Skechers USA Inc. has made an acquisition proposal to acquire Heelys, Inc. for $5.25 per share in cash, or an aggregate of $142.8 million, based upon the number of fully-diluted shares of Heelys common stock, subject to certain terms and conditions. The proposal came in a letter that Robert Greenberg, chairman and CEO of Skechers sent to Gary Martin, chairman of the board of directors of Heelys.

 

This proposal, which follows a proposal made by Skechers to Heelys on May 28, 2008, provides to Heelys’ stockholders an 8.2% premium to the closing price of its common shares on August 12, 2008 and a 31.0% premium to the closing price of its common shares, net of the cash and cash equivalents that the company reported, as of June 30, 2008.

 

The full text of both letters is below.

 

August 13, 2008 
  
Board of Directors 
Heelys, Inc. 
3200 Belmeade Drive 
Suite 100 
Carrollton, TX 75006 
  
Attention:     c/o Gary L. Martin 
  Capital Southwest Corporation 
  12900 Preston Road at LBJ 
  Suite 700 
  Dallas, TX 75230 



Dear Gary:


Beginning in December 2007, we have had numerous discussions with you exploring the potential acquisition of Heelys Inc., culminating in the delivery to Heelys’ Board of Directors of a formal proposal on May 28, 2008 for Skechers USA Inc. to acquire Heelys in an all cash transaction. We were disappointed to hear that this proposal was declined by the Board and ask for you to reconsider a business combination with Skechers.


Skechers is prepared to acquire Heelys for a cash purchase price of $5.25 per share of Heelys’ common stock, or $142.8 million in the aggregate, based on the number of fully-diluted Heelys shares of common stock outstanding on April 30, 2008, as set forth in Heelys’ SEC filings. We are prepared to consider a mix of stock and cash as consideration, if you believe that is more attractive to your stockholders. We believe that this price represents a significant value for Heelys’ stockholders and acceptance of this proposal is in the best interests of Heelys and its stockholders. We note that our offer represents a premium of 21.0% to the closing price of Heelys’ common stock on May 27, 2008, the date immediately preceding our prior offer on May 28, and an 8.2% premium to yesterday’s closing price. More importantly, this offer represents a premium of 143.9%1 and 31.0%2 to the net enterprise value of Heelys’ common stock on May 28 and August 12, respectively. We remain committed to our proposal and, as we indicated at that time, may also be prepared to increase our proposal if increased value can be identified upon the completion of selected and concise due diligence measures.


We initially desired for this to be a private discussion; however, given Heelys’ failure to provide a positive response to our May 28 proposal, we thought it would be best for both companies, and our respective stockholders, to publicly announce this proposal and our interest in pursuing this transaction. As a result, we plan to publicly announce this proposal today, along with this letter.


This letter is not intended to be, and is not, a definitive agreement between us or in any way binding upon Skechers or Heelys, but is intended to express our proposal as of the date hereof. As stated, it is further subject to the negotiation and execution of a mutually acceptable acquisition agreement. The parties will be bound only in accordance with such definitive agreement, if and when executed.


We continue to welcome the opportunity to meet with you and your representatives and discuss our acquisition proposal in greater detail. We are confident that our proposal offers compelling value for Heelys’ stockholders and we are excited about the prospects that the combined company would hold.


Sincerely, 
  
Robert Greenberg 
Chairman and Chief Executive Officer 
Skechers USA Inc. 



1 Calculated net of the $100.8 million in cash and cash equivalents that Heelys held as of March 31, 2008, and assumes 27.2 million fully diluted outstanding shares of Heelys’ common stock.


2 Calculated net of the $96.8 million in cash and cash equivalents that Heelys held as of June 30, 2008, and assumes 27.2 million fully diluted outstanding shares of Heelys’ common stock.


    
    
    
May 28, 2008 
  
Board of Directors 
Heelys, Inc. 
3200 Belmeade Drive 
Suite 100 
Carrollton, TX 75006 
  
Attention:   c/o Gary L. Martin 
  Capital Southwest Corporation 
  12900 Preston Road at LBJ 
  Suite 700 
  Dallas, TX 75230 



Dear Mr. Martin:


On behalf of Skechers USA Inc. (“Skechers”), I am writing to make a formal proposal to acquire all of the outstanding shares of Heelys, Inc. (“Heelys” or the “Company”). As you know, Skechers carefully considered a potential transaction with Heelys prior to its December 2006 initial public offering. We were then, and continue to be today, impressed by Heelys’ strong brand and proprietary technology. Over the past several months, our executive management team, Board of Directors and advisors have devoted significant time and effort to analyzing the potential strategic benefits of combining our two companies and we are excited by the prospects that a potential acquisition would hold.


