UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549


_________________________________________





FORM
10-Q


(Mark
One)


þ Quarterly report pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934


For
the quarterly period ended March 31, 2009





OR


o Transition report
pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934


For
the transition period from ______ to __________





Commission
File No. 1-15289





Sport
Supply Group, Inc.


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
            
            22-2795073(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            
            (I.R.S.
      Employer Identification No.)





1901
      Diplomat Drive, Farmers Branch, Texas
            
            75234(Address
      of Principal Executive Offices)
            
            (Zip
      Code)





(972)
484-9484


(Registrant’s
Telephone Number, Including Area Code)





Indicate
by check mark whether the registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.


Yes  þ     No  o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes  o     No  o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.





Large
      accelerated filer
              o
              Accelerated
      filer
              oNon-accelerated
      filer
              o
              Smaller
      reporting company
              þ(Do
      not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  o     No  þ





As of May
11, 2009, there were 12,386,830 shares of the issuer’s common stock
outstanding.









SPORT
SUPPLY GROUP, INC. AND SUBSIDIARIES


TABLE OF CONTENTS








Page
                NumberPART I: FINANCIAL INFORMATIONItem 1. Consolidated Financial Statements
      (Unaudited)Condensed Consolidated Balance Sheets at March 31,
      2009 and June 30, 2008
              1Condensed Consolidated Statements of Income
      for the three and nine months ended March 31, 2009 and
      2008
              2Condensed Consolidated Statements of Cash
      Flows for the nine months ended March 31, 2009 and
2008
              3Notes to Unaudited Condensed Consolidated Financial
      Statements
              4Item 2. Management's Discussion and Analysis of Financial
      Condition and Results of Operations.
              13Item 3. Quantitative and Qualitative Disclosures About Market
      Risk
              29Item 4. Controls and Procedures
              30PART II: OTHER INFORMATIONItem 1. Legal Proceedings
              31Item 6. Exhibits
              32SIGNATURES
              33










Table of
Contents




PART I. FINANCIAL INFORMATION


Item 1.  Consolidated Financial Statements.





SPORT
SUPPLY GROUP, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED BALANCE SHEETS


(Unaudited)


(in
thousands, except share and per share amounts)





March
      31,2009
                
                
                June
      30,
                  2008ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                
                $
                3,557
                
                
                $
                20,531Accounts
      receivable, net of allowance for doubtful accounts of$1,681
      and $1,320 respectively
                
                
                37,463
                
                
                
                34,060Inventories
                
                
                34,541
                
                
                
                36,318Current
      portion of deferred income taxes
                
                
                3,934
                
                
                
                3,866Prepaid
      income taxes
                
                
                915
                
                
                
                --Prepaid
      expenses and other current assets
                
                
                2,363
                
                
                
                1,203Total
      current assets
                
                
                82,773
                
                
                
                95,978PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of
                  $8,650
      and $7,576, respectively
                
                
                8,673
                
                
                
                9,715DEFERRED
      DEBT ISSUANCE COSTS, net of accumulated amortization of
                  $1,712
      and $2,978, respectively
                
                
                384
                
                
                
                1,389INTANGIBLE
      ASSETS, net of accumulated amortization of
                  $5,007
      and $4,431, respectively
                
                
                6,414
                
                
                
                6,972GOODWILL
                
                
                53,082
                
                
                
                53,543OTHER
      ASSETS, net
                
                
                76
                
                
                
                98Total
      assets
                
                $
                151,402
                
                
                $
                167,695


LIABILITIES AND STOCKHOLDERS'
      EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                
                $
                20,376
                
                
                $
                21,183Accrued
      liabilities
                
                
                7,479
                
                
                
                11,842Dividends
      payable
                
                
                311
                
                
                
                309Accrued
      interest
                
                
                559
                
                
                
                240Current
      portion of notes payable and other long-term debt
                
                
                28,920
                
                
                
                108Income
      taxes payable
                
                
                --
                
                
                
                677Total
      current liabilities
                
                
                57,645
                
                
                
                34,359DEFERRED
      INCOME TAX LIABILITY
                
                
                3,699
                
                
                
                4,014NOTES
      PAYABLE AND OTHER LONG-TERM DEBT
                
                
                750
                
                
                
                50,036Total
      liabilities
                
                
                62,094
                
                
                
                88,409COMMITMENTS
      AND CONTINGENCIESSTOCKHOLDERS’
      EQUITY:Preferred
      stock, $0.01 par value, 1,000,000 shares authorized; no shares
      issued
                
                
                --
                
                
                
                --Common
      stock, $0.01 par value, 50,000,000 shares authorized;12,490,756
      and 12,465,986 shares issued and
                  12,386,830
      and 12,362,060 shares outstanding, respectively
                
                
                125
                
                
                
                125Additional
      paid-in capital
                
                
                65,980
                
                
                
                64,648Retained
      earnings
                
                
                24,006
                
                
                
                15,316Treasury
      stock at cost, 103,926 shares
                
                
                (803
                )
                
                
                (803
                )Total
      stockholders' equity
                
                
                89,308
                
                
                
                79,286Total
      liabilities and stockholders' equity
                
                $
                151,402
                
                
                $
                167,695







The
accompanying notes are an integral part of these condensed consolidated
financial statements.


- 1
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Table
of Contents




SPORT
SUPPLY GROUP, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF
INCOME


(Unaudited)


(in
thousands, except share and per share amounts)





Three
      Months Ended
                
                
                Nine
      Months EndedMarch
      31,
                
                
                March
      31,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      sales
                
                $
                63,761
                
                
                $
                65,821
                
                
                $
                190,513
                
                
                $
                190,284Cost
      of sales
                
                
                41,186
                
                
                
                41,739
                
                
                
                122,287
                
                
                
                121,301Gross
      profit
                
                
                22,575
                
                
                
                24,082
                
                
                
                68,226
                
                
                
                68,983Selling,
      general and administrative expenses
                
                
                15,998
                
                
                
                17,750
                
                
                
                51,525
                
                
                
                53,328Operating
      profit
                
                
                6,577
                
                
                
                6,332
                
                
                
                16,701
                
                
                
                15,655Other
      income (expense):Interest
      income
                
                
                2
                
                
                
                45
                
                
                
                118
                
                
                
                202Interest
      expense
                
                
                (887
                )
                
                
                (974
                )
                
                
                (2,801
                )
                
                
                (3,154
                )Gain
      on early retirement of Notes
                
                
                --
                
                
                
                --
                
                
                
                1,443
                
                
                
                --Other
      income
                
                
                19
                
                
                
                42
                
                
                
                19
                
                
                
                77Total
      other expense
                
                
                (866
                )
                
                
                (887
                )
                
                
                (1,221
                )
                
                
                (2,875
                )Income
      before income taxes
                
                
                5,711
                
                
                
                5,445
                
                
                
                15,480
                
                
                
                12,780Income
      tax provision
                
                
                2,201
                
                
                
                2,069
                
                
                
                5,857
                
                
                
                4,856Net
      income
                
                $
                3,510
                
                
                $
                3,376
                
                
                $
                9,623
                
                
                $
                7,924Weighted
      average number of shares outstanding:Basic
                
                
                12,386,830
                
                
                
                12,296,813
                
                
                
                12,381,895
                
                
                
                12,043,082Diluted
                
                
                14,388,369
                
                
                
                15,842,816
                
                
                
                14,975,812
                
                
                
                15,578,514Net
      income per common share – basic
                
                $
                0.28
                
                
                $
                0.27
                
                
                $
                0.78
                
                
                $
                0.66Net
      income per common share – diluted
                
                $
                0.27
                
                
                $
                0.25
                
                
                $
                0.68
                
                
                $
                0.61Dividends
      declared per common share
                
                $
                .050
                
                
                $
                0.025
                
                
                $
                0.075
                
                
                $
                0.075





The
accompanying notes are an integral part of these condensed consolidated
financial statements.




- 2
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Table
of Contents




SPORT
SUPPLY GROUP, INC. AND SUBSIDIARIES


CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited)


(in
thousands)





Nine
      Months EndedMarch
      31,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                9,623
                
                
                $
                7,924Adjustments
      to reconcile net income to cash provided by operating
      activities:Provision
      for uncollectible accounts receivable
                
                
                711
                
                
                
                714Depreciation
      and amortization
                
                
                2,120
                
                
                
                2,798Amortization
      of deferred debt issuance costs
                
                
                1,133
                
                
                
                719Gain
      on early retirement of long term debt
                
                
                (1,443
                )
                
                
                --Deferred
      income taxes
                
                
                78
                
                
                
                3,901Stock-based
      compensation expense
                
                
                853
                
                
                
                355Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                (4,114
                )
                
                
                (9,691
                )Inventories
                
                
                1,777
                
                
                
                (62
                )Prepaid
      expenses and other current assets
                
                
                (1,160
                )
                
                
                (1,001
                )Other
      assets
                
                
                22
                
                
                
                31Accounts
      payable
                
                
                (807
                )
                
                
                4,694Income
      taxes payable / prepaid income taxes
                
                
                (1,592
                )
                
                
                3,112Accrued
      liabilities and accrued interest
                
                
                (4,044
                )
                
                
                1,604Net
      cash provided by operating activities:
                
                
                3,157
                
                
                
                15,098CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                
                
                (520
                )
                
                
                (1,371
                )Net
      cash used in investing activities:
                
                
                (520
                )
                
                
                (1,371
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Early
      retirement of long term debt
                
                
                (19,701
                )
                
                
                --Deferred
      debt issuance cost
                
                
                (128
                )
                
                
                (23
                )Proceeds
      from bank line of credit
                
                
                36,773
                
                
                
                1,015Payments
      on notes payable and line of credit
                
                
                (36,103
                )
                
                
                (25,809
                )Payment
      of dividends
                
                
                (931
                )
                
                
                (871
                )Tax
      benefit related to the exercise of stock options
                
                
                249
                
                
                
                --Cash
      paid for treasury shares
                
                
                --
                
                
                
                (145
                )Proceeds
      from issuance of common stock
                
                
                230
                
                
                
                19,481Net
      cash used in financing activities:
                
                
                (19,611
                )
                
                
                (6,352
                )Net
      change in cash and cash equivalents
                
                
                (16,974
                )
                
                
                7,375Cash
      and cash equivalents, beginning of period
                
                
                20,531
                
                
                
                5,670Cash
      and cash equivalents, end of period
                
                $
                3,557
                
                
                $
                13,045SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
                
                $
                1,371
                
                
                $
                1,976Cash
      paid (refunded) for income taxes
                
                $
                7,207
                
                
                $
                (1,532
                )








The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  - 3
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Table
of Contents





SPORT
SUPPLY GROUP, INC. AND SUBSIDIARIES


Notes to Unaudited Condensed Consolidated Financial
Statements





1.  Basis
of Presentation:





The
accompanying unaudited condensed consolidated financial statements of Sport
Supply Group, Inc. and its subsidiaries (collectively, the “Company”) have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“US GAAP”) for interim
financial reporting.  Accordingly, they do not include all of the
information and footnotes required by US GAAP for complete financial statements
and should be read in conjunction with the Company’s Annual Report on Form 10-K
for the fiscal year ended June 30, 2008.  All intercompany
transactions and balances have been eliminated in consolidation.  In
the opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation of the interim
financial information have been included.





Operating
results and cash flows for interim periods presented herein are not necessarily
indicative of results that may be expected for any other interim period or the
fiscal year ending June 30, 2009.





