UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q


(Mark
One)


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


For
the quarterly period ended December 31, 2009





OR


 ̈     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
                      
                      (I.R.S.
      Employer Identification No.)Incorporation
      or Organization)





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   ̈




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   ̈





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
February 3, 2010, there were 12,472,506 shares of the issuer’s common stock
outstanding.










SPORT
SUPPLY GROUP, INC. AND SUBSIDIARIES


TABLE
OF CONTENTS





PageNumberPART
      I:
                                
                                FINANCIAL INFORMATIONItem
      1.
                                
                                Consolidated Financial Statements
    (Unaudited)Condensed Consolidated Balance Sheets at December 31, 2009
      and June 30, 2009
                                
                                
                                1Condensed Consolidated Statements of Income for the three and
      six months ended December 31, 2009 and 2008
                                
                                
                                2Condensed Consolidated Statements of Cash Flows for the six
      months ended December 31, 2009 and 2008
                                
                                
                                3Notes to Unaudited Condensed Consolidated Financial
      Statements
                                
                                
                                4Item
      2.
                                
                                Management's Discussion and Analysis of
      FinancialCondition and Results of Operations.
                                
                                
                                10Item
      3.
                                
                                Quantitative and Qualitative Disclosures About Market
      Risk
                                
                                
                                23Item
      4.
                                
                                Controls and Procedures
                                
                                
                                24PART
      II:
                                
                                OTHER INFORMATIONItem
      1.
                                
                                Legal Proceedings
                                
                                
                                26Item
      4.
                                
                                Submission of Matters to a Vote of Security
      Holders
                                
                                
                                26Item
      6.
                                
                                Exhibits
                                
                                
                                27SIGNATURES
                                
                                
                                28Exhibits








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)





December 31,
                            2009
                          
                          
                          June 30,
                            2009ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                          
                          $
                          2,015
                          
                          
                          $
                          10,743Accounts
      receivable, net of allowance for doubtful accounts of$1,536
      and $1,457, respectively
                          
                          
                          32,452
                          
                          
                          
                          32,276Inventories
                          
                          
                          28,900
                          
                          
                          
                          33,872Current
      portion of deferred income taxes
                          
                          
                          4,040
                          
                          
                          
                          4,040Prepaid
      income taxes
                          
                          
                          1,221
                          
                          
                          
                          1,828Prepaid
      expenses and other current assets
                          
                          
                          2,369
                          
                          
                          
                          1,821Total
      current assets
                          
                          
                          70,997
                          
                          
                          
                          84,580PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $10,093 and $9,128,
      respectively
                          
                          
                          7,855
                          
                          
                          
                          8,504DEFERRED
      DEBT ISSUANCE COSTS, net of accumulated amortization of $46 and $1,823,
      respectively
                          
                          
                          111
                          
                          
                          
                          291INTANGIBLE
      ASSETS, net of accumulated amortization of $5,550 and $5,195,
      respectively
                          
                          
                          5,872
                          
                          
                          
                          6,226GOODWILL
                          
                          
                          53,525
                          
                          
                          
                          53,426OTHER
      ASSETS, net
                          
                          
                          76
                          
                          
                          
                          76Total
      assets
                          
                          $
                          138,436
                          
                          
                          $
                          153,103LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                          
                          $
                          19,448
                          
                          
                          $
                          20,132Accrued
      liabilities
                          
                          
                          8,551
                          
                          
                          
                          7,602Dividends
      payable
                          
                          
                          313
                          
                          
                          
                          311Current
      portion of long-term debt
                          
                          
                          24
                          
                          
                          
                          28,892Total
      current liabilities
                          
                          
                          28,336
                          
                          
                          
                          56,937DEFERRED
      INCOME TAX LIABILITIES
                          
                          
                          4,257
                          
                          
                          
                          4,331NOTES
      PAYABLE AND OTHER LONG-TERM DEBT
                          
                          
                          6,900
                          
                          
                          
                          –Total
      liabilities
                          
                          
                          39,493
                          
                          
                          
                          61,268COMMITMENTS
      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;12,557,641
      and 12,490,756 shares issued and 12,454,015 and 12,386,830 shares
      outstanding, respectively
                          
                          
                          126
                          
                          
                          
                          125Additional
      paid-in capital
                          
                          
                          68,276
                          
                          
                          
                          66,526Retained
      earnings
                          
                          
                          31,344
                          
                          
                          
                          25,987Treasury
      stock at cost, 103,626 and 103,926 shares, respectively
                          
                          
                          (803
                          )
                          