To review the recent history of our interest, the current dialogue between our companies began in December 2007 when Financo, Inc. (“Financo”) received an inquiry from a member of Heelys’ Board as to whether Skechers would be interested in forming a strategic relationship with the Company. We responded positively to this overture and have since retained Financo to negotiate on Skechers’ behalf in this regard. At your direction, Financo began to interact with Heelys’ Board member Jeff Peterson to explore a potential relationship between our companies, culminating in a letter from Skechers to Heelys on April 18, 2008. This letter confirmed our interest in acquiring Heelys and requested information of limited scope to evaluate a potential acquisition. On May 5, 2008, you responded with an acknowledgement of the potential strategic opportunity that a transaction could hold and a willingness to dedicate your full attention to a formal offer from Skechers to acquire Heelys; however, you declined to provide the requested diligence items.


Therefore, on the basis of Heelys’ publicly available financial information and Skechers’ own knowledge of the footwear market, we are submitting this offer to acquire all of the Company’s outstanding stock at a purchase price of between $4.75 and $5.10 per share. The eventual purchase price will be determined by a number of factors that we expect to address during our due diligence process. We believe that the share price range encompassed in our offer represents a compelling value for Heelys’ shareholders. Heelys’ common stock closed at $4.34 per share on Tuesday May 27, 2008 and, over the prior three month period, closed at an average price of $4.48 per share. Net the $100.8 million in cash and cash equivalents that the Company held as of March 31, 2008, Heelys’ enterprise value was $0.63 per share based on the May 27, 2008 closing price and $0.77 per share based on the three month average closing price3.


When measured against these share prices, our offer of $4.75 to $5.10 per share ($1.04 to $1.39 of net enterprise value per share) equates to the following premiums:


May 27, 2008 closing price:


— Market value
    9.4% to 17.5% 
— Net enterprise value
  65.1% to 120.6% 



Three month average closing price:


— Market value
    6.0% to 13.8% 
— Net enterprise value
  35.1% to 80.5% 



We are prepared to pay for the proposed acquisition, which would not be subject to financing contingencies, with one half of the consideration in cash and one half in Skechers’ common stock. We recognize, however, that Heelys’ Board of Directors and shareholders might desire a different asset mix and we are open to discussing alternative structures. Please note that Skechers reported $152.4 million in cash and cash equivalents as of March 31, 2008 and has ready access to third party financing sources. We also expect that any shares of Skechers’ common stock received by Heelys’ shareholders would, subject to the terms of our definitive agreement, be fairly liquid given our stock’s outstanding float of 34 million shares and three month average daily trading volume of 708,000 shares.


Skechers is in a position to proceed expeditiously with an acquisition. Our Board of Directors and executive management team are aware of this proposal and are in support of the pursuit of this acquisition. We expect to perform certain focused and concise due diligence measures, which we are in a position to do within a 45 day timeline. Thereafter, we anticipate a swift completion of the transaction, subject to Heelys’ shareholder approval and regulatory filings. No shareholder vote or extraordinary approvals are required on Skechers’ end to consummate the potential acquisition.


We have engaged Financo as our strategic advisor and Kirkpatrick & Lockhart Preston Gates Ellis LLP as our legal counsel. We and they are prepared to devote substantial resources toward ensuring an expedited process and the negotiation of a definitive agreement.


Our proposal is submitted to you on a confidential basis. Should this letter become public in any manner, Skechers will cease to pursue this transaction. This letter is not intended to be, and is not, a definitive agreement between us or in any way binding upon Skechers or Heelys, but is intended to express our indication of interest as of the date hereof. As stated, it is further subject to the completion of due diligence and the negotiation and execution of a mutually acceptable acquisition agreement. The parties will be bound only in accordance with such definitive agreement, if and when executed.


We would welcome the opportunity to meet with you to discuss this acquisition proposal in greater detail.


Sincerely, 
  
Robert Greenberg 
Chairman and Chief Executive Officer 
Skechers USA Inc. 



3 Assumes 27.2 million fully diluted outstanding shares of Heelys’ common stock.