2.  Recent
Accounting Pronouncements:





In September 2006, the Financial
Accounting Standards Board (the “FASB”) issued Statement of Financial
Accounting Standards (“SFAS”) No. 157,Fair Value
Measurements(“SFAS
157”).  This
statement, effective for interim or annual reporting periods beginning after
November 15, 2007, establishes a framework for measuring fair value in US GAAP
and expands disclosures about fair value measurements.  In February
2008, the FASB issued FASB Staff Position ("FSP") FAS 157-2,Effective Date
of FASB Statement No. 157,
to provide a one-year deferral of the effective date of SFAS 157 for
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed in financial statements at fair value on a recurring
basis (that is, at least annually).  For nonfinancial assets and
nonfinancial liabilities subject to the deferral, the effective date of SFAS 157
is postponed to fiscal years beginning after November 15, 2008 and to interim
periods within those fiscal years.  Except for nonfinancial assets and
nonfinancial liabilities subject to the deferral, the Company adopted SFAS 157
on July 1, 2008, with no impact on its consolidated financial
statements.





In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities including an Amendment of FASB Statement No.
115("SFAS
159"). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. The provisions of SFAS 159
are effective for fiscal years beginning after November 15, 2007. The Company
adopted SFAS 159 on July 1, 2008, with no impact on its consolidated
financial statements.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS 141R”). SFAS 141R will
significantly change the accounting for business combinations. Under SFAS 141R,
an acquiring entity will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date fair value with
limited exceptions. SFAS 141R will change the accounting treatment for certain
specific items, including:





·
            Acquisition
      costs will generally be expensed as
incurred;




·
            Non-controlling
      interests (currently referred to as “minority interests”) will be valued
      at fair value at the acquisition
date;




·
            In-process
      research and development will be recorded at fair value as an
      indefinite-lived intangible asset at the acquisition
  date;




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Table
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·
            Restructuring
      costs associated with a business combination will generally be expensed
      subsequent to the acquisition date;
and




·
            Changes
      in deferred tax asset valuation allowances and income tax uncertainties
      after the acquisition date generally will affect income tax
      expense.





SFAS 141R
also includes a substantial number of new disclosure requirements. SFAS 141R is
to be applied prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. Earlier adoption is
prohibited.  The Company will adopt SFAS 141R beginning in the first
quarter of fiscal 2010.





On
April 1, 2009, the FASB issued FSP FAS 141R-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies (“FSP FAS 141R-1”), to
address application issues regarding the accounting and disclosure provisions
for contingencies in SFAS 141R.  FSP FAS 141R-1 amends SFAS 141R by
replacing the guidance on the initial recognition and measurement of assets and
liabilities arising from contingencies acquired or assumed in a business
combination with guidance similar to that for preacquisition contingencies in
FASB Statement 141, Business
Combinations, before the 2007 revision.  SFAS 141R, as amended,
requires the following:





·
            If
      the acquisition-date fair value of an asset or liability arising from a
      contingency can be determined during the measurement period of a business
      combination, the asset or liability must initially be recognized at fair
      value.




·
            If
      the acquisition-date fair value cannot be determined for an asset or
      liability arising from a contingency during the measurement period, the
      asset or liability must be recognized at the acquisition date if both of
      the following criteria are met using the guidance in FASB Statement 5,
      Accounting for
      Contingencies, and FASB Interpretation 14, Reasonable Estimation of the
      Amount of a Loss:




–
            Information
      available before the end of the measurement period indicates that it is
      probable that the asset existed or liability was incurred at the
      acquisition date.


–
            The
      amount of the asset or liability can be reasonably
    estimated.





FSP FAS
141R-1 also replaces SFAS 141R’s subsequent accounting guidance for contingent
assets and liabilities recognized at the acquisition date with a new requirement
to develop a systematic and rational method to subsequently measure and account
for assets and liabilities arising from contingencies. In addition, FSP FAS
141R-1 amends SFAS 141R’s disclosure requirements for contingencies.  FSP
FAS 141R-1 is effective for business combinations with an acquisition date that
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008.  FSP FAS 141R-1’s amendments to SFAS 141R
are effective when goodwill is tested for impairment under FASB Statement No.
142, Goodwill and Other
Intangible Assets, during the Company’s fiscal year ending June 30,
2010.





In
April 2008, the FASB issued FSP FAS 142-3,Determination of the Useful Life of
Intangible Assets (“FSP 142-3”). FSP
142-3 amends the factors an entity should consider in developing renewal or
extension assumptions used in determining the useful life of recognized
intangible assets under FASB Statement No. 142,Goodwill and Other Intangible
Assets. This new guidance applies prospectively to intangible assets that
are acquired individually or with a group of other assets in business
combinations and asset acquisitions. FSP 142-3 is effective for Company’s fiscal
year beginning July 1, 2009.  The Company is currently evaluating the
impact that the implementation of FSP 142-3 will have on its consolidated
financial position, results of operations and cash flows.





In
May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (including Partial Cash
Settlement)(“APB 14-1”). APB 14-1
requires issuers of certain convertible debt instruments that may be settled in
cash upon conversion to separately account for the liability and equity
components in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent
periods.




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The
accounting for these types of instruments under APB 14-1 is intended to
appropriately reflect the underlying economics by capturing the value of the
conversion options as borrowing costs; therefore, recognizing their potential
dilutive effect on earnings per share.





The
effective date of APB 14-1 is for financial statements issued for fiscal years
beginning after December 15, 2008 and interim periods within those fiscal
years, and does not permit earlier application. However, the transition guidance
requires retrospective application to all periods presented and does not
grandfather existing instruments. In November 2004, the Company issued $50
million in convertible senior subordinated notes that mature December 1, 2009.
The Company does not believe the adoption of APB 14-1 will have a significant
effect on its consolidated financial position, results of operations or cash
flows.





In
June 2008, the FASB issued FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities(“FSP EITF
03-6-1”). FSP EITF 03-6-1 applies to the calculation of earnings per
share for share-based payment awards with rights to dividends or dividend
equivalents under SFAS No. 128, Earnings Per Share.Unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents will be considered participating securities and will be
included in the computation of earnings per share pursuant to the two-class
method. The effective date of FSP EITF 03-6-1 is for financial statements issued
for fiscal years beginning after December 15, 2008, and all interim periods
within those years. Early adoption is not permitted. Once effective, all prior
period earnings per share data presented will be adjusted
retrospectively.  The Company will adopt FSP EITF 03-6-1 on July 1,
2009.The
Company is currently evaluating the impact that the implementation of FSP EITF
03-6-1 will have on its consolidated financial statements.





In May
2008, the FASB issued SFAS No. 162 (“SFAS 162”), The Hierarchy of Generally Accepted
Accounting Principles.  SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with US GAAP.  SFAS 162 became effective
November 15, 2008.  The Company’s adoption of SFAS 162 did not have a
material impact on its consolidated financial statements.




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3.  Net
Sales:





The
Company’s net sales to external customers are attributable to sales of sporting
goods equipment and soft good athletic apparel and footwear products (“soft goods”), as well
as freight, through the Company’s catalog and team dealer
divisions.  The following table details the Company’s consolidated net
sales by these product groups and divisions for the three and nine months ended
March 31, 2009 and 2008:





Three
      Months Ended March 31,2009
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                2008Catalog
      Group
                                                                
                                                                
                                                                Team
      Dealer
                                                                
                                                                
                                                                Total
                                                                
                                                                
                                                                Catalog
      Group
                                                                
                                                                
                                                                Team
      Dealer
                                                                
                                                                
                                                                Total(in
      thousands)Sporting
      Goods Equipment
                                                                
                                                                $
                                                                34,647
                                                                
                                                                
                                                                $
                                                                6,753
                                                                
                                                                
                                                                $
                                                                41,400
                                                                
                                                                
                                                                $
                                                                36,037
                                                                
                                                                
                                                                $
                                                                6,453
                                                                
                                                                
                                                                $
                                                                42,490Soft
      Goods
                                                                
                                                                
                                                                5,177
                                                                
                                                                
                                                                
                                                                13,772
                                                                
                                                                
                                                                
                                                                18,949
                                                                
                                                                
                                                                
                                                                5,311
                                                                
                                                                
                                                                
                                                                14,136
                                                                
                                                                
                                                                
                                                                19,447Freight
                                                                
                                                                
                                                                2,630
                                                                
                                                                
                                                                
                                                                782
                                                                
                                                                
                                                                
                                                                3,412
                                                                
                                                                
                                                                
                                                                2,985
                                                                
                                                                
                                                                
                                                                899
                                                                
                                                                
                                                                
                                                                3,884Net
      Sales
                                                                
                                                                $
                                                                42,454
                                                                
                                                                
                                                                $
                                                                21,307
                                                                
                                                                
                                                                $
                                                                63,761
                                                                
                                                                
                                                                $
                                                                44,333
                                                                
                                                                
                                                                $
                                                                21,488
                                                                
                                                                
                                                                $
                                                                65,821Nine
      Months Ended March 31,2009
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                2008Catalog
      Group
                                                                
                                                                
                                                                Team
      Dealer
                                                                
                                                                
                                                                Total
                                                                
                                                                
                                                                Catalog
      Group
                                                                
                                                                
                                                                Team
      Dealer
                                                                
                                                                
                                                                Total(in
      thousands)Sporting
      Goods Equipment
                                                                
                                                                $
                                                                92,167
                                                                
                                                                
                                                                $
                                                                21,684
                                                                
                                                                
                                                                $
                                                                113,851
                                                                
                                                                
                                                                $
                                                                93,025
                                                                
                                                                
                                                                $
                                                                21,029
                                                                
                                                                
                                                                $
                                                                114,054Soft
      Goods
                                                                
                                                                
                                                                8,214
                                                                
                                                                
                                                                
                                                                58,182
                                                                
                                                                
                                                                
                                                                66,396
                                                                
                                                                
                                                                
                                                                8,572
                                                                
                                                                
                                                                
                                                                57,515
                                                                
                                                                
                                                                
                                                                66,087Freight
                                                                
                                                                
                                                                7,315
                                                                
                                                                
                                                                
                                                                2,951
                                                                
                                                                
                                                                
                                                                10,266
                                                                
                                                                
                                                                
                                                                7,328
                                                                
                                                                
                                                                
                                                                2,815
                                                                
                                                                
                                                                
                                                                10,143Net
      Sales
                                                                
                                                                $
                                                                107,696
                                                                
                                                                
                                                                $
                                                                82,817
                                                                
                                                                
                                                                $
                                                                190,513
                                                                
                                                                
                                                                $
                                                                108,925
                                                                
                                                                
                                                                $
                                                                81,359
                                                                
                                                                
                                                                $
                                                                190,284





4.  Inventories:





Inventories
are carried at the lower of cost or market using the weighted-average cost
method for items purchased for resale and the average cost method for
manufactured items.





Inventories
at March 31, 2009 and June 30, 2008 consisted of the following:





March
      31, 2009
                
                
                June
      30, 2008(in
      thousands)Raw
      materials
                
                $
                2,010
                
                
                $
                2,297Work
      in progress
                
                
                142
                
                
                
                159Finished
      goods
                
                
                32,389
                
                
                
                33,862Total
      inventories
                
                $
                34,541
                
                
                $
                36,318








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5.  Allowance
for Doubtful Accounts:





Changes
in the Company’s allowance for doubtful accounts for the nine months ended March
31, 2009 and the fiscal year ended June 30, 2008, are as follows:





Nine
      Months Ended
                
                
                Fiscal
      Year EndedMarch
      31, 2009
                
                
                June
      30, 2008(in
      thousands)Balance
      at beginning of period
                
                $
                1,320
                
                
                $
                1,296Provision
      for uncollectible accounts receivable
                
                
                711
                
                
                
                1,028Accounts
      written off, net of recoveries
                
                
                (350
                )
                
                
                (1,004
                )Balance
      at end of period
                
                $
                1,681
                
                
                $
                1,320





6.  Accrued
Liabilities:





Accrued liabilities at March 31, 2009
and June 30, 2008 included the following:





March
      31, 2009
                
                
                June
      30, 2008(in
      thousands)Accrued
      compensation and benefits
                
                $
                2,084
                
                
                $
                4,303Customer
      deposits
                
                
                1,055
                
                
                
                1,403Taxes
      other than income taxes
                
                
                2,052
                
                
                
                3,719Gift
      certificates
                
                
                520
                
                
                
                603Other
                
                
                1,768
                
                
                
                1,814Total
      accrued liabilities
                
                $
                7,479
                
                
                $
                11,842








7.  Notes
Payable and Other Long-Term Debt:





In November 2004, the Company issued
$50.0 million principal amount of 5.75% Convertible Senior SubordinatedNotesdue December 1, 2009
(the “Notes”).  The issuance of
the Notes resulted in aggregate proceeds of $46.6 million to the Company, net of
issuance costs.





