public information) any inquiries regarding, or the making of any proposal or offer that constitutes, or could reasonably be expected to lead to, an alternative acquisition proposal, or engage in, continue, or otherwise participate in any discussions or negotiations regarding, or furnish to any other person information in connection with or for the purpose of encouraging or facilitating, an alternative transaction proposal, or enter into any letter of intent, agreement, or agreement in principle with respect to an alternative transaction proposal, subject to limited exceptions.
Notwithstanding the no-shop provisions of the Asset Purchase Agreement described in the immediately preceding paragraph, during the period commencing on the No-Shop Start Date and ending on the date of receipt of the approval of the Sale by the Stockholders, under the Asset Purchase Agreement, the Seller Parties may, under certain circumstances, provide information to and participate in discussions or negotiations with third parties with respect to certain alternative transaction proposals that the Board has determined are or would lead to a bona fide written alternative transaction proposal that the Board or a committee thereof has determined, after consultation with its outside legal counsel and financial advisors, in its good faith judgment is reasonably likely to be consummated in accordance with its terms, taking into account all legal, regulatory, and financial aspects (including certainty of closing) of the proposal and the person making the proposal, and, if consummated, would result in a transaction more favorable to the Stockholders than the transactions contemplated by the Asset Purchase Agreement (including any revisions to the terms of the Asset Purchase Agreement proposed by the Buyer Parties in response to such proposal or otherwise), subject to certain other criteria set forth in the Asset Purchase Agreement. If, during this period, the Board determines to pursue a Superior Proposal in accordance with the Asset Purchase Agreement, the Asset Purchase Agreement requires, among other things, that the Seller Parties give Buyer prior notice of such determination, along with supporting documentation with respect to such Superior Proposal, and the opportunity to propose revisions to the Asset Purchase Agreement such that the Superior Proposal would no longer constitute a Superior Proposal.
Termination Events and Termination Fee
The Asset Purchase Agreement may be terminated at any time before the Closing upon the mutual consent of Buyer and Heelys Parent. In addition, the Asset Purchase Agreement may be terminated by Buyer upon the occurrence of certain events, including, without limitation, the following:
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there has been an uncured breach, inaccuracy in, or failure to perform any representation, warranty, covenant or agreement made by the Seller Parties pursuant to the Asset Purchase Agreement that would give rise to the failure of any of Buyer’s closing conditions, if Buyer is not in material breach of any provision of the Asset Purchase Agreement;
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Buyer’s closing conditions have not been, or it becomes apparent that any of such conditions will not be, fulfilled by December 31, 2012 (the “Drop-Dead Date”), unless Buyer is responsible for such failure to comply with such conditions;
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the approval of the Sale by the Stockholders is not obtained;
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the Board or the Seller Parties take certain specified actions with respect to, among other things, pursuing entry into an alternative transaction similar to the Sale with a third-party, or if the Company fails to hold the Meeting within ten business days before the Drop-Dead Date; or
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there shall be any law that makes consummation of the Sale illegal or otherwise prohibited or there shall be any Governmental Order restraining or enjoining the Sale, and such Governmental Order shall have become final and non-appealable.
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The Company, acting as the Seller Parties’ Representative may terminate the Asset Purchase Agreement upon the occurrence of certain events, including, without limitation, the following:
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there has been an uncured breach, inaccuracy in, or failure to perform any representation, warranty, covenant or agreement made by Buyer pursuant to the Asset Purchase Agreement that would give rise to the failure of any of the Seller Parties’ closing conditions, if the Seller Parties are not in material breach of any provision of the Asset Purchase Agreement;
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the Seller Parties’ closing conditions have not been, or it becomes apparent that any of such conditions will not be, fulfilled by the Drop-Dead Date, unless the Seller Parties are responsible for such failure to comply with such conditions;
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the approval of the Sale by the Stockholders is not obtained; provided, that the Seller Parties may not terminate the Asset Purchase Agreement for failure to obtain the approval of the Sale by the Stockholders if any of the Seller Parties has breached in any material respect its obligations under the Asset Purchase Agreement in any manner that proximately contributed to the failure to obtain the approval of the Sale by the Stockholders;
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before receipt of the approval of the Sale by the Stockholders the Seller Parties enter into a definitive agreement relating to an alternative transaction proposal with a third-party that constitutes a Superior Proposal, subject to payment of the applicable termination fee due to Buyer; or
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there shall be any law that makes consummation of the Sale illegal or otherwise prohibited or there shall be any Governmental Order restraining or enjoining the Sale, and such Governmental Order shall have become final and non-appealable.