                          
                          (803
                          )Total
      stockholders' equity
                          
                          
                          98,943
                          
                          
                          
                          91,835Total
      liabilities and stockholders' equity
                          
                          $
                          138,436
                          
                          
                          $
                          153,103





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


- 1
-


SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(Unaudited)


(in
thousands, except share and per share amounts)





Three Months Ended
                    
                    
                    Six Months EndedDecember 31,
                    
                    
                    December 31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Net
      sales
                    
                    $
                    55,529
                    
                    
                    $
                    53,175
                    
                    
                    $
                    132,999
                    
                    
                    $
                    126,752Cost
      of sales
                    
                    
                    35,499
                    
                    
                    
                    34,443
                    
                    
                    
                    85,065
                    
                    
                    
                    81,101Gross
      profit
                    
                    
                    20,030
                    
                    
                    
                    18,732
                    
                    
                    
                    47,934
                    
                    
                    
                    45,651Selling,
      general and administrative expenses
                    
                    
                    18,187
                    
                    
                    
                    17,273
                    
                    
                    
                    37,337
                    
                    
                    
                    35,527Operating
      profit
                    
                    
                    1,843
                    
                    
                    
                    1,459
                    
                    
                    
                    10,597
                    
                    
                    
                    10,124Other
      income (expense):Interest
      income
                    
                    
                    25
                    
                    
                    
                    40
                    
                    
                    
                    42
                    
                    
                    
                    117Interest
      expense
                    
                    
                    (366
                    )
                    
                    
                    (926
                    )
                    
                    
                    (893
                    )
                    
                    
                    (1,914
                    )Gain
      on early retirement of Notes
                    
                    
                    –
                    
                    
                    
                    1,192
                    
                    
                    
                    –
                    
                    
                    
                    1,443Other
      income (expense)
                    
                    
                    –
                    
                    
                    
                    (21
                    )
                    
                    
                    1
                    
                    
                    
                    –Total
      other income (expense), net
                    
                    
                    (341
                    )
                    
                    
                    285
                    
                    
                    
                    (850
                    )
                    
                    
                    (354
                    )Income
      before income taxes
                    
                    
                    1,502
                    
                    
                    
                    1,744
                    
                    
                    
                    9,747
                    
                    
                    
                    9,770Income
      tax provision
                    
                    
                    580
                    
                    
                    
                    692
                    
                    
                    
                    3,766
                    
                    
                    
                    3,657Net
      income
                    
                    $
                    922
                    
                    
                    $
                    1,052
                    
                    
                    $
                    5,981
                    
                    
                    $
                    6,113Weighted
      average number of shares outstanding:Basic
                    
                    
                    12,483,542
                    
                    
                    
                    12,444,198
                    
                    
                    
                    12,469,516
                    
                    
                    
                    12,436,224Diluted
                    
                    
                    12,720,985
                    
                    
                    
                    12,912,607
                    
                    
                    
                    14,276,549
                    
                    
                    
                    15,315,960Net
      income per share common stock – basic
                    
                    $
                    0.07
                    
                    
                    $
                    0.08
                    
                    
                    $
                    0.48
                    
                    
                    $
                    0.49Net
      income per share common stock – diluted
                    
                    $
                    0.07
                    
                    
                    $
                    0.04
                    
                    
                    $
                    0.46
                    
                    
                    $
                    0.41Dividends
      declared per share common stock
                    
                    $
                    0.025
                    
                    
                    $
                    0.00
                    
                    
                    $
                    0.05
                    
                    
                    $
                    0.025





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


- 2
-


SPORT SUPPLY GROUP, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


(in
thousands)





Six Months EndedDecember 31,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                5,981
                
                
                $
                6,113Adjustments
      to reconcile net income to cash provided by (used in) operating
      activities:Provision
      for uncollectible accounts receivable
                
                
                500
                
                
                
                498Depreciation
      and amortization
                
                
                1,323
                
                
                
                1,420Amortization
      of deferred debt issuance costs
                
                
                190
                
                
                
                686Gain
      on early retirement of Notes
                
                
                –
                
                
                
                (1,443
                )Deferred
      income taxes
                
                
                (74
                )
                
                
                78Stock-based
      compensation expense
                
                
                1,389
                
                
                
                569Changes
      in operating assets and liabilities (net of effects of
      acquisitions):Accounts
      receivable
                
                
                (677
                )
                
                
                (1,076
                )Inventories
                
                
                5,085
                
                
                
                (1,666
                )Prepaid
      expenses and other current assets
                
                
                (549
                )
                
                
                (705
                )Other
      assets, net
                
                
                –
                
                
                