The Notes are governed by the Indenture
dated as of November 26, 2004 between the Company and The Bank of New York Trust
Company N.A., as trustee (the “Indenture”).  The Indenture provides,
among other things, that the Notes will bear interest of 5.75% per year, payable
semi-annually, and will be convertible at the option of the holder of the Notes
into the Company’s common stock at a conversion rate of 68.2594 shares per $1
thousand principal amount of Notes, subject to certain
adjustments.  This is equivalent to a conversion price of
approximately $14.65 per share. The Company may redeem the Notes, in whole or in
part, at the redemption price, which is 100% of the principal amount, plus
accrued and unpaid interest and additional interest, if any, to, but excluding,
the redemption date only if the closing price of the Company’s common stock
exceeds 150% of the conversion price for at least 20 trading days in any
consecutive 30-day trading period.  Upon the occurrence of a change in
control of the Company, holders may require the Company to purchase all or a
portion of the Notes in cash at a price equal to 100% of the principal amount of
Notes to be repurchased, plus accrued and unpaid interest and additional
interest, if any, to, but excluding, the repurchase date, plus the make whole
premium, if applicable.




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During
the nine months ended March 31, 2009, the Company used cash on hand and proceeds
from the Revolving Facility, as defined below, to retire $21.1 million of the
Notes for approximately $19.7 million, resulting in a gain on the early
retirement of Notes of approximately $1.4 million.





The $28.9
million balance of Notes outstanding is classified as a current liability on the
Company’s March 31, 2009 balance sheet.  The Notes were included in
notes payable on the Company’s June 30, 2008 balance sheet.





From June
29, 2006 until February 9, 2009, the Company’s senior lending facility was led
by Merrill Lynch Business Financial Services, Inc. (the “Revolving
Facility”).  The Revolving Facility established a commitment to
provide the Company with a $25 million secured revolving credit facility through
June 1, 2010, subject to the terms, conditions and covenants stated in the
lending agreement as amended and restated through February 9, 2009.





On
February 9, 2009, the Company terminated the Revolving Facility and entered into
a Credit Agreement (the “New Credit
Agreement”) with Bank of America, N.A., as administrative agent, swing
line lender, letter of credit issuer, sole lead arranger and sole book
manager.  The New Credit Agreement establishes a commitment to provide
the Company with a $40 million secured revolving credit facility through
February 8, 2012.  The facility provided under the New Credit
Agreement may be expanded through the exercise of an accordion feature to $60
million, subject to certain conditions set forth in the New Credit
Agreement.  Borrowings under the New Credit Agreement may be limited
to a borrowing base equal to 85% of the Company’s eligible accounts receivable
plus 60% of the Company’s eligible inventories, but only if the Company’s Quick
Ratio (as defined in the New Credit Agreement) is less than 1.00 to
1.00.  Borrowings are subject to certain conditions including that
there has not been a material adverse effect on the Company's
operations.





All
borrowings under the New Credit Agreement will bear interest at the London
Interbank Offered Rate (“LIBOR”) plus a spread
ranging from 1.25% to 3.00%, with the amount of the spread at any time based on
the Company’s Funded Debt to EBITDA Ratio (as defined in the New Credit
Agreement) on a trailing 12-month basis.





The New
Credit Agreement includes covenants that require the Company to meet certain
financial ratios.  The Company’s Debt Service Coverage Ratio (as
defined in the New Credit Agreement) must be at least 1.25 to 1.00 at all times
and the Company’s Funded Debt to EBITDA Ratio on a trailing 12-month basis may
not exceed 2.75 to 1.00.  The New Credit Agreement also contains
certain conditions that must be met with respect to acquisitions that in the
aggregate cannot exceed $25 million during the term of the New Credit
Agreement.





The New
Credit Agreement allows the Company to refinance the Notes with borrowings under
the facility at or prior to maturity and to purchase up to $5,000,000 of its
common stock, each provided certain conditions are met.  The Notes
mature on December 1, 2009.  In the absence of the Notes converting
into shares of the Company’s common stock, it is the Company’s intent to
repurchase as many of the Notes on the open market that can be obtained at
attractive prices utilizing cash flows from operations and then refinancing the
remaining balance with borrowings under the New Credit Agreement.





The New
Credit Agreement is guaranteed by each of the Company’s domestic subsidiaries
and is secured by, among other things, a pledge of all of the issued and
outstanding shares of stock of each of the Company’s domestic subsidiaries and a
first priority perfected security interest on substantially all of the assets of
the Company and each of its domestic subsidiaries.  The Company’s
Asian subsidiary, Sport Supply Group Asia Limited, must be dissolved within 180
days of the closing of the New Credit Agreement.  This subsidiary does
not have any operations or material assets.  Accordingly, its
dissolution will not have an effect on the Company’s liquidity, results of
operations or financial condition.  If the Asian subsidiary is not
dissolved within this time period, it will also guarantee the New Credit
Agreement.





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The New
Credit Agreement contains customary representations, warranties and covenants
(affirmative and negative) and is subject to customary rights of the lenders and
the administrative agent upon the occurrence and during the continuance of an
event of default, including, under certain circumstances, the right to
accelerate payment of the loans made under the New Credit Agreement and the
right to charge a default rate of interest on amounts outstanding under the New
Credit Agreement.





A
commitment fee of 0.125% was due upon closing of the New Credit
Agreement.  There is no agency fee under the New Credit Agreement
until a second lender becomes a party to the New Credit Agreement, at which
point a $30,000 annual agency would be payable.





At March 31, 2009, the Company had $750
thousandoutstandingunder
theNew Credit Agreement,
thereby leaving the Company with approximately $39.2 million of availability
under the terms of theNew Credit Agreement.  At March 31,
2009, the Company was in compliance with all of its financial covenants under
the New Credit Agreement.








Notes
payable and other long-term debt at March 31, 2009 and June 30, 2008 consisted
of the following:





March
      31, 2009
                
                
                June
      30, 2008(in
      thousands)Notes
                
                $
                28,856
                
                
                $
                50,000New
      Credit Agreement
                
                
                750
                
                
                
                --Other
      notes payable
                
                
                64
                
                
                
                144Total
      notes payable
                
                
                29,670
                
                
                
                50,144Less
      current portion
                
                
                (28,920
                )
                
                
                (108
                )Notes
      payable and other long-term debt
                
                $
                750
                
                
                $
                50,036





Future
payments on notes payable and other long-term debt are as follows for fiscal
years ending June 30:





(in
      thousands)2009
                
                $
                282010
                
                
                28,8922011
                
                
                --2012
                
                
                750Thereafter
                
                
                --Total
      future payments
                
                $
                29,670






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8.  Income
Per Share:





The table
below outlines the determination of the number of diluted shares of common stock
used in the calculation of diluted earnings per share as well as the calculation
of diluted earnings per share for the periods presented:





For
      the Three Months Ended
                    
                    
                    For
      the Nine Months EndedMarch
      31,
                    
                    
                    March
      31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in
      thousands except share and per share data)Numerator:Net
      income
                    
                    $
                    3,510
                    
                    
                    $
                    3,376
                    
                    
                    $
                    9,623
                    
                    
                    $
                    7,924Effect
      of Notes
                    
                    
                    316
                    
                    
                    
                    552
                    
                    
                    
                    523
                    
                    
                    
                    1,655Diluted
      income
                    
                    $
                    3,826
                    
                    
                    $
                    3,928
                    
                    
                    $
                    10,146
                    
                    
                    $
                    9,579Denominator:Basic
      weighted average shares outstanding
                    
                    
                    12,386,830
                    
                    
                    
                    12,296,813
                    
                    
                    
                    12,381,895
                    
                    
                    
                    12,043,082Add
      effect of:Stock
      options and restricted stock
                    
                    
                    31,846
                    
                    
                    
                    133,034
                    
                    
                    
                    77,068
                    
                    
                    
                    122,463Notes
                    
                    
                    1,969,693
                    
                    
                    
                    3,412,969
                    
                    
                    
                    2,516,849
                    
                    
                    
                    3,412,969Diluted
      weighted average shares outstanding
                    
                    
                    14,388,369
                    
                    
                    
                    15,842,816
                    
                    
                    
                    14,975,812
                    
                    
                    
                    15,578,514Basic
      income per share
                    
                    $
                    0.28
                    
                    
                    $
                    0.27
                    
                    
                    $
                    0.78
                    
                    
                    $
                    0.66Diluted
      income per share
                    
                    $
                    0.27
                    
                    
                    $
                    0.25
                    
                    
                    $
                    0.68
                    
                    
                    $
                    0.61




During
the nine months ended March 31, 2009, the Company used available cash on hand
and proceeds from the Revolving Facility to repurchase approximately $21.1
million of the Notes in privately-negotiated transactions.  None of
these repurchases were made during the three months ended March 31, 2009.
 Under the if-converted method of SFAS No. 128, Earnings Per Share (“SFAS 128”), Notes
repurchased are treated as having been converted to common stock equivalents at
the start of the period to the extent they are dilutive.  Adjustments
to diluted net income related to the repurchased Notes consist primarily of
removing the gain related to the repurchases and similarly removing the effects
of interest expense and other items.





For the
three months ended March 31, 2009 and 2008, stock options to purchase 1,431,542
and 688,300 shares, respectively, and for the nine months ended March 31, 2009
and 2008, stock options to purchase 1,136,311 and 535,333 shares, respectively,
were excluded in the computations of diluted income per share because their
effect was anti-dilutive due to their exercise prices being above the average
stock prices for the respective periods.





On
July 30, 2007, the Company privately sold 1,830,000 shares of its common
stock for $18,300,000 to CBT Holdings, LLC.




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9.  Stockholders’
Equity:





Changes
in stockholders’ equity during the nine months ended March 31, 2009, were as
follows:





(in
      thousands)Stockholders’
      equity at June 30, 2008
                
                $
                79,286Issuance
      of stock for cash
                
                
                230Stock-based
      compensation
                
                
                853Tax
      benefit related to the exercise of stock options
                
                
                249Net
      income
                
                
                9,623Dividends
      declared
                
                
                (933
                )Stockholders’
      equity at March 31, 2009
                
                $
                89,308




10.
Legal Proceedings:








The
Company is a party to various litigation matters, in most cases involving
ordinary and routine claims incidental to the Company’s business.  The
Company cannot estimate with certainty its ultimate legal and financial
liability with respect to such pending litigation matters.  However,
the Company believes, based on its review of such matters, that its ultimate
liability will not have a material adverse effect on its financial position,
results of operations or cash flows.




11.
Subsequent Event:





On March
27, 2009, the Company announced that its Board of Directors approved and
declared a quarterly cash dividend of $0.025 per share on the Company's common
stock for the third quarter of fiscal 2009, which ended March 31, 2009. The
quarterly cash dividend was paid on April 30, 2009, to all stockholders of
record on the close of business on April 10, 2009.




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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.





