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Heelys, Inc. Reports Second Quarter 2012 Financial Results

Consolidated gross profit margin decreased to 38.5% for the three months ended June 30, 2012, from 46.9% for the three months ended June 30, 2011. The decrease in gross profit percentage from the same quarter in the prior year was primarily the result of 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, 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.

Selling, general and administrative expenses, excluding restructuring charges (discussed below), decreased $1.3 million, primarily as a result of decreased marketing in our German and French markets and decreased shipping and handling costs and commissions, as a result of decreased sales.

Loss from operations increased $645,000, from a loss of $1.1 million for the three months ended June 30, 2011, to a loss of $1.7 million for the three months ended June 30, 2012, primarily as a result of the decrease in gross margins and the restructuring charges recognized during the second quarter of 2012.

The Company reported a net loss of $1.6 million, or $(0.06) per fully diluted share, for the three months ended June 30, 2012, versus a net loss of $973,000, or $(0.04) per fully diluted share for the three months ended June 30, 2011.

Restructuring

As part of an initiative to improve efficiency and reduce costs, the Company began taking steps in the first quarter of 2012 to close its office in Brussels, Belgium and transition the business operations conducted through that office to its 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 the Company's Belgian subsidiary was transitioned to our headquarters in the United States. In connection with these initiatives, we have recorded $457,000 in severance and one-time termination benefit costs, $92,000 in contract termination costs and $185,000 in other costs, including, but not limited to, costs to close the Company's office in Belgium, transfer the business operations to the Company's French, German and U.S. offices, and repatriate the Company's Vice President, International back to the United States. In addition, we recognized $34,000 in fixed asset impairment charges related to these initiatives. The Company does not anticipate that the actions taken thus far with respect to the initiative will result in pre-tax savings in 2012, but estimates pre-tax annual savings of approximately $1.5 million in future years.

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