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If (a) Buyer terminates the Asset Purchase Agreement because (i) there has been an uncured breach, inaccuracy in, or failure to perform any representation, warranty, covenant or agreement made by the Seller Parties pursuant to the Asset Purchase Agreement that would give rise to the failure of any of the Buyer’s closing conditions, and Buyer is not in material breach of any provision of the Asset Purchase Agreement, or (ii) the Board or the Seller Parties take certain specified actions with respect to, among other things, pursuing entry into an alternative transaction similar to the Sale with a third-party, or because the Company fails to hold the Meeting within ten business days before the Drop-Dead Date, (b) the Seller Parties terminate the Asset Purchase Agreement to enter into a transaction that constitutes a Superior Proposal, (c) the Seller Parties do not consummate the Sale by the Drop-Dead Date and such failure constitutes a breach of the Asset Purchase Agreement or (d) Buyer or the Seller Parties terminate the Asset Purchase Agreement because of a failure to obtain the approval of the Sale by the Stockholders, and in the case of clauses (a), (c), and (d), at any time during the six-month period following such termination of the Asset Purchase Agreement, one or more of the Seller Parties accepts any alternative transaction proposal or enters into a definitive agreement with respect to an alternative transaction proposal, the Seller Parties must pay to Buyer (x) in the case of a termination described in clauses (a), (b), or (c) above, no later than five business days after receipt of written demand, a termination fee equal to 4.25% of the aggregate consideration payable pursuant to the alternative transaction proposal, or (y) in the case of a termination described in clause (d), no later than five business days after the receipt of any consideration pursuant to the alternative transaction, a termination fee equal to 4.25% of any such consideration received in such alternative transaction. The calculation of either such termination fee excludes any consideration to the extent attributable to cash, cash equivalents or marketable securities being sold to the third-party.
Survival
Subject to certain exceptions, under the Asset Purchase Agreement, the representations, warranties and covenants in the Asset Purchase Agreement do not survive the Closing Date. The covenants in the Asset Purchase Agreement that survive the Closing Date relate to, among others, the following matters: the provisions governing the adjustments to the Purchase Price; allocation of the Purchase Price and ad valorem taxes; third party consents; covenants relating to employees and employee benefits; confidentiality; non-solicitation of certain employees; breaches of certain covenants; governmental approvals and consents; receivables; transfer taxes; access to retained books and records; and cash retention.
In addition, absent fraud or intentional misrepresentation with intent to defraud, the Buyer Parties have no right of recovery against any of the Seller Parties under the Asset Purchase Agreement resulting from any breach of any representation, warranty, or covenant (other than the specified surviving obligations) contained in Asset Purchase Agreement.
Voting Agreements
Capital Southwest Venture Corporation, which currently owns 9,317,310 shares of the Company’s common stock, or approximately 33.79% of the Company’s current issued and outstanding common stock, and Patrick F. Hamner, one of the Company’s directors who currently owns 363,150 shares of the Company’s common stock , or 1.3% of our current issued and outstanding common stock (and who holds currently exercisable options to purchase, at a price of $4.05 per share, approximately 2.9% more of our current issued and outstanding common stock), entered into voting agreements with Buyer on October 22, 2012, pursuant to which they agreed, among other things, to vote their shares in favor of the Sale and grant to Buyer an irrevocable proxy with respect to their respective shares covered by the voting agreements. The Company is a party to these voting agreements for the limited purposes of agreeing to (a) instruct its transfer agent to restrict transfer of the Covered Shares during the term of the Asset Purchase Agreement, (b) take certain actions with respect to such transfer restrictions upon any termination of the Asset Purchase Agreement and (c) not take any action in contravention of the voting agreements.
The foregoing description of such voting agreements and the Company’s obligations therein does not purport to be complete and is qualified in its entirety by reference to the full text of the respective voting agreements entered into by the referenced parties, copies of which are attached hereto as Exhibit 10.2 and Exhibit 10.3 and incorporated herein by reference.