Our
Business





Certain
statements in Management’s Discussion and Analysis of Financial Condition and
Results of Operations are forward-looking as defined in the Private Securities
Litigation Reform Act of 1995.  These statements are based on current
expectations that are subject to risks and uncertainties, including those
discussed under the heading “Risk Factors” in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2008 and elsewhere in this Quarterly
Report.  As such, actual results may differ materially from
expectations as of the date of this filing.





Sport
Supply Group, Inc. (“Sport Supply Group,”
“we,” “us,” “our,” or the “Company”) is a
marketer, manufacturer and distributor of sporting goods equipment, physical
education, recreational and leisure products and a marketer and distributor of
soft goods, primarily to the institutional market in the United
States.  The institutional market generally consists of youth sports
programs, YMCAs, YWCAs, park and recreational organizations, schools, colleges,
churches, government agencies, athletic teams, athletic clubs and
dealers.  We sell our products directly to our customers primarily
through the distribution of our unique, informative catalogs and fliers, our
strategically located road sales professionals, our telemarketers, various sales
events and the Internet.  We offer a broad line of sporting goods and
equipment, soft goods and other recreational products, as well as provide
after-sale customer service.  We currently market approximately 22
thousand sports and physical education related equipment products, soft goods
and recreational related equipment and products to institutional, retail,
Internet, sports teams and other team dealer customers.  We market our
products through the support of a customer database of over 400 thousand
potential customers, our approximately 190 person direct sales force
strategically located throughout the South-Western, South-Central, Mid-Western,
Mid-Atlantic and South-Atlantic United States, and our call centers located at
our headquarters in Farmers Branch, Texas, Corona, California in the Los Angeles
basin, Richmond, Indiana and Richmond, Virginia.  Our fiscal year ends
on June 30 of each year.





Historically,
sales of our sporting goods have experienced seasonal
fluctuations.  This seasonality causes our financial results to vary
from quarter to quarter, which usually results in lower net sales and operating
profit in the second quarter of our fiscal year (October through December) and
higher net sales and operating profit in the remaining quarters of our fiscal
year.  We attribute this seasonality primarily to the budgeting
procedures of our customers and the seasonal demand for our products, which have
historically been driven by fall, spring and summer
sports.  Generally, between the months of October and December of each
fiscal year, there is a lower level of sports activities at our non-retail
institutional customer base, a higher degree of adverse weather conditions and a
greater number of school recesses and major holidays.  We believe the
operations of our team dealers, which have a greater focus on fall and winter
sports, have reduced the seasonality of our financial results.  We
have also somewhat mitigated this sales reduction during the second quarter by
marketing our products through the websites of large
retailers.  Retail customers order the products from the retailers’
websites and we ship the products to the retailers’ customers.





Executive
Overview





U.S.
economic conditions continued to decline throughout calendar 2008, accelerating
in the second half of the calendar year with a sharp decline in the general
economy providing confirmation that our country was in a
recession.  The economic and national news reports in the first
quarter of calendar 2009 reported further economic challenges caused by
increasing unemployment, decreased consumer confidence and spending, continued
strain on the financial sector and credit markets, growing housing foreclosures,
declining construction, continued government and municipal budget challenges,
tax revenue declines and continuing reports of declines in corporate revenues
and profits.




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As we
report our third quarter ended March 31, 2009 and move into our fourth quarter
ending June 30, 2009, the U.S. economy remains in a severe recession and
institutional sporting goods customers and suppliers continue to face adverse
economic pressures.  During our first quarter ended September 30,
2008, we continued to realize year-over-year quarterly revenue, gross profit and
net income increases.  During our second quarter ended December 31,
2008, our operating results began to modestly reflect the revenue, gross profit
and operating profit challenges the recession was causing the institutional
sporting goods market.





We are
now experiencing more significant revenue and gross profit challenges we believe
are the result of the weakening economy, reductions in school, municipal,
county, state and federal budgets, and increased unemployment, which together
negatively impact the funds available for youth sports, youth physical education
and athletic facilities.  Additionally, the budget reductions are
causing increasing competitive pressures.  While our results reflect
these revenue and gross profit challenges, we are reporting improved overall
profit performance.  As such, we believe our company is performing
reasonably well in the current economic and competitive
environment.





·
            Net sales for the third quarter
      ended March 31, 2009 decreased 3.1% to $63.8 million.  Net sales
      for the nine month period ended March 31, 2009 increased 0.1% to $190.5
      million.  The net sales decrease in the quarter ended March 31,
      2009 was attributable to a decrease in catalog division
      sales.




·
            Gross profit as a percentage of
      net sales for the third quarter ended March 31, 2009 decreased 120 basis
      points to 35.4%.  Gross profit as a percentage of net sales for
      the nine month period ended March 31, 2009 decreased 40 basis points to
      35.8%.  Gross profit percentage decreases are primarily the
      result of our aggressive sales efforts, including price reductions and
      other special discounting strategies, against competitive pressures in the
      market.




·
            Operating profit for the third
      quarter ended March 31, 2009 increased 3.4% to $6.6
      million.  Operating profit for the nine month period ended March
      31, 2009 increased 6.7% to $16.7 million.  The increase in
      operating profit is primarily due to lower selling, general and
      administrative expenses.




·
            Net income for the third quarter
      ended March 31, 2009 increased 4.0% to $3.5 million.  Net income
      for the nine month period ended March 31, 2009 increased 21.4% to $9.6
      million.  The primary contributors to increased net income are
      reductions in selling, general and administrative expenses and gains
      realized on the early retirement of Notes, as discussed
      below.







The
institutional sporting goods industry can be greatly affected by macroeconomic
factors, including changes in global, national, regional and local economic
conditions, as well as consumers’ perceptions of such economic
factors.  Recent actions taken or under consideration by the federal
government designed to increase spending could soften the impact of the
recession.  Nonetheless, there remains the possibility that sporting
goods sales and gross margins may be further adversely
impacted.





A
significant portion of the products that we purchase for resale, including those
purchased from domestic suppliers, is manufactured abroad in countries such as
China, Taiwan, and South Korea.  We cannot predict the effect that
future changes in economic conditions in such foreign countries may have on our
operations.  In the event of disruptions or delays in supply due to
economic conditions in foreign countries, such disruptions or delays could
adversely affect our results of operations unless and until alternative supply
arrangements can be made.





Given the
volatile trends and uncertain economic conditions, we have limited ability to
forecast our fiscal 2009 consolidated operating and financial
results.  Accordingly, we cannot give assurance that our trend of
improved overall profit performance will continue.  While there are
many significant factors that we cannot control, we intend to navigate the
present general economic downturn by remaining focused on improving areas within
our control and on achieving further progress on three primary goals:
maintaining a strong balance sheet; generating positive earnings before
interest, taxes, depreciation and amortization (“EBITDA”) growth; and
positioning our business to capitalize on an economic recovery when it occurs.
Consistent with these goals, in the past nine months
we:  (i) utilized existing cash to redeem approximately $21.1
million of Notes, resulting in a reduction in our debt, $1.2 million in
annualized interest savings, and the recognition of a $1.4 million gain in
connection with the early redemption; (ii) consolidated operations and cut
overhead costs; and (iii) implemented additional marketing programs
designed to address our institutional customers’ needs and affordability
concerns.  Our key business strategies and plans for the remainder of
fiscal 2009 and into fiscal 2010 will continue to reflect these
priorities.


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Critical
Accounting Policies





Our
discussion and analysis of our financial condition and results of operations is
based upon our  consolidated financial statements, which have been
prepared in accordance with US GAAP.  Certain of our accounting
policies are particularly important to the portrayal of our financial position
and results of operations included elsewhere in this Quarterly Report on Form
10-Q and require the application of significant judgment by us; as a result,
they are subject to an inherent degree of uncertainty.  In applying
these policies, we use our judgment to determine the appropriate assumptions to
be used in the determination of certain estimates.  These estimates
are based on our historical experience, our observation of trends in the
industry and information available from other outside sources, as appropriate,
and have been historically accurate in all material respects and consistently
applied. The estimates described below are reviewed from time to time and are
subject to change if the circumstances so indicate.  The effect of any
such change is reflected in results of operations for the period in which the
change is made.





Inventories.  We
adjust the value of our inventories to lower of cost or market, which includes
write-downs for slow-moving or obsolete inventories.  Factors included in
determining which inventories are slow-moving or obsolete include current and
anticipated demand or customer preferences, merchandise aging, seasonal trends
and decisions to discontinue certain products. Because most of our products have
an extended life, we have not historically experienced significant occurrences
of obsolescence.  Inventory write-downs are recorded as a percentage
of product revenues and evaluated at least quarterly based on the above
factors.  We perform physical inventories at least once per year and cycle
count the majority of inventory at our distribution centers at least once each
six months.  Slow moving inventory and shrinkage can be impacted by
internal factors such as the level of employee training and loss prevention, and
external factors such as the health of the overall economy and customer
demand.





Our
inventory adjustments for lower of cost or market provisions totaled $225
thousand and $614 thousand for the three and nine months ended March 31, 2009
and $242 thousand and $861 thousand for the three and nine months ended March
31, 2008, respectively.  We evaluate our inventory value each quarter based
on the criteria discussed above.





A 10%
change in our inventory write-downs for the nine months ended March 31, 2009
would result in a change in our inventories of approximately $60 thousand and a
change in pre-tax earnings by the same amount.  Our adjustments are
estimates, which could vary significantly, either favorably or unfavorably, from
actual results if future economic conditions, consumer demand and competitive
environments differ from our expectations. At this time, we do not believe there
is a reasonable likelihood there will be a material change in the future
estimates or assumptions that we use to determine our inventory
adjustments.





Allowance for Doubtful
Accounts.  We evaluate the collectibility of accounts
receivable based on a combination of factors.  In circumstances where
there is knowledge of a specific customer’s inability to meet its financial
obligations, a specific allowance is provided to reduce the net receivable to
the amount that is reasonably believed to be collectible.  For all
other customers, allowances are established based on historical bad debts,
customer payment patterns and current economic conditions.  The
establishment of these allowances requires judgment and assumptions regarding
the potential for losses on receivable balances.  If the financial
condition of our customers deteriorates, resulting in an impairment of their
ability to make payments, additional allowances may be required resulting in an
additional charge to expenses when made.





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At March
31, 2009, our total allowance for doubtful accounts was approximately $1.7
million, compared to $1.3 million as of June 30, 2008, representing
approximately 4.3% and 3.7%, respectively, of our accounts
receivable.  We evaluate our allowance for doubtful accounts each
quarter based on the criteria discussed above.





A 10%
change in our allowance for doubtful accounts at March 31, 2009 would result in
a change in reserves of approximately $170 thousand and a change in pre-tax
earnings by the same amount.  Our reserves are estimates, which could
vary significantly, either favorably or unfavorably, from actual results if
future economic conditions or customer payment patterns differ from our
expectations.  At this time, we do not believe there is a reasonable
likelihood there will be a material change in the future estimates or
assumptions that we use to calculate our allowance for doubtful
accounts.





Accounting for Business
Combinations.  Whenever we acquire a business, significant
estimates are required to complete the accounting for the
transaction.  We hire independent valuation experts familiar with
purchase accounting issues and we work with them to ensure that all identifiable
tangible and intangible assets are properly identified and assigned appropriate
values.  Because estimating the fair value of certain assets acquired
requires significant management judgment and our use of estimates impact our
reported assets, we believe the accounting estimates related to purchase
accounting are “critical accounting estimates.”





Goodwill and Intangible
Assets.We
review amortizable intangible
assets for impairment whenever events or changes in circumstances indicate the
carrying amount of such assets may not be recoverable, in accordance with
Statement of Financial Accounting Standards (“SFAS”) No. 144,Accounting for the
Impairment or Disposal of Long-Lived Assets(“SFAS
144”). If such a review
should indicate the carrying amount of amortizable intangible assets is not
recoverable, we reduce the carrying amount of such assets to fair
value.  We review non-amortizable intangible assets for impairment
annually as of March 31, or more frequently if circumstances dictate, in
accordance with SFAS No. 142,Goodwill and Other
Intangible Assets(“SFAS
142”).  No
impairment of intangible assets was required for the year ended June 30, 2008 or
for the nine months ended March 31, 2009.