                22Accounts
      payable
                
                
                (681
                )
                
                
                (4,224
                )Income
      taxes payable / prepaid income taxes
                
                
                607
                
                
                
                (1,389
                )Accrued
      liabilities and accrued interest
                
                
                807
                
                
                
                (1,544
                )Net
      cash provided by (used in) operating activities:
                
                
                13,901
                
                
                
                (2,661
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                
                
                (322
                )
                
                
                (330
                )Proceeds
      from disposals of property and equipment
                
                
                52
                
                
                
                –Cash
      used in business acquisitions
                
                
                (121
                )
                
                
                –Net
      cash used in investing activities:
                
                
                (391
                )
                
                
                (330
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Retirement
      of long term debt
                
                
                (28,856
                )
                
                
                (19,701
                )Deferred
      debt issuance cost
                
                
                (10
                )
                
                
                –Proceeds
      from line of credit
                
                
                13,100
                
                
                
                15,213Payments
      on notes payable and line of credit
                
                
                (6,212
                )
                
                
                (9,829
                )Payment
      of dividends
                
                
                (622
                )
                
                
                (620
                )Tax
      benefit related to the exercise of stock options
                
                
                74
                
                
                
                249Proceeds
      from issuance of common stock
                
                
                288
                
                
                
                230Net
      cash used in financing activities:
                
                
                (22,238
                )
                
                
                (14,458
                )Net
      change in cash and cash equivalents
                
                
                (8,728
                )
                
                
                (17,449
                )Cash
      and cash equivalents, beginning of period
                
                
                10,743
                
                
                
                20,531Cash
      and cash equivalents, end of period
                
                $
                2,015
                
                
                $
                3,082SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
                
                $
                838
                
                
                $
                1,345Cash
      paid for income taxes
                
                $
                3,197
                
                
                $
                4,807





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


- 3
-


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, 2009. 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, 2010.





2.  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 six months ended December 31, 2009 and
2008:





Three Months Ended December 31,2009
                                      
                                      
                                      
                                      2008Catalog
                                        Group
                                      
                                      
                                      Team
                                        Dealer
                                      
                                      
                                      Total
                                      
                                      
                                      Catalog
                                        Group
                                      
                                      
                                      Team
                                        Dealer
                                      
                                      
                                      Total(in
      thousands)Sporting
      goods equipment
                                      
                                      $
                                      22,650
                                      
                                      
                                      $
                                      5,153
                                      
                                      
                                      $
                                      27,803
                                      
                                      
                                      $
                                      23,164
                                      
                                      
                                      $
                                      4,707
                                      
                                      
                                      $
                                      27,871Soft
      goods
                                      
                                      
                                      1,483
                                      
                                      
                                      
                                      23,554
                                      
                                      
                                      
                                      25,037
                                      
                                      
                                      
                                      1,238
                                      
                                      
                                      
                                      21,222
                                      
                                      
                                      
                                      22,460Freight
                                      
                                      
                                      1,676
                                      
                                      
                                      
                                      1,013
                                      
                                      
                                      
                                      2,689
                                      
                                      
                                      
                                      1,889
                                      
                                      
                                      
                                      955
                                      
                                      
                                      
                                      2,844Net
      sales
                                      
                                      $
                                      25,809
                                      
                                      
                                      $
                                      29,720
                                      
                                      
                                      $
                                      55,529
                                      
                                      
                                      $
                                      26,291
                                      
                                      
                                      $
                                      26,884
                                      
                                      
                                      $
                                      53,175





Six Months Ended December 31,2009
                                        
                                        
                                        2008Catalog
                                          Group
                                        
                                        
                                        Team
                                          Dealer
                                        
                                        
                                        Total
                                        
                                        
                                        Catalog
                                          Group
                                        
                                        
                                        Team
                                          Dealer
                                        
                                        
                                        Total(in
      thousands)Sporting
      goods equipment
                                        
                                        $
                                        59,680
                                        
                                        
                                        $
                                        15,324
                                        
                                        
                                        $
                                        75,004
                                        
                                        
                                        $
                                        57,492
                                        
                                        
                                        $
                                        14,952
                                        
                                        
                                        $
                                        72,444Soft
      goods
                                        
                                        
                                        3,809
                                        
                                        
                                        
                                        47,810
                                        
                                        
                                        
                                        51,619
                                        
                                        
                                        
                                        3,065
                                        
                                        
                                        
                                        44,388
                                        
                                        
                                        
                                        47,453Freight
                                        
                                        
                                        4,114
                                        
                                        
                                        
                                        2,262
                                        
                                        
                                        