Cautionary Statements Regarding Asset Purchase Agreement
The Asset Purchase Agreement was filed as an exhibit to our Current Report on Form 8-K on October 23, 2012 and is filed as Exhibit 10.1 hereto only to provide investors with information regarding the terms and conditions of the Asset Purchase Agreement, and not to provide investors with any other factual information regarding the Company or its subsidiaries, or their business or operations. The Stockholders should not rely on the representations and warranties in the Asset Purchase Agreement or any descriptions thereof as characterizations of the actual state of facts or condition of the Company or any of its subsidiaries. Information concerning the subject matter of the representations and warranties in the Asset Purchase Agreement may change after the date of the Asset Purchase Agreement, and such subsequent information may or may not be fully reflected in the Company’s public disclosures or periodic reports filed with the Securities and Exchange Commission. The Asset Purchase Agreement should not be read alone, but should instead be read in conjunction with the other information regarding the Company and its subsidiaries, and their businesses and operations, that is or will be contained in, or incorporated by reference into, the Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, proxy statements, and other documents that the Company files with or furnishes to the Securities and Exchange Commission.
The description of the Asset Purchase Agreement in this Report does not purport to be a complete description of all of the terms and conditions of the Asset Purchase Agreement and is qualified in its entirety by reference to the full text of the Asset Purchase Agreement.
Board Approval of the Sale; Fairness Opinion
The Board established a special committee, composed of directors of the Company, to evaluate the proposal from the Buyer Parties and others, and to make a recommendation to the Board, with respect to the Sale. This special committee engaged Roth Capital Partners, LLC (“Roth”), an independent investment banking firm, to evaluate the Sale and to provide its opinion as to the fairness to the Company, from a financial point of view, of the consideration to be paid to the Company pursuant to the Asset Purchase Agreement. Roth delivered an opinion to the Board, dated October 20, 2012, that, subject to the limitations set forth in its opinion, the payment of $13,900,000 in cash, which is subject to adjustment, and the assumption of certain liabilities by the Buyer Parties, is fair, from a financial point of view, to the Company.
The Board, upon recommendation from its special committee, taking into account the fairness opinion received from Roth, unanimously approved and authorized the Asset Purchase Agreement and the Sale.
Plan of Dissolution
The Board has determined that the Company should be wound up, dissolved and liquidated completely after the consummation of the Sale (the “Winding Up”). In this respect, the Board approved a Plan of Liquidation and Dissolution (the “Plan of Dissolution”) on October 20, 2012. The Plan of Dissolution is conditioned on the consummation of the Sale and obtaining approval of the Plan of Dissolution from the holders of a majority of the Company’s outstanding shares of common stock. A copy of the Plan of Dissolution is attached hereto as Exhibit 2.1 and incorporated herein by reference.
Winding Up Actions
When the Plan of Dissolution becomes effective, the Company, acting by an officer, employee, or agent, as applicable, will, among other things:
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file a Certificate of Dissolution with the Delaware Secretary of State specifying the date upon which the Certificate of Dissolution will become effective (the “Winding Up Effective Date”);
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cease its business activities and withdraw from any jurisdiction in which the Company is qualified to do business (unless any such qualification to do business is necessary, appropriate, or desirable for the Sale and any other liquidation of the Company’s assets, and for the proper winding up of the Company);
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negotiate and consummate the sales and conversion of all of the assets and properties of the Company remaining after the Sale into cash and/or other distributable form of asset; and
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take all actions required or permitted under the applicable dissolution procedures of the Delaware General Corporation Law (the “DGCL”).
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In addition, subject to approval by the Board and the consummation of the Sale, under the Plan of Dissolution, the officers, employees, and agents of the Company will, as promptly as feasible, proceed to:
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collect all sums due or owing to the Company;
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sell and convert into cash and/or other distributable form all the remaining assets and properties of the Company, if any, and;
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out of the assets and properties of the Company, pay, satisfy, and discharge or make adequate provision for the payment, satisfaction, and discharge of all debts and liabilities of the Company pursuant to the Plan of Dissolution, including all expenses of the sales of assets and of the dissolution and liquidation provided for by the Plan of Dissolution.