Goodwill
represents the excess of the purchase price paid and liabilities assumed over
the estimated fair market value of assets acquired and identifiable intangible
assets.  Goodwill is
tested for impairment annually as of March 31, or when there is a triggering
event, in accordance with SFAS 142. Based on the annual impairment tests
performed, there was no impairment indicated for the year ended June 30, 2008 or
for the nine months ended March 31, 2009.





Impairment of Long-Lived
Assets.  We periodically evaluate the carrying value of
depreciable and amortizable long-lived assets whenever events or changes in
circumstances indicate the carrying amount may not be fully recoverable in
accordance with SFAS 144.  If the total of the expected future
undiscounted cash flows is less than the carrying amount of the assets, a loss
is recognized if the carrying value of the assets exceeds their fair value,
which is determined based on quoted market prices in active markets, if
available, prices of other similar assets, or other valuation
techniques.  There were no impairment charges recorded by the Company
for the year ended June 30, 2008
or for the nine months ended March 31, 2009.




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Consolidated
Results of Operations





Results
for the three and nine months ended March 31, 2009 are not necessarily
indicative of results for the entire fiscal year.  The following table
compares selected financial data from the Condensed Consolidated Statements of
Income for the three and nine months ended March 31, 2009 and 2008 (dollars in
thousands, except per share amounts):


For
      the Three Months Ended March 31,
                
                
                For
      the Nine Months Ended March 31,2009
                
                
                2008
                
                
                2009
                
                
                2008Dollars
                
                
                Percent
                
                
                Dollars
                
                
                Percent
                
                
                Dollars
                
                
                Percent
                
                
                Dollars
                
                
                PercentNet
      sales
                
                $
                63,761
                
                
                
                100.0
                %
                
                $
                65,821
                
                
                
                100.0
                %
                
                $
                190,513
                
                
                
                100.0
                %
                
                $
                190,284
                
                
                
                100.0
                %Cost
      of sales (1)
                
                
                41,186
                
                
                
                64.6
                %
                
                
                41,739
                
                
                
                63.4
                %
                
                
                122,287
                
                
                
                64.2
                %
                
                
                121,301
                
                
                
                63.7
                %Gross
      profit
                
                
                22,575
                
                
                
                35.4
                %
                
                
                24,082
                
                
                
                36.6
                %
                
                
                68,226
                
                
                
                35.8
                %
                
                
                68,983
                
                
                
                36.3
                %Selling,
      general and administrative expenses (2)
                
                
                15,998
                
                
                
                25.1
                %
                
                
                17,750
                
                
                
                27.0
                %
                
                
                51,525
                
                
                
                27.0
                %
                
                
                53,328
                
                
                
                28.0
                %Operating
      profit
                
                
                6,577
                
                
                
                10.3
                %
                
                
                6,332
                
                
                
                9.6
                %
                
                
                16,701
                
                
                
                8.8
                %
                
                
                15,655
                
                
                
                8.2
                %Other
      expense (3)
                
                
                866
                
                
                
                1.4
                %
                
                
                887
                
                
                
                1.3
                %
                
                
                1,221
                
                
                
                0.6
                %
                
                
                2,875
                
                
                
                1.5
                %Income
      tax provision
                
                
                2,201
                
                
                
                3.5
                %
                
                
                2,069
                
                
                
                3.1
                %
                
                
                5,857
                
                
                
                3.1
                %
                
                
                4,856
                
                
                
                2.6
                %Net
      income
                
                $
                3,510
                
                
                
                5.5
                %
                
                $
                3,376
                
                
                
                5.1
                %
                
                $
                9,623
                
                
                
                5.1
                %
                
                $
                7,924
                
                
                
                4.2
                %Net
      income per share – basic
                
                $
                0.28
                
                
                
                
                
                
                $
                0.27
                
                
                
                
                
                
                $
                0.78
                
                
                
                
                
                
                $
                0.66Net
      income per share – diluted
                
                $
                0.27
                
                
                
                
                
                
                $
                0.25
                
                
                
                
                
                
                $
                0.68
                
                
                
                
                
                
                $
                0.61





1)
            Cost
      of sales includes the acquisition and manufacturing costs of inventory,
      the cost of shipping and handling (freight costs) and adjustments to
      reflect lower of cost or market, which includes write-downs for
      slow-moving or obsolete
inventories.


2)
            Selling,
      general and administrative expenses include employee salaries and related
      costs, advertising, depreciation and amortization, management information
      systems, purchasing, distribution warehouse costs, legal, accounting and
      professional fees, costs related to operating a public company and expense
      related to managing the Company and operating our corporate
      headquarters.


3)
            Other
      expense includes interest expense and debt acquisition costs, net of
      interest income and gains realized from the early retirement of
      Notes.




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Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008





Net Sales.  Net
sales for the quarter ended March 31, 2009 were $63.8 million compared to $65.8
million for the quarter ended March 31, 2008, a decrease of $2.0 million, or
3.1%.  The following schedule provides the components of net
sales:





For
      the Three Months Ended March 31,2009
                  
                  
                  2008(in
      thousands)Sporting
      goods equipment
                  
                  $
                  41,400
                  
                  
                  $
                  42,490Soft
      goods
                  
                  
                  18,949
                  
                  
                  
                  19,447Freight
                  
                  
                  3,412
                  
                  
                  
                  3,884Net
      sales
                  
                  $
                  63,761
                  
                  
                  $
                  65,821





Sporting
goods equipment sales and the sales of soft goods each declined 2.6%
year-over-year, as a result of the current economic recession that has caused
budget reductions or budget deficits in many states.  Freight billed
to our customers declined 12.1% year-over-year as we increased our free freight
promotions to stimulate customer orders.  We believe there will be
continuing customer budgetary and competitive market pressures resulting in
revenue challenges as our economy moves through and out of the current
recession.





Gross
Profit.  Gross profit for the quarter ended March 31, 2009
decreased $1.5 million to $22.6 million, or 35.4% of net sales, compared with
$24.1 million, or 36.6% of net sales, for the quarter ended March 31,
2008.  Sporting goods equipment and soft goods gross profit as a
percentage of net sales decreased 1.4% and 1.7%, respectively, for the quarter
ended March 31, 2009 compared to the quarter ended March 31,
2008.  Freight costs were $953 thousand and $979 thousand,
respectively, in excess of freight revenues for the quarter ended March 31, 2009
compared to the quarter ended March 31, 2008.  These decreases in
gross profit percentages are the result of challenging competitive market
pressures during the current economic recession.  We believe the
continuing competitive and customer budgetary challenges discussed above will
continue to adversely impact our gross profit as a percentage of net sales as
our economy moves through and out of the current recession.





The
components of cost of sales and gross profit as a percentage of net sales are as
follows:





For
      the Three Months Ended March 31,2009
                                  
                                  
                                  2008Cost
      ofSales(thousands)
                                  
                                  
                                  GrossProfit
      as% of NetSales
                                  
                                  
                                  Cost
      ofSales(thousands)
                                  
                                  
                                  GrossProfit
      as% of NetSales
                                  
                                  
                                  Changein
      GrossProfit %Sporting
      goods equipment
                                  
                                  $
                                  24,229
                                  
                                  
                                  
                                  41.5
                                  %
                                  
                                  $
                                  24,280
                                  
                                  
                                  
                                  42.9
                                  %
                                  
                                  
                                  (1.4
                                  )%Soft
      goods
                                  
                                  
                                  12,592
                                  
                                  
                                  
                                  33.5
                                  %
                                  
                                  
                                  12,596
                                  
                                  
                                  
                                  35.2
                                  %
                                  
                                  
                                  (1.7
                                  )%Freight
      costs
                                  
                                  
                                  4,365
                                  
                                  
                                  
                                  
                                  
                                  
                                  
                                  4,863Cost
      of sales
                                  
                                  $
                                  41,186
                                  
                                  
                                  
                                  35.4
                                  %
                                  
                                  $
                                  41,739
                                  
                                  
                                  
                                  36.6
                                  %
                                  
                                  
                                  (1.2
                                  )%




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The
acquisition and manufacturing costs of inventories, the cost of shipping and
handling (freight costs) and any decrease in the value of inventories due to
obsolescence or lower of cost or market adjustments are included in the
determination of cost of sales.  Cost of sales for the quarter ended
March 31, 2009 was $41.2 million, or 64.6% of net sales, compared to $41.7
million, or 63.4% of net sales, for the fiscal quarter ended March 31,
2008.





Selling, General and Administrative
Expenses.  Selling, general and administrative (“SG&A”) expenses
for the quarter ended March 31, 2009 were $16.0 million, or 25.1% of net sales,
compared with $17.8 million, or 27.06% of net sales, for the quarter ended March
31, 2008.  The decrease in SG&A expenses was primarily
attributable to the following:





·
            Employee
      related expenses, including variable commission costs, decreased $797
      thousand primarily due to lower commission and incentive compensation
      costs as a result of the net sales and gross profit
    decreases.




·
            We
      settled a tax assessment for unpaid sales and use taxes and reduced a
      previously established reserve by $870
thousand.




·
            Depreciation
      and amortization expenses decreased $221 thousand due to long-lived assets
      becoming fully depreciated.





Operating
Profit.  Operating profit for the quarter ended March 31, 2009
increased to $6.6 million, or 10.3% of net sales, compared to operating profit
of $6.3 million, or 9.6% of net sales, for the quarter ended March 31,
2008.  The $245 thousand increase in operating profit was attributable
to the decrease in SG&A expenses of $1.8 million being partially offset by
decreased gross profit of $1.5 million.





Other
Expense.  Other expense was $866 thousand for the quarter ended
March 31, 2009, compared to $887 thousand for the quarter ended March 31,
2008.  The table below shows the components of other
expense.





For
      the Three Months Ended March 31,2009
                
                
                2008
                
                
                Change(in
      thousands)Interest
      income
                
                $
                2
                
                
                $
                45
                
                
                $
                (43
                )Interest
      expense
                
                
                (440
                )
                
                
                (751
                )
                
                
                311Amortization
      of debt issuance costs
                
                
                (125
                )
                
                
                (223
                )
                
                
                98Accelerated
      amortization of debt issuance costs due to the early termination of the
      Revolving Facility
                
                
                (322
                )
                
                
                --
                
                
                
                (322
                )Other
      income
                
                
                19
                
                
                
                42
                
                
                
                (23
                )Total
      other expense
                
                $
                (866
                )
                
                $
                (887
                )
                
                $
                21





During
the three months ended March 31, 2009, we terminated the Revolving Facility, as
defined below, before its term had expired and accordingly expensed the
remaining $322 thousand of related unamortized debt issuance costs.





At March
31, 2009, we had $750 thousand outstanding under the New Credit Agreement, as
defined below, and $28.9 million of Notes outstanding.  We will
continue to have 5.75% interest expense per annum plus the amortization of the
remaining $263 thousand of debt issuance costs on the $28.9 million of Notes
until the Notes mature December 1, 2009.  Other ongoing interest
expense will depend on borrowings under the New Credit Agreement and other notes
payable.





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Income
Taxes.  Income tax expense for the quarter ended March 31, 2009
was $2.2 million, approximately 38.5% of our income before income taxes,
compared to income tax expense of $2.1 million, approximately 38.0% of our
income before income taxes, for the quarter ended March 31, 2008.





Net Income.  Net
income for the quarter ended March 31, 2009 was $3.5 million, or 5.5% of net
sales, compared to net income of $3.4 million, or 5.1% of net sales, for the
quarter ended March 31, 2008.