                                        6,376
                                        
                                        
                                        
                                        4,685
                                        
                                        
                                        
                                        2,170
                                        
                                        
                                        
                                        6,855Net
      sales
                                        
                                        $
                                        67,603
                                        
                                        
                                        $
                                        65,396
                                        
                                        
                                        $
                                        132,999
                                        
                                        
                                        $
                                        65,242
                                        
                                        
                                        $
                                        61,510
                                        
                                        
                                        $
                                        126,752


- 4
-





3.  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 December 31, 2009 and June 30, 2009 consisted of the following:





December 31, 2009
                    
                    
                    June 30, 2009(in thousands)Raw
      materials
                    
                    $
                    1,786
                    
                    
                    $
                    1,898Work
      in progress
                    
                    
                    107
                    
                    
                    
                    200Finished
      goods
                    
                    
                    27,007
                    
                    
                    
                    31,774Inventories
                    
                    $
                    28,900
                    
                    
                    $
                    33,872




4.  Allowance
for Doubtful Accounts:




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





Six Months Ended
                      
                      
                      Fiscal Year EndedDecember 31, 2009
                      
                      
                      June 30, 2009(in thousands)Balance
      at beginning of period
                      
                      $
                      1,457
                      
                      
                      $
                      1,320Provision
      for uncollectible accounts receivable
                      
                      
                      500
                      
                      
                      
                      851Accounts
      written off, net of recoveries
                      
                      
                      (421
                      )
                      
                      
                      (714
                      )Balance
      at end of period
                      
                      $
                      1,536
                      
                      
                      $
                      1,457





5.  Accrued
Liabilities:





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





December 31, 2009
                  
                  
                  June 30, 2009(in thousands)Accrued
      compensation and benefits
                  
                  $
                  3,417
                  
                  
                  $
                  2,639Customer
      deposits
                  
                  
                  1,544
                  
                  
                  
                  1,582Taxes
      other than income taxes
                  
                  
                  1,777
                  
                  
                  
                  1,700Other
                  
                  
                  1,813
                  
                  
                  
                  1,681Total
      accrued liabilities
                  
                  $
                  8,551
                  
                  
                  $
                  7,602





6.  Long-Term
Debt and Line of Credit:





During
the fiscal quarter ended December 31, 2004, the Company issued $50.0 million
principal amount of 5.75% Convertible Senior Subordinated Notes that matured
December 1, 2009 (the “Notes”).





During
the year ended June 30, 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. As of June 30, 2009, the $28.9 million
balance of Notes outstanding was classified as a current liability on the
Company’s consolidated balance sheet.


- 5
-





The Notes
were paid in full on the December 1, 2009 maturity date. The Company used cash
on hand and borrowed $8.3 million under the New Credit Agreement, as defined
below, to pay off the Notes and related accrued interest. As a result of the
retirement of the Notes and the expiration of the Company’s contractual
obligation to maintain the effectiveness of the registration statement for the
Notes,the Company
filed Post-Effective Amendment No. 1 to Form S-3 (the “Post-Effective
Amendment”) on December 17, 2009 to remove from registration all Notes
and all shares of Common Stock registered for issuance under the registration
statement that remained unsold as of the date of the Post-Effective Amendment.
The Post-Effective Amendment was declared effective December 22,
2009.





The
Company’s principal external source of liquidity is its credit agreement, dated
as of February 9, 2009, 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”), which is collateralized by substantially all of the
assets of the Company and its wholly-owned subsidiaries.





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
the New Credit Agreement. 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 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 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.


- 6
-





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 fee
would be payable.





On June
19, 2009, the Company entered into Amendment No. 1 to the New Credit Agreement,
which permitted the Company to make acquisitions up to $2.0 million in the
aggregate and subject to certain conditions, prior to the repayment of the Notes
on December 1, 2009.





On July
30, 2009, the Company entered into Amendment No. 2 to the New Credit Agreement,
which permitted the Company to make acquisitions up to $5.0 million in the
aggregate and subject to certain conditions, prior to the repayment of the Notes
on December 1, 2009.





At
December 31, 2009, the Company had $6.9 million outstanding under the New Credit
Agreement, leaving the Company with $27.0 million of availability under the
terms of the New Credit Agreement based on eligible accounts receivable and
inventories. At December 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 December 31, 2009 and June 30, 2009
consisted of the following:





December 31, 2009
                  
                  
                  June 30, 2009(in thousands)New
      Credit Agreement
                  
                  $
                  6,900
                  
                  
                  $
                  –Notes
                  
                  
                  –
                  
                  
                  
                  28,856Other
      notes payable
                  
                  
                  24
                  
                  
                  
                  36Total
      notes payable
                  
                  
                  6,924
                  
                  
                  
                  28,892Less
      current portion
                  
                  
                  (24
                  )
                  
                  
                  (28,892
                  )Notes
      payable and other long-term debt
                  
                  $
                  6,900
                  
                  
                  $
                  –





As of
December 31, 2009, the New Credit Agreement is classified as a non-current
liability due to the February 8, 2012 maturity date.