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Liquidating Distributions
If the Sale is consummated, under the Plan of Dissolution, liquidating distributions, if any, shall be made from time to time after the filing of the Certificate of Dissolution to the Stockholders of record, at the close of business on the Winding Up Effective Date, pro rata to Stockholders in accordance with the respective number of shares then held of record, provided that in the opinion of the Board adequate provision has been made for the payment, satisfaction, and discharge of all known, unascertained, or contingent debts, obligations, and liabilities of the Company (including costs and expenses incurred and anticipated to be incurred in connection with the sale and distribution of assets and liquidation of the Company). Pursuant to the Plan of Dissolution, liquidating distributions will be made in cash or in kind, including in stock of, or ownership interests in, subsidiaries of the Company and remaining assets of the Company, if any. Such distributions may occur in a single distribution or in a series of distributions, in such amounts and at such time or times as the Board in its absolute discretion, and in accordance with the DGCL, may determine; provided, however, that the Company must complete the distribution of all its properties and assets to its Stockholders as provided in the Plan of Dissolution as soon as practicable following the filing of its Certificate of Dissolution with the Delaware Secretary of State and in any event on or before the tenth anniversary of the Winding Up Effective Date (the “Final Distribution Date”).
Contingency Reserve
Under the Plan of Dissolution, if and to the extent deemed necessary, appropriate, or desirable by the Board in its absolute discretion, the Company may establish and retain or set aside a reasonable amount of cash and/or property to satisfy claims against the Company and its subsidiaries and other obligations of the Company and its subsidiaries, including (a) tax obligations; (b) all expenses of the sale of the Company’s property and assets; (c) the salary, fees, and expenses of members of the Board, management, and employees; (d) expenses for the collection and defense of the Company’s property and assets; (e) the expenses for attorneys and other professional advisors incurred in connection with the Plan of Dissolution; and (f) all other expenses related to the dissolution and liquidation of the Company and the winding-up of its affairs. Any unexpended amounts remaining in a contingency reserve will be distributed to the Stockholders no later than the Final Distribution Date pursuant to the Plan of Dissolution. As of the date hereof, the Company plans to establish a contingency reserve and anticipates that the amount of that reserve will be approximately $6.7 million.
Liquidating Trust
Under the Plan of Dissolution, the Board may, but is not required to, establish a liquidating trust (the “Liquidating Trust”) and distribute assets of the Company to the Liquidating Trust rather than continue to hold the assets in the Company. The Liquidating Trust may be established by agreement with one or more trustees selected by the Board. If the Liquidating Trust is established by agreement with one or more trustees, the trust agreement establishing and governing the Liquidating Trust shall be in form and substance determined by the Board. The trustees will in general be authorized to take charge of the Company’s property, and to sell and convert into cash or other distributable form any and all corporate non-cash or non-distributable assets and collect the debts and property due and belonging to the Company, with power to prosecute and defend, in the name of the Company, or otherwise, all such suits as may be necessary or proper for the foregoing purposes, and to appoint an agent under it and to do all other acts which might be done by the Company that may be necessary, appropriate or advisable for the final settlement of the unfinished business of the Company.
Indemnification and Advancement of Expenses
The Plan of Dissolution requires the Company to continue to indemnify and advance expenses to its officers, directors, employees, and agents in accordance with its Certificate of Incorporation and Bylaws and any contractual arrangements for actions taken in connection with the Plan of Dissolution and the winding up of the affairs of the Company. The Board, in its sole and absolute discretion, is authorized under the Plan of Dissolution to obtain and maintain directors’ and officers’ liability insurance and any other insurance as may be necessary, appropriate, or advisable to cover the Company’s obligations.
Amendment, Modification or Abandonment
If for any reason the Board determines that such action would be in the best interests of the Company, it may amend, modify or abandon the Plan of Dissolution and all actions contemplated thereunder, including the Sale or the proposed Winding Up, notwithstanding the Stockholder approval of the Sale or the Plan of Dissolution, to the extent permitted by the DGCL; provided, however, that the Board may not abandon the Plan of Dissolution following the filing of the Certificate of Dissolution without first obtaining the approval of the holders of a majority of the voting power of the outstanding common stock at a special meeting or annual meeting of the Stockholders called for such purpose by the Board. Upon the abandonment of the Plan of Dissolution, the Plan of Dissolution will be void.