Nine
Months Ended March 31, 2009 Compared to Nine Months Ended March 31,
2008





Net Sales.  Net
sales for the nine months ended March 31, 2009 were $190.5 million as compared
to $190.3 million for the nine months ended March 31, 2008, an increase of $200
thousand.  The following schedule provides the components of net
sales:





For
      the Nine Months Ended March 31,2009
                  
                  
                  2008(in
      thousands)Sporting
      goods equipment
                  
                  $
                  113,850
                  
                  
                  $
                  114,054Soft
      goods
                  
                  
                  66,396
                  
                  
                  
                  66,087Freight
                  
                  
                  10,267
                  
                  
                  
                  10,143Net
      sales
                  
                  $
                  190,513
                  
                  
                  $
                  190,284





Sales of
sporting goods equipment and soft goods and the amount of freight billed have
been consistent between the nine month periods.  Net sales for the
first quarter ended September 30, 2008 increased $3.2 million over the first
quarter of the previous year.  Net sales for the second and third
quarters ended December 31, 2008 and March 31, 2009 decreased $941 thousand and
$2.1 million, respectively, as compared to the same quarters of the previous
year.  We believe there will be continuing customer budgetary and
competitive market pressures resulting in revenue challenges as our economy
moves through and out of the current recession.





Gross
Profit.  Gross profit for the nine months ended March 31, 2009
decreased $800 thousand to $68.2 million, or 35.8% of net sales, compared with
$69.0 million, or 36.3% of net sales, for the nine months ended March 31,
2008.  Sporting goods equipment gross profit as a percentage of net
sales decreased 1.1% during the nine months ended March 31, 2009 compared to the
nine months ended March 31, 2008.  Soft goods gross profit as a
percentage of net sales was 0.2% lower for the nine months ended March 31, 2009
compared to the nine months ended March 31, 2008.  Freight costs were
$2.8 million and $3.4 million, respectively, in excess of freight revenues for
the nine months ended March 31, 2009 compared to the nine months ended March 31,
2008.  The nine month gross profit percentage decrease is less than
the gross profit percentage decrease for the comparative three month periods
discussed above.  We believe the continuing competitive and customer
budgetary challenges discussed above will continue to adversely impact our gross
profit as a percentage of net sales as our economy moves through and out of the
current recession.




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The
components of cost of sales and gross profit as a percentage of net sales are as
follows:





For
      the Nine Months Ended March 31,2009
                        
                        
                        2008Cost
      ofSales(thousands)
                        
                        
                        GrossProfit
      as% of NetSales
                        
                        
                        Cost
      ofSales(thousands)
                        
                        
                        GrossProfit
      as% of NetSales
                        
                        
                        Change
      inGrossProfit %Sporting
      goods equipment
                        
                        $
                        66,495
                        
                        
                        
                        41.6
                        %
                        
                        $
                        65,392
                        
                        
                        
                        42.7
                        %
                        
                        
                        (1.1
                        )%Soft
      goods
                        
                        
                        42,756
                        
                        
                        
                        35.6
                        %
                        
                        
                        42,396
                        
                        
                        
                        35.8
                        %
                        
                        
                        (0.2
                        )%Freight
      costs
                        
                        
                        13,036
                        
                        
                        
                        
                        
                        
                        
                        13,513Cost
      of sales
                        
                        $
                        122,287
                        
                        
                        
                        35.8
                        %
                        
                        $
                        121,301
                        
                        
                        
                        36.3
                        %
                        
                        
                        (0.5
                        )%





The
acquisition and manufacturing costs of inventories, the cost of shipping and
handling (freight costs) and any decrease in the value of inventories due to
obsolescence or lower of cost or market adjustments are included in the
determination of cost of sales.  Cost of sales for the nine months
ended March 31, 2009 was $122.3 million, or 64.2% of net sales, compared to
$121.3 million, or 63.7% of net sales, for the nine months ended March 31,
2008.





Selling, General and Administrative
Expenses.  SG&A expenses for the nine months ended March
31, 2009 were $51.5 million, or 27.0% of net sales, compared with $53.3 million,
or 28.0% of net sales, for the nine months ended March 31, 2008.  The
decrease in SG&A expenses was primarily attributable to the
following:





·
            Employee
      related expenses, including variable commission costs, decreased $786
      thousand primarily due to lower commission and incentive compensation
      costs resulting from year-to-date net sales and gross profit
      performance.




·
            We
      settled a tax assessment for unpaid sales and use taxes and reduced a
      previously established reserve by $870
thousand.




·
            Professional
      fees related to auditing and accounting professional services decreased
      $718 thousand primarily due to the Company qualifying for smaller
      reporting company status during fiscal
2009.




·
            Depreciation
      and amortization expenses decreased $594 thousand due to long-lived assets
      becoming fully depreciated.




The
foregoing decreases were partially offset by the following:




·
            Advertising
      and catalog expenses increased $723 thousand due to increased catalog
      creation and distribution costs.




·
            Management
      information systems (“MIS”) costs
      increased $313 thousand primarily due to the capitalization of
      professional fees associated with a system development project incurred in
      the prior year.  These capitalized costs are being depreciated
      over the useful life of the asset.  MIS costs for the nine
      months ended March 31, 2009 are representative of expected ongoing MIS
      operating expenses.




Operating
Profit.  Operating profit for the nine months ended March 31,
2009 increased to $16.7 million, or 8.8% of net sales, compared to operating
profit of $15.7 million, or 8.2% of net sales, for the nine months ended March
31, 2008.  The $1.0 million increase in operating profit was
attributable to the $1.8 million reduction in SG&A expenses being partially
offset by an $800 thousand decrease in gross profit.





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Other
Expense.  Other expense was $1.2 million for the nine months
ended March 31, 2009, compared to $2.9 million for the nine months ended March
31, 2008.  The table below shows the components of other
expense.





For
      the Nine Months Ended
                  March
      31,(in
      thousands)2009
                
                
                2008
                
                
                ChangeInterest
      income
                
                $
                118
                
                
                $
                202
                
                
                $
                (84
                )Interest
      expense
                
                
                (1,640
                )
                
                
                (2,435
                )
                
                
                795Amortization
      of debt issuance costs
                
                
                (504
                )
                
                
                (719
                )
                
                
                215Accelerated
      amortization of debt issuance costs due to early retirement of Notes and
      early termination of the Revolving Facility
                
                
                (657
                )
                
                
                --
                
                
                
                (657
                )Gain
      on early retirement of Notes
                
                
                1,443
                
                
                
                --
                
                
                
                1,443Other
      income
                
                
                19
                
                
                
                77
                
                
                
                (58
                )Total
      other expense
                
                $
                (1,221
                )
                
                $
                (2,875
                )
                
                $
                1,654





During
the nine months ended March 31, 2009, debt issuance cost amortization was
accelerated because:





·
            we
      repurchased $21.1 million of Notes and the remaining $335 thousand of
      unamortized debt issuance costs related to those repurchased Notes was
      expensed in the six months ended December 31, 2008;
  and





·
            we
      terminated the Revolving Facility before its term had expired and
      accordingly expensed the remaining $322 thousand of related unamortized
      debt issuance costs.





At March
31, 2009, we had $750 thousand outstanding under the New Credit Agreement and
$28.9 million of Notes outstanding.  The Company will continue to have
5.75% interest expense per annum plus the amortization of the remaining $263
thousand of debt issuance costs on the $28.9 million of Notes until the Notes
mature December 1, 2009.  Other ongoing interest expense will depend
on future borrowings outstanding under the New Credit Agreement and other notes
payable.





Income
Taxes.  Income tax expense for the nine months ended March 31,
2009 was $5.9 million, approximately 37.8% of our income before income taxes,
compared to income tax expense of $4.9 million, approximately 38.0% of our
income before income taxes, for the nine months ended March 31,
2008.





Net Income.  Net
income for the nine months ended March 31, 2009 was $9.6 million, or 5.0% of net
sales, compared to net income of $7.9 million, or 4.2% of net sales, for the
nine months ended March 31, 2008.




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Liquidity
and Capital Resources





The Company’s primary sources of
liquidity and capital resources are its operating cash flow, working capital,New Credit Agreementand Notes.  Each
is discussed below.





Liquidity





On July
30, 2007, the Company privately sold 1,830,000 shares of its common stock for
$18.3 million to CBT Holdings, LLC (“CBT
Holdings”).  The Company used the proceeds from the private
placement for the prepayment of outstanding indebtedness under the Revolving
Facility.





Cash
Flows





Cash and
cash equivalents decreased $17.0 million during the nine months ended March 31,
2009 due primarily to $3.2 million cash generated by operations and $19.6
million cash used in financing activities.  Net cash flows for the
nine month periods ended March 31, 2009 and March 31, 2008 are summarized
below.





Nine
      Months Ended March 31,2009
                
                
                2008(in
      thousands)Operating
      activities
                
                $
                3,157
                
                
                $
                15,098Investing
      activities
                
                $
                (520
                )
                
                $
                (1,371
                )Financing
      activities
                
                $
                (19,611
                )
                
                $
                (6,352
                )





Operating Activities. Net
cash flows from operating activities was $3.1 million for the nine months ended
March 31, 2009, as compared to $15.1 million for the nine months ended March 31,
2008, and resulted primarily from net income generated, non-cash charges related
to depreciation, amortization, stock-based compensation and taxes, and increases
and decreases in working capital.





Increases
in operating cash flows during the nine months ended March 31, 2009 were
attributable to:





·
            Net
      income of $9.6 million, an increase of $1.7 million as compared to the
      same period last year, that was primarily attributable to improved
      management of the Company’s SG&A and debt service
      expenses.





·
            $3.3
      million of depreciation and amortization, a $678 thousand decrease as
      compared to the same period last
year.





·
            A
      $1.8 million decrease in inventories due to inventories sold during the
      third quarter and improvements in managing
  inventory.





Decreases
in operating cash flows during the nine months ended March 31, 2009 were
attributable to:





·
            An
      increase in accounts receivable of $3.4 million due to the third quarter
      being the largest net sales
quarter.





·
            A
      decrease in accounts payable and accrued liabilities of $4.9 million,
      which was primarily due to lower SG&A expenses and reduced inventory
      purchases.





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·
            An
      increase in prepaid income taxes of $1.6 million, which was primarily the
      result of using most of our accumulated tax deferrals and benefits in
      prior years.





·
            An
      increase in prepaid expenses of $1.2 million due to costs incurred in
      advance of catalog mailings.





Increases
in operating cash flows during the nine months ended March 31, 2008 were
attributable to:





·
            Net
      income of $7.9 million, which was primarily the result of revenue, gross
      profit and operating increases over the prior
  year.





·
            $3.5
      million of depreciation and amortization, a $245 thousand decrease from
      the prior year.





·
            An
      increase in accounts payable and accrued liabilities of $6.3 million,
      which was attributable to improved management of the Company’s financial
      resources.





·
            A
      decrease in prepaid income taxes of $3.1 million during the nine months
      ended March 31, 2008, which was primarily attributable to $1.5 million in
      taxes refunded.





·
            A
      decrease in deferred tax assets of $3.9 million, which was due primarily
      to the utilization of net operating loss
  carryforwards.





Decreases
in operating cash flows during the nine months ended March 31, 2008 were
attributable to:





·
            An
      increase in accounts receivable of $9.0 million due to the third quarter
      being the largest net sales
quarter.





·
            An
      increase in prepaid expenses of $1.0 million due to costs incurred in
      advance of catalog mailings.





Investing
Activities.  Net cash used in investing activities during the
nine months ended March 31, 2009 and nine months ended March 31, 2008 were $520
thousand and $1.4 million, respectively, and consisted primarily of purchases of
computer equipment and software.