- 7
-





7.  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 Six Months EndedDecember 31,
                
                
                December 31,2009
                
                
                2008
                
                
                2009
                
                
                2008(in thousands except share and per share data)Numerator:Net
      income
                
                $
                922
                
                
                $
                1,052
                
                
                $
                5,981
                
                
                $
                6,113Effect
      of Notes
                
                
                –
                
                
                
                (528
                )
                
                
                524
                
                
                
                209Diluted
      income
                
                $
                922
                
                
                $
                524
                
                
                $
                6,505
                
                
                $
                6,322Denominator:Basic
      weighted average shares outstanding
                
                
                12,483,542
                
                
                
                12,444,198
                
                
                
                12,469,516
                
                
                
                12,436,224Add
      effect of:Stock
      options
                
                
                237,443
                
                
                
                41,999
                
                
                
                169,191
                
                
                
                95,256Notes
                
                
                –
                
                
                
                426,410
                
                
                
                1,637,842
                
                
                
                2,784,480Diluted
      weighted average shares outstanding
                
                
                12,720,985
                
                
                
                12,912,607
                
                
                
                14,276,549
                
                
                
                15,315,960Basic
      income per share
                
                $
                0.07
                
                
                $
                0.08
                
                
                $
                0.48
                
                
                $
                0.49Diluted
      income per share
                
                $
                0.07
                
                
                $
                0.04
                
                
                $
                0.46
                
                
                $
                0.41


For the
three months ended December 31, 2009 and 2008, stock options to purchase 323,120
and 1,376,885 shares, respectively, and for the six months ended December 31,
2009 and 2008, stock options to purchase 475,987 and 960,012 shares,
respectively, were excluded in the computations of diluted income per share
because their effect was anti-dilutive.





For the
three months ended December 31, 2009 and 2008, the assumed conversion of the
Notes into 1,969,693 shares and 2,612,224 shares, respectively, is not included
in the diluted weighted average shares. During the six months ended December 31,
2008, the assumed conversion of the Notes into 628,489 shares was not included
in the diluted weighted average shares. These shares were not included in the
diluted weighted average shares because under the if-converted method of US
GAAP, they were anti-dilutive. During the six months ended December 31, 2009,
the assumed conversion of the Notes into 1,969,693 shares was dilutive and is
included in the weighted average share calculation above until their December 1,
2009 maturity date.





During
the three and six months ended December 31, 2008, the Company used available
cash on hand and proceeds from the Revolving Facility to retire $15.6 million
and $21.1 million, respectively of Notes. No similar early retirements were made
during the three and six months ended December 31, 2009.


- 8
-




On July
1, 2009, the Company adopted the provisions of Accounting Standards Codification
Topic 260, Earnings Per
Share, related to determining whether instruments granted in share-based
payment transactions are participating securities. Under the provisions,
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 both basic and diluted earnings per
share. The Company restated prior period basic and diluted earnings per share to
include such outstanding unvested restricted shares of its common stock in the
basic weighted average shares outstanding calculation. Upon adoption, there was
no change in basic and diluted income per share for the three and six months
ended December 31, 2008.





8.  Stockholders’
Equity:





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





(in thousands)Stockholders’
      equity at June 30, 2009
                  
                  $
                  91,835Issuance
      of stock for cash
                  
                  
                  288Stock-based
      compensation
                  
                  
                  1,389Tax
      benefit related to the exercise of stock options
                  
                  
                  74Net
      income
                  
                  
                  5,981Dividends
      declared
                  
                  
                  (624
                  )Stockholders’
      equity at December 31, 2009
                  
                  $
                  98,943





9.   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.





10.   Subsequent
Events:





On
December 17, 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 second quarter of fiscal 2010, which ended December 31,
2009. The quarterly cash dividend was paid on January 29, 2010, to all
stockholders of record on the close of business on January 12,
2010.





The
Company evaluated its December 31, 2009 condensed consolidated financial
statements for subsequent events through February 3, 2010, the date the
financial statements were issued, and is not aware of any other subsequent
events that would require recognition or disclosure in its condensed
consolidated financial statements.