Complete Liquidation
Distributions to the Stockholders made pursuant to the Plan of Dissolution will be treated as made in complete liquidation of the Company within the meaning of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. Under the Plan of Dissolution, the adoption of the Plan of Dissolution by the Stockholders will constitute full and complete authority for the making by the Board of all such liquidating distributions.
Participants in Solicitation of Proxy Statement
The Company and its directors, executive officers, and other members of its management and employees may be deemed to be participants in the solicitation of proxies from the Stockholders in connection with the Sale and proposed dissolution of the Company. Information concerning the interests of the Company’s participants in the solicitation is set forth in the Company’s Annual Reports on Form 10-K previously filed with the Securities and Exchange Commission, and will set forth in the proxy statement relating to the Sale and Plan of Dissolution when it becomes available. Each of these documents is, or will be, available free of charge at the Securities and Exchange Commission’s website at http://www.sec.gov and from the Company at http://investors.heelys.com or by writing to: Corporate Secretary, Heelys, Inc., 3200 Belmeade Drive, Suite 100, Carrollton, Texas 75006. The reference to such website addresses does not constitute incorporation by reference of the information contained on, or linked to, such websites and none of such information is part of this Quarterly Report on Form 10-Q.
Additional Information Regarding the Sale and the Plan of Dissolution
The Sale is not conditioned upon the Stockholders approving the Plan of Dissolution. The effectiveness of the Plan of Dissolution, however, is conditioned on the consummation of the Sale. Stockholders do not have dissenters’ rights of appraisal in connection with the Sale or the Plan of Dissolution.
As part of the Sale, we also are selling the name “Heelys” and will need to change our name. We will be asking Stockholders in our forthcoming proxy statement regarding the Sale, the Plan of Dissolution and related matters to vote to amend our Certificate of Incorporation to change our name to “HLYS Liquidation Company, Inc.,” contingent upon the closing of the Sale (the “Name Change”).
If the Stockholders approve the Sale and the Plan of Dissolution, immediately upon consummation of the Sale, the Plan of Dissolution will take effect and the liquidation and dissolution of the Company will commence. As soon as practical after the closing of the Sale, the Company plans to distribute, in an initial distribution (with potential subsequent installment distributions thereafter), cash from the Sale and the Company’s other cash, subject to a contingency reserve for remaining costs and liabilities. The amount and timing of the distributions to Stockholders will be determined by the Board in its discretion, subject to the provisions of the Plan of Dissolution. On the bases to be described in the Proxy Statement, the Board anticipates that the amount of the initial distribution to Stockholders will be approximately $2.00 per share of Common Stock.
As a result of the consummation of the Sale, the Company will cease to be engaged in an ongoing business and will not be eligible to remain listed on the The Nasdaq Capital Market. The Company intends to (a) file a Certificate of Dissolution with the Delaware Secretary of State and (b) delist from the The Nasdaq Capital Market as soon as practicable following the closing of the Sale. In addition, the Company plans to deregister its shares of common stock under Section 12(b), and suspend its periodic reporting obligations under Section 15(d), of the Exchange Act.
The Company will file with the Securities and Exchange Commission a proxy statement containing information about the Sale and the Plan of Dissolution. THE STOCKHOLDERS ARE ADVISED TO READ THE COMPANY’S PROXY STATEMENT IN ITS ENTIRETY WHEN IT BECOMES AVAILABLE, AND ANY OTHER DOCUMENTS THAT THE COMPANY FILES WITH THE SECURITIES AND EXCHANGE COMMISSION, BECAUSE THESE DOCUMENTS WILL CONTAIN IMPORTANT INFORMATION ABOUT THE COMPANY, THE OTHER SELLER PARTIES, THE BUYER PARTIES, THE SALE, AND THE PLAN OF DISSOLUTION AND RELATED TRANSACTIONS.
Stockholders may obtain copies of the proxy statement and other documents that the Company files with the Securities and Exchange Commission (when they are available) free of charge at the Securities and Exchange Commission’s website at www.sec.gov. The Company’s definitive proxy statement and other relevant documents may also be obtained (when available) free of charge on the Company’s website at http://investors.heelys.com or by writing to: Corporate Secretary, Heelys, Inc., 3200 Belmeade Drive, Suite 100, Carrollton, Texas 75006. The reference to such website addresses does not constitute incorporation by reference of the information contained on, or linked to, such websites and none of such information is part of this Quarterly Report on Form 10-Q.