Financing
Activities.  Net cash used in financing activities during the
nine months ended March 31, 2009 was $19.6 million, compared to net cash used in
financing activities of $6.4 million during the nine months ended March 31,
2008.  During the nine months ended March 31, 2009, we used cash on
hand and proceeds from the Revolving Facility to retire, at a $1.4 million gain,
$21.1 million of Notes.  Also during the nine months ended March 31,
2009, we borrowed under the Revolving Facility and the New Credit
Agreement.  At March 31, 2009, we had $750 thousand outstanding under
the New Credit Agreement.





On July
30, 2007, the Company privately sold 1,830,000 shares of its common stock for
$18.3 million to CBT Holdings.  The Company used the proceeds from the
private placement for the prepayment of outstanding indebtedness under the
Revolving Facility.  During the nine months ended March 31, 2008, we
used $24.8 million in cash to repay the entire amount outstanding under the
Revolving Facility, resulting in $0 outstanding under the Revolving Facility at
June 30, 2008.





Capital
Resources





During the fiscal quarter ended December
31, 2004, we sold $50.0 million principal amount of 5.75% Convertible Senior
SubordinatedNotes that
mature December 1, 2009(the “Notes”).  The Notes were sold to
qualifiedinstitutionalbuyers pursuant to Rule 144A under the Securities Act of 1933, as
amended.The issuance of the Notes resulted in aggregate
proceeds of $46.6 million to the Company, net of issuance costs.




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The Notes are governed by the Indenture
dated as of November 26, 2004 between the Company and The Bank of New York Trust
Company N.A., as trustee (the “Indenture”).  The Indenture provides,
among other things, that the Notes will bear interest of 5.75% per year, payable
semi-annually, and will be convertible at the option of the holder of the Notes
into the Company’s common stock at a conversion rate of 68.2594 shares per $1
thousand principal amount of Notes, subject to certain
adjustments.  This is equivalent to a conversion price of
approximately $14.65 per share. The Company may redeem the Notes, in whole or in
part, at the redemption price, which is 100% of the principal amount, plus
accrued and unpaid interest and additional interest, if any, to, but excluding,
the redemption date only if the closing price of the Company’s common stock
exceeds 150% of the conversion price for at least 20 trading days in any
consecutive 30-day trading period.  Upon the occurrence of a change in
control of the Company, holders may require the Company to purchase all or a
portion of the Notes in cash at a price equal to 100% of the principal amount of
Notes to be repurchased, plus accrued and unpaid interest and additional
interest, if any, to, but excluding, the repurchase date, plus the make whole
premium, if applicable.





Under the
terms of a registration rights agreement the Company entered into with the
holders of the Notes, the Company was required to file a registration statement
on Form S-3 to register the Notes and the shares issuable upon conversion of the
Notes.  On February 28, 2006, the Securities and Exchange Commission
(the “SEC”)
declared the registration statement effective.





During
the nine months ended March 31, 2009, the Company used cash on hand and proceeds
from the Revolving Facility to repurchase approximately $21.1 million of the
Notes.  The repurchases were made in private transactions, as
described below.  The retired Notes were repurchased at a discounted
price of approximately 93.2% of face value and resulted in a non-cash, pre-tax
gain on early retirement of debt of approximately $1.4 million.  The
Notes are due December 1, 2009.  This maturity date requires the $28.9
million balance of outstanding Notes to be classified as a current liability on
the Company’s March 31, 2009 balance sheet.  The Notes were included
in notes payable on the Company’s June 30, 2008 balance sheet.





From June
29, 2006 until February 9, 2009, the Company’s senior lending facility was led
by Merrill Lynch Business Financial Services, Inc. (the “Revolving
Facility”).  The Revolving Facility established a commitment to
provide the Company with a $25 million secured revolving credit facility through
June 1, 2010, subject to the terms, conditions and covenants stated in the
lending agreement as amended and restated through February 9, 2009.





On
February 9, 2009, the Company terminated the Revolving Facility and entered into
a Credit Agreement (the “New Credit
Agreement”) with Bank of America, N.A., as administrative agent, swing
line lender, letter of credit issuer, sole lead arranger and sole book
manager.  The New Credit Agreement establishes a commitment to provide
the Company with a $40 million secured revolving credit facility through
February 8, 2012.  The facility provided under the New Credit
Agreement may be expanded through the exercise of an accordion feature to $60
million, subject to certain conditions set forth in the New Credit
Agreement.  Borrowings under the New Credit Agreement may be limited
to a borrowing base equal to 85% of the Company’s eligible accounts receivable
plus 60% of the Company’s eligible inventories, but only if the Company’s Quick
Ratio (as defined in the New Credit Agreement) is less than 1.00 to
1.00.





All
borrowings under the New Credit Agreement will bear interest at the London
Interbank Offered Rate (“LIBOR”) plus a spread
ranging from 1.25% to 3.00%, with the amount of the spread at any time based on
the Company’s Funded Debt to EBITDA Ratio (as defined in the New Credit
Agreement) on a trailing 12-month basis.





The New
Credit Agreement includes covenants that require the Company to meet certain
financial ratios.  The Company’s Debt Service Coverage Ratio (as
defined in the New Credit Agreement) must be at least 1.25 to 1.00 at all times
and the Company’s Funded Debt to EBITDA Ratio on a trailing 12-month basis may
not exceed 2.75 to 1.00.  The New Credit Agreement also contains
certain conditions that must be met with respect to acquisitions that in the
aggregate cannot exceed $25 million.




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The New
Credit Agreement allows the Company to refinance the Notes with borrowings under
the facility at or prior to maturity and to purchase up to $5,000,000 of its
common stock, each provided certain conditions are met.  The Notes
mature on December 1, 2009.  In the absence of the Notes converting
into shares of the Company’s common stock, it is our intent to repurchase as
many of the Notes on the open market that can be obtained at attractive prices
utilizing cash flows from operations and then refinancing the remaining balance
with borrowings under the New Credit Agreement.  Interest rates under
the New Credit Agreement are currently lower than the 5.75% coupon on the
Notes.





The New
Credit Agreement is guaranteed by each of the Company’s domestic subsidiaries
and is secured by, among other things, a pledge of all of the issued and
outstanding shares of stock of each of the Company’s domestic subsidiaries and a
first priority perfected security interest on substantially all of the assets of
the Company and each of its domestic subsidiaries.  The Company’s
Asian subsidiary, Sport Supply Group Asia Limited, must be dissolved within 180
days of the closing of the New Credit Agreement.  This subsidiary does
not have any operations or material assets.  Accordingly, its
dissolution will not have an effect on the Company’s liquidity, results of
operations or financial condition.  If the Asian subsidiary is not
dissolved within this time period, it will also guarantee the New Credit
Agreement.





The New
Credit Agreement contains customary representations, warranties and covenants
(affirmative and negative) and is subject to customary rights of the lenders and
the administrative agent upon the occurrence and during the continuance of an
event of default, including, under certain circumstances, the right to
accelerate payment of the loans made under the New Credit Agreement and the
right to charge a default rate of interest on amounts outstanding under the New
Credit Agreement.





A
commitment fee of 0.125% was due upon closing of the New Credit
Agreement.  There is no agency fee under the New Credit Agreement
until a second lender becomes a party to the New Credit Agreement, at which
point a $30,000 annual agency would be payable.





At March 31, 2009, the Company had $750
thousandoutstandingunder
theNew Credit Agreement,
thereby leaving the Company with approximately $39.2 million of availability
under the terms of theNew Credit Agreement.  At March 31, 2009,
the Company was in compliance with all of its financial covenants under the New
Credit Agreement.





On July
30, 2007, the Company privately sold 1,830,000 shares of its common stock to CBT
Holdings for $18.3 million. The Company used the proceeds from the private
placement for the repayment of outstanding indebtedness under the Revolving
Facility and the payment of out-of-pocket costs and expenses incurred in
connection with the private placement.





In
addition, for so long as CBT Holdings owns not less than 600,000 of the shares,
it will have certain rights with respect to access to Company management, the
ability to designate a representative who is reasonably acceptable to the
Company to attend in a non-voting, observer capacity, the meetings of the
Company’s Board of Directors and its committees, and the ability to require that
the Company’s Board of Directors nominate a designee chosen by CBT Holdings and
who is otherwise reasonably acceptable to the Company and further recommend to
the Company’s stockholders the election of such nominee to the Company’s Board
of Directors.  CBT Holdings has exercised its Board of Directors
participation right and Scott H. Richland, Manager of CBT Holdings, has been
elected to the Company’s Board of Directors.





On July
26, 2004, the Company issued promissory notes related to acquisitions in the
aggregate amount of $500 thousand.  Payments of principal are paid
monthly and interest accrues at the rate of 4% per annum on any past due
principal amount of the notes.  The notes mature on July 31,
2009.  Principal payments made in the nine months ended March 31, 2009
were $65 thousand and the remaining principal payments of $33 thousand are due
through the fiscal year ending June 30, 2010.




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Long-Term
Financial Obligations and Other Commercial Commitments





The
following table summarizes the outstanding borrowings and long-term contractual
obligations of the Company at March 31, 2009, and the effects such obligations
are expected to have on liquidity and cash flows in future periods.





Payments
      due by 12 month Period(in
      thousands)Contractual
      Obligations
                
                Total
                
                
                Less
      than
                  1
      year
                
                
                1
      - 3 years
                
                
                3
      - 5 years
                
                
                After
                  5
      yearsLong-term
      debt, including current portion
                
                $
                29,670
                
                
                $
                28,920
                
                
                $
                750
                
                
                $
                --
                
                
                $
                --Operating
      leases
                
                
                5,673
                
                
                
                2,865
                
                
                
                2,688
                
                
                
                120
                
                
                
                --Interest
      expense on long-term debt
                
                
                1,773
                
                
                
                1,745
                
                
                
                28
                
                
                
                --
                
                
                
                --Total
      contractual cash obligations
                
                $
                37,116
                
                
                $
                33,530
                
                
                $
                3,466
                
                
                $
                120
                
                
                $
                --





Purchase
Commitments.  The Company currently has no purchase
commitments.





Long-Term Debt and Advances Under
Credit Facilities.As of March 31, 2009, we had $28.9 million
in Notes outstanding and maintained the New Credit Agreement with Bank of
America, N.A.  As of
March 31, 2009, the Company had $750 thousandoutstandingunder theNew Credit
Agreement, thereby leaving the
Company with approximately $39.2 million of availability under the terms of the
New Credit Agreement.Promissory notes related to past
acquisitions were approximately $33 thousand.





Future Capital
Requirements.  We believe the Company’s borrowings under the
New Credit Agreement, cash on hand, and cash flows from operations will satisfy
its respective short-term and long-term liquidity requirements.  The
Notes mature on December 1, 2009.  In the absence of the Notes
converting into shares of the Company’s common stock, which we believe is
unlikely because the price per share of the Company’s common stock would have to
reach or exceed $14.65 prior to November 30, 2009, it is our intent to
repurchase as many of the Notes on the open market that can be obtained at
attractive prices utilizing cash flows from operations and then refinancing the
remaining balance with borrowings under the New Credit
Agreement.  Interest rates under the New Credit Agreement are
currently lower than the 5.75% coupon on the Notes.





If the
Company refinances the Notes and was to actively seek expansion through future
acquisitions and/or joint ventures, then the success of such efforts may require
additional bank debt, or public or private sales of debt or equity securities,
which may not be readily available, and if available may not be obtainable on
acceptable terms.  While neither the conversion nor refinancing of the
Notes would have an impact on our operations, the conversion of the Notes into
shares of the Company’s stock would lower our leverage and increase the number
of shares outstanding of our common stock.





The
Company may experience periods of higher borrowings under the New Credit
Agreement due to the seasonal nature of its business and based on its inventory
and product sourcing decisions, particularly given the current global economic
instability.