- 9
-


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, 2009 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 20,000 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 400,000 potential customers, our over 200 person direct sales force
strategically located throughout the South-Western, South-Central, Mid-Western,
Mid-Atlantic and South-Atlantic United States, mailing over 3 million catalogs
and promotional flyers each year 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 activity 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





The
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. The United States is
in the second year of a recession. The deteriorating economy and turbulent
financial and credit markets have continued to result in further eroded consumer
confidence, increased unemployment and continuing real estate foreclosures. In
addition, government tax revenues have decreased, and school districts, cities,
counties and state governments continue to experience budget constraints and
shortfalls. Actions taken or currently under consideration by the federal
government designed to stimulate the economy could soften the impact of the
recession. There remains the possibility, however, that sporting goods sales and
gross margins may be adversely impacted as our country’s economy moves through
and recovers from the current recession.


- 10
-


As part
of our strategy to increase our market penetration and limit the possible impact
the current economy may have on our business, we acquired three businesses that
have been fully integrated into our team dealer operations. On June 24, 2009, we
purchased the assets of Webster’s Team Sports located in Florida. On June 30,
2009, we acquired the rights to Doerner’s Team Sports Division located in
Indiana. On July 30, 2009, we acquired certain assets of Har-Bell Athletic Goods
located in Missouri. These transactions expanded our road sales force in the
respective geographic regions.





As we
report the results of our second quarter ended December 31, 2009 and move into
our third quarter ending March 31, 2010, institutional sporting goods customers
and suppliers continue to face adverse economic pressures. We believe the
Company is performing reasonably well in the current economic and competitive
environment. For the three and six months ended December 31, 2009, we are
reporting stable overall profit performance, realizing year-over-year revenue,
gross profit, gross profit percentage and operating profit increases, while
experiencing a decrease in our net income.





·
            Net sales for thesecondquarter endedDecember 31, 2009increased$2.4 million, or 4.4%,to $55.5million. Net sales for thesix monthsendedDecember 31, 2009increased$6.2 million, or 4.9%,to $133.0million.The net sales increaseswereprimarilyattributable to increased
      penetration into the government sector, our business to consumerinternet
      businessand the
      recent acquisitions of three team dealer operations.




·
            Gross profitfor the second quarter ended
      December 31, 2009 increased $1.3 million, or 6.9%, to $20.0 million.Gross profitfor the six months
      ended December 31, 2009 increased $2.3 million, or 5.0%, to $47.9 million.
      As a percentage of net sales, gross profit increased90basis points to36.1%for the three months ended
      December 31, 2009.Our gross profit percentageincreaseisprimarily the result offewer special
      discounts than those offered in the three months ended December 31, 2008.
      For the six months ended December 31, 2009, gross profit as a percentage
      of net sales remained flat at
36.0%.




·
            Operating profit for the second
      quarter ended December 31, 2009 increased $0.4 million or 26.3%, to $1.8
      million. Operating profit for the six months ended December 31, 2009
      increased $0.5 million, or 4.7%, to $10.6 million. The increase in operating profit
      is primarily due to higher gross profit percentages and holding selling,
      general and administrative expensesconsistent as a percentage of net
      sales.




·
            Net income for thesecondquarter endedDecember 31, 2009decreased $0.1 million, or 12.4%,
      to $0.9 million. Net
      income for thesix
      monthsendedDecember
      31, 2009decreased $0.1 million, or 2.2%,
      to $6.0 million.The
      primary contributor to the reduction in net income is related to the gains
      realized on the early retirement of the Notes, as defined below,during fiscal year 2009. We
      recognized a $1.2 million gain anda$1.4 million gain on the early
      retirement of the Notes for the three and six months ended December 31,
      2008,respectively.




A
significant portion of the products we purchase for resale, including those
purchased from domestic suppliers, is manufactured abroad in countries such as
China, Taiwan, South Korea and India. We cannot predict the effect future
changes in political or economic conditions in such foreign countries may have
on our operations. In the event of disruptions or delays in supply due to
political or 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.


- 11
-


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
growth before interest, taxes, depreciation and amortization (“EBITDA”); and
positioning our business to capitalize on an economic recovery when it occurs.
Consistent with these goals, in the past six months, among other things, we: (i)
paid off the remaining $28.9 million of Notes, reducing our outstanding debt by
$22.0 million and reducing our effective borrowing rate from 5.75% to 1.73% as
of December 31, 2009; (ii) integrated three team dealer operations into our
operations; (iii) maintained selling, general and administrative expenses
at a consistent percentage of net sales; and (iv) 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 2010 will continue to reflect these priorities.