The New
Credit Agreement expires February 8, 2012.  As previously discussed,
the New Credit Agreement has defined debt compliance covenants and borrowing
base provisions.  We believe Bank of America, N.A. will be able to
support the New Credit Agreement until it expires.  We also believe we
will continue to meet our covenant compliance requirements.  However,
there can be no assurance regarding these matters given the current state of the
financial markets and global economy.




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Operating
Leases.We lease property and equipment, manufacturing and
warehouse facilities, and office space under non-cancellable
leases.  Certain of these leases obligate us to pay taxes, maintenance
and repair costs.





Off-Balance Sheet
Arrangements.We do not utilize off-balance sheet financing
arrangements. We do, however, finance the use of certain facilities, office and
computer equipment, and automobiles under various non-cancellable operating
lease agreements.  At March 31, 2009, the total future minimum lease
payments under various operating leases to which we are a party to totaled
approximately $5.7 million and are payable through fiscal 2013.




Subsequent
Event




On March
27, 2009, the Company announced that its Board of Directors approved and
declared a quarterly cash dividend of $0.025 per share on the Company's common
stock for the third quarter of fiscal 2009, which ended March 31, 2009. The
quarterly cash dividend is payable on April 30, 2009, to all stockholders of
record on the close of business on April 10, 2009.





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Item 3. Quantitative and Qualitative Disclosures About Market
Risk.





Interest Rates.  We
are exposed to interest rate risk in connection with our borrowings under the
New Credit Agreement, which bears interest at floating rates based on LIBOR plus
an applicable borrowing margin.  For our Notes, interest rate changes
affect the fair market value but do not impact earnings or cash
flows.  Conversely, for variable rate debt, interest rate changes
generally do not affect the fair market value but do impact future earnings and
cash flows, assuming other factors are held constant.  Should we incur
borrowings under our New Credit Agreement, a fluctuation of 100 basis points in
interest rates, which are tied to LIBOR, would affect our pre-tax earnings and
cash flows by $10 thousand annually for each $1.0 million outstanding for twelve
months.





As of
March 31, 2009, we had $28.9 million in principal amount of fixed rate debt
represented by the Notes and $750 thousand of variable rate debt represented by
borrowings under the New Credit Agreement.  At March 31, 2009, up to
$39.2 million of variable rate borrowings were available under the New Credit
Agreement.





Foreign Currency and
Derivatives.  We have not used derivative financial instruments
to manage foreign currency risk related to the procurement of merchandise
inventories from foreign sources, and we do not earn income denominated in
foreign currencies.  We make all of our sales and pay all of our
obligations in United States dollars.  We may in the future invest in
foreign currencies or pay obligations in foreign currencies to reduce the
foreign currency risk related to procuring merchandise inventories from foreign
sources.  We may also use derivative financial instruments, where
appropriate, to manage our interest rate risks or risks of a declining United
States dollar.  However, as a matter of policy, we do not enter into
derivative or other financial investments for trading or speculative
purposes.  At March 31, 2009, we had no such derivative financial
instruments outstanding.




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Table
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Item 4. Controls and Procedures.





Evaluation of Disclosure Controls
and Procedures.  An evaluation was carried out under the
supervision and with the participation of the Company’s management, including
the Chief Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), of the
effectiveness of the Company’s disclosure controls and procedures (as defined in
§240.13a–15(e) or §240.15d–15(e) of the General Rules and Regulations of the
Securities Exchange Act of 1934, as amended (the “1934 Act”)) as of the
end of the period covered by this Quarterly Report.  Based on that
evaluation, management, including the CEO and CFO, has concluded that, as of
March 31, 2009, the Company’s disclosure controls and procedures were
effective.





Changes in Internal Control Over
Financial Reporting. Sport Supply Group’s management, with
the participation of Sport Supply Group’s CEO and CFO, has evaluated whether any
change in Sport Supply Group’s internal control over financial reporting
occurred during the three months ended March 31, 2009.  Based on its
evaluation, management, including the CEO and CFO, has concluded that there has
been no change in Sport Supply Group’s internal control over financial reporting
during the three months ended March 31, 2009 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.





Statement
Regarding Forward-Looking Disclosure





This
Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in Item 2, contains
forward-looking statements that involve risks and uncertainties, as well as
assumptions that, if never materialized or are proven incorrect, could cause the
results of Sport Supply Group and its consolidated subsidiaries to differ
materially from those expressed or implied by such forward-looking
statements.  All statements other than statements of historical fact
are statements that could be deemed forward-looking statements, including but
not limited to any projections of net sales, gross profit margin, expenses,
earnings or losses from operations, synergies or other financial items,
including statements regarding ability and manner of satisfying short-term and
long-term liquidity requirements; any statements of the plans, strategies and
objectives of management for future operations; any statements regarding future
economic conditions or performance; any statements of expectation or belief; and
any statements of assumptions underlying any of the foregoing.  The
risks, uncertainties and assumptions referred to above include Sport Supply
Group’s ability to integrate acquired businesses, global economic conditions,
reduced product demand, increased product costs, reductions in school,
municipal, state and national government budgets, financial market performance,
the ability to acquire future financing given the current state of the credit
and capital markets and other risks that are described herein, as well as those
items described from time to time in Sport Supply Group’s SEC filings, including
Sport Supply Group’s Annual Report on Form 10-K for the fiscal year ended June
30, 2008. Sport Supply Group cautions that the foregoing list of important
factors is not all encompassing.  Any forward-looking statements
included in this report are made as of the date of filing of this report with
the SEC, and we assume no obligation and do not intend to update these
forward-looking statements




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Table of Contents.






PART II. OTHER INFORMATION





Item 1. Legal Proceedings.





The
Company is a party to various litigation matters, in most cases involving
ordinary and routine claims incidental to the Company’s business.  The
Company cannot estimate with certainty its ultimate legal and financial
liability with respect to such pending litigation matters.  However,
the Company believes, based on its review of such matters, that its ultimate
liability will not have a material adverse effect on its financial position,
results of operations or cash flows.





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Item 6. Exhibits.





A.           Exhibits.  The
following exhibits are filed as part of this report:





ExhibitNumber
                                          Description
                                          
                                          Incorporated
      by Reference From3.1
                                          Certificate
      of Incorporation of the Registrant.
                                          
                                          Exhibit 1
      to the Registrant’s Registration Statement on Form 8-A filed on
      September 9, 1999.3.1.1
                                          Certificate
      of Amendment to Certificate of Incorporation of Collegiate Pacific
      Inc.
                                          
                                          Exhibit 3.10
      to the Registrant’s Registration Statement on Form SB-2
      (No. 333-34294) originally filed on April 7,
    2000.3.1.2
                                          Amendment
      to Certificate of Incorporation of Collegiate Pacific Inc.
                                          
                                          Exhibit 3.1
      to the Registrant’s Current Report on Form 8-K filed on July 2,
      2007.3.2
                                          By-Laws
      of the Registrant.
                                          
                                          Exhibit 2
      to the Registrant’s Registration Statement on Form 8-A filed on
      September 9, 1999.3.2.1
                                          Amendment
      to the Bylaws of Collegiate Pacific Inc.
                                          
                                          Exhibit 3.1
      to the Registrant’s Current Report on Form 8-K filed on June 14,
      2007.3.2.2
                                          Amendment
      to the Bylaws of Collegiate Pacific Inc.
                                          
                                          Exhibit 3.2
      to the Registrant’s Current Report on Form 8-K filed on July 2,
      2007.4.1
                                          Specimen
      Certificate of Common Stock, $0.01 par value, of Sport Supply Group,
      Inc.
                                          
                                          Exhibit
      4.1 to the Registrant’s Annual Report on Form 10-K filed on September 13,
      2007.4.2
                                          Indenture,
      dated as of November 26, 2004, by and between Collegiate Pacific Inc.
      and The Bank of New York Trust Company N.A., as Trustee.
                                          
                                          Exhibit 99.1
      to the Registrant’s Current Report on Form 8-K filed on
      November 29, 2004.4.3
                                          Form
      of 5.75% Convertible Senior Subordinated Note Due 2009 (included in
      Section 2.2 of Exhibit 4.2 to this report).
                                          
                                          Exhibit 99.2
      to the Registrant’s Current Report on Form 8-K filed on
      November 29, 2004.10.1
                                          Letter
      of Modification, dated April 1, 2009, to Credit Agreement with Bank of
      America N.A.*31.1
                                          Certification
      of Adam Blumenfeld pursuant to Rule 13a-14(a) or 15d-14(a) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*31.2
                                          Certification
      of John Pitts pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
      Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*32
                                          Certification
      of Adam Blumenfeld and John Pitts pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.**





*
            Filed
      herewith


**
            Furnished
      herewith




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of Contents




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereto
duly authorized.





SPORT
      SUPPLY GROUP, INC.Dated:
      May 14, 2009
                /s/
      Adam BlumenfeldAdam
      Blumenfeld, Chief Executive
Officer





Dated:
      May 14, 2009
                /s/
      John PittsJohn
      Pitts, Chief Financial Officer
                  (Principal
      Financial and Accounting
Officer)







Table
of Contents




EXHIBIT
INDEX





The
following exhibits are filed as part of this report:





ExhibitNumber
                                      Description
                                      
                                      Incorporated
      by Reference From3.1
                                      Certificate
      of Incorporation of the Registrant.
                                      
                                      Exhibit 1
      to the Registrant’s Registration Statement on Form 8-A filed on
      September 9, 1999.3.1.1
                                      Certificate
      of Amendment to Certificate of Incorporation of Collegiate Pacific
      Inc.
                                      
                                      Exhibit 3.10
      to the Registrant’s Registration Statement on Form SB-2
      (No. 333-34294) originally filed on April 7,
    2000.3.1.2
                                      Amendment
      to Certificate of Incorporation of Collegiate Pacific Inc.
                                      
                                      Exhibit 3.1
      to the Registrant’s Current Report on Form 8-K filed on July 2,
      2007.3.2
                                      By-Laws
      of the Registrant.
                                      
                                      Exhibit 2
      to the Registrant’s Registration Statement on Form 8-A filed on
      September 9, 1999.3.2.1
                                      Amendment
      to the Bylaws of Collegiate Pacific Inc.
                                      
                                      Exhibit 3.1
      to the Registrant’s Current Report on Form 8-K filed on June 14,
      2007.3.2.2
                                      Amendment
      to the Bylaws of Collegiate Pacific Inc.
                                      
                                      Exhibit 3.2
      to the Registrant’s Current Report on Form 8-K filed on July 2,
      2007.4.1
                                      Specimen
      Certificate of Common Stock, $0.01 par value, of Sport Supply Group,
      Inc.
                                      
                                      Exhibit
      4.1 to the Registrant’s Annual Report on Form 10-K filed on September 13,
      2007.4.2
                                      Indenture,
      dated as of November 26, 2004, by and between Collegiate Pacific Inc.
      and The Bank of New York Trust Company N.A., as Trustee.
                                      
                                      Exhibit 99.1
      to the Registrant’s Current Report on Form 8-K filed on
      November 29, 2004.4.3
                                      Form
      of 5.75% Convertible Senior Subordinated Note Due 2009 (included in
      Section 2.2 of Exhibit 4.2 to this report).
                                      
                                      Exhibit 99.2
      to the Registrant’s Current Report on Form 8-K filed on
      November 29, 2004.10.1
                                      Letter
      of Modification, dated April 1, 2009, to Credit Agreement with Bank of
      America N.A.*31.1
                                      Certification
      of Adam Blumenfeld pursuant to Rule 13a-14(a) or 15d-14(a) of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*31.2
                                      Certification
      of John Pitts pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities
      Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.*32
                                      Certification
      of Adam Blumenfeld and John Pitts pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.**





*
            Filed
      herewith


**
            Furnished
      herewith