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 accounting principles generally accepted in the United States of
America (“US
GAAP”). Certain of our accounting policies are particularly important to
the portrayal of our consolidated financial position, results of operations and
statements of cash flows 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 every six months. 
Slow moving inventory and shrinkage can be impacted by internal factors such as
the level of employee training and loss prevention programs 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 $0.5
million and $0.4 million for the six months ended December 31, 2009 and 2008,
respectively.  The increase in the inventory adjustments is due to the
identification of additional excess and obsolete inventories during the six
months ended December 31, 2009. We evaluate our inventory value each quarter
based on the criteria discussed above.





A 10%
change in our inventory write-downs for the six months ended December 31, 2009
would result in a change in our inventories of approximately $50 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.


- 12
-


Allowance for Doubtful
Accounts. We evaluate the collectability 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.





At
December 31, 2009 and June 30, 2009, our total allowance for doubtful accounts
remained at $1.5 million, but increased to approximately 4.5% of our December
31, 2009 accounts receivable as compared to 4.3% of our June 30, 2009 accounts
receivable. This increase as a percent of accounts receivable is primarily
attributable to the growth in our past due accounts receivable balances due to
the cyclicality of the collection cycle. 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 December 31, 2009 would result
in a change in reserves of approximately $150 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. For any material
acquisitions, 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 withUS GAAP. 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 withUS GAAP. No impairment of intangible assets was
requiredforthe
year ended June 30,
2009or for thesixmonths endedDecember 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 withUS
GAAP.No impairmentof goodwill was requiredforthe year ended June 30, 2009or for thesixmonths endedDecember 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 US
GAAP. 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,
2009or for thesixmonths endedDecember 31, 2009.


- 13
-


Consolidated
Results of Operations





Results
for the three and six months ended December 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 six months ended December 31, 2009 and 2008 (dollars in thousands,
except per share amounts):


For the Three Months Ended December 31,
                
                
                For the Six Months Ended December 31,2009
                
                
                2008
                
                
                2009
                
                
                2008Dollars
                
                
                Percent
                
                
                Dollars
                
                
                Percent
                
                
                Dollars
                
                
                Percent
                
                
                Dollars
                
                
                PercentNet
      sales
                
                $
                55,529
                
                
                
                100.0
                %
                
                $
                53,175
                
                
                
                100.0
                %
                
                $
                132,999
                
                
                
                100.0
                %
                
                $
                126,752
                
                
                
                100.0
                %Cost
      of sales (1)
                
                
                35,499
                
                
                
                63.9
                %
                
                
                34,443
                
                
                
                64.8
                %
                
                
                85,065
                
                
                
                64.0
                %
                
                
                81,101
                
                
                
                64.0
                %Gross
      profit
                
                
                20,030
                
                
                
                36.1
                %
                
                
                18,732
                
                
                
                35.2
                %
                
                
                47,934
                
                
                
                36.0
                %
                
                
                45,651
                
                
                
                36.0
                %Selling,
      general and administrative expenses (2)
                
                
                18,187
                
                
                
                32.8
                %
                
                
                17,273
                
                
                
                32.5
                %
                
                
                37,337
                
                
                
                28.1
                %
                
                
                35,527
                
                
                
                28.0
                %Operating
      profit
                
                
                1,843
                
                
                
                3.3
                %
                
                
                1,459
                
                
                
                2.7
                %
                
                
                10,597
                
                
                
                7.9
                %
                
                
                10,124
                
                
                
                8.0
                %Other
      income (expense) (3)
                
                
                (341
                )
                
                
                (0.6
                )%
                
                
                285
                
                
                
                0.5
                %
                
                
                (850
                )
                
                
                (0.6
                )%
                
                
                (354
                )
                
                
                (0.3
                )%Income
      tax provision
                
                
                580
                
                
                
                1.0
                %
                
                
                692
                
                
                
                1.2
                %
                
                
                3,766
                
                
                
                2.8
                %
                
                
                3,657
                
                
                
                2.9
                %Net
      income
                
                $
                922
                
                
                
                1.7
                %
                
                $
                1,052
                
                
                
                2.0
                %
                
                $
                5,981
                
                
                
                4.5
                %
                
                $
                6,113
                
                
                
                4.8
                %Net
      income per share – basic
                
                $
                0.07
                
                
                
                
                
                
                $
                0.08
                
                
                
                
                
                
                $
                0.48
                
                
                
                
                
                
                $
                0.49Net
      income per share - diluted
                
                $
                0.07
                
                
                
                
                
                
                $
                0.04
                
                
                
                
                
                
                $
                0.46
                
                
                
                
                
                
                $
                0.41





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
      expenses related to managing the Company and operating our corporate
      headquarters.


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





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





Net Sales. Net sales for the
quarter ended December 31, 2009 were $55.5 million compared to $53.1 million for
the quarter ended December 31, 2008, an increase of $2.4 million, or 4.4%. The
following schedule provides the components of net sales:


- 14
-





For the Three Months Ended
                            December 31,2009
                          
                          
                          2008(in
      thousands)Sporting
      goods equipment
                          
                          $
                          27,803
                          
                          
                          $
                          27,871Soft
      goods
                          
                          
                          25,037
                          
                          
                          
                          22,460Freight
                          
                          
                          2,689
                          
                          
                          
                          2,844Net
      sales
                          
                          $
                          55,529
                          
                          
                          $
                          53,175





Sales of
soft goods increased 11.5% for the quarter ended December 31, 2009 as compared
to the quarter ended December 31, 2008. The increase is primarily due to the
success of integrating the three new team dealer operations as well as offering
fewer product discounts. Sporting goods equipment sales for the quarter ended
December 31, 2009 remained flat as compared to the quarter ended December 31,
2008. Freight billed to our customers declined 5.5% year-over-year as we
increased our free freight promotions to stimulate customer orders. We believe
there may 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 December 31, 2009 increased $1.3 million to $20.0 million,
or 36.1% of net sales, compared with $18.7 million, or 35.2% of net sales, for
the quarter ended December 31, 2008. Sporting goods equipment and soft goods
gross profit as a percentage of net sales each increased 0.4% for the quarter
ended December 31, 2009 compared to the quarter ended December 31, 2008. Freight
costs were $0.7 million and $0.9 million, respectively, in excess of freight
revenues for the quarter ended December 31, 2009 compared to the quarter ended
December 31, 2008. The increases in gross profit percentages are the result of
offering fewer product discounts. We believe the continuing competitive and
customer budgetary challenges discussed above may challenge our ability to
further improve 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 December 31,2009
                      
                      
                      2008Cost of
                        Sales
                        (thousands)
                      
                      
                      Gross
                        Profitas
                        % of Net
                        Sales
                      
                      
                      Cost of
                        Sales
                        (thousands)
                      
                      
                      Gross
                        Profitas
                        % of Net
                        Sales
                      
                      
                      Change
                        in
                        Gross
                        Profit
                        %Sporting
      goods equipment
                      
                      $
                      16,278
                      
                      
                      
                      41.5
                      %
                      
                      $
                      16,424
                      
                      
                      
                      41.1
                      %
                      
                      
                      0.4
                      %Soft
      goods
                      
                      
                      15,809
                      
                      
                      
                      36.9
                      %
                      
                      
                      14,252
                      
                      
                      
                      36.5
                      %
                      
                      
                      0.4
                      %Freight
      costs
                      
                      
                      3,412
                      
                      
                      
                      
                      
                      
                      
                      3,767Cost
      of sales
                      
                      $
                      35,499
                      
                      
                      
                      36.1
                      %
                      
                      $
                      34,443
                      
                      
                      
                      35.2
                      %
                      
                      
                      0.9
                      %





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 December 31,
2009 was $35.5 million, or 63.9% of net sales, compared to $34.4 million, or
64.8% of net sales, for the quarter ended December 31, 2008.


- 15
-


Selling, General and Administrative
Expenses. Selling, general and administrative (“SG&A”) expenses
for the quarter ended December 31, 2009 were $18.2 million, or 32.8% of net
sales, compared with $17.3 million, or 32.5% of net sales, for the quarter ended
December 31, 2008. The increase in SG&A expenses was primarily attributable
to $0.4 million of SG&A expenses related to the increased operating costs
from the June 2009 and July 2009 acquisitions of the three new team dealer
operations and a $0.4 million increase in stock-based compensation related to
the awards issued in June 2009 on an accelerated vesting schedule in lieu of
cash bonuses.





Operating Profit. Operating
profit for the quarter ended December 31, 2009 increased to $1.8 million, or
3.3% of net sales, compared to $1.4 million, or 2.7% of net sales, for the
quarter ended December 31, 2008. The $0.4 million increase in operating profit
was attributable to the increase in gross profit of $1.3 million being partially
offset by increased SG&A expenses of $0.9 million.





Other Income (Expense). Other
expense was $0.3 million for the quarter ended December 31, 2009, compared to
other income of $0.3 million for the quarter ended December 31, 2008. The table
below shows the components of other income (expense).


For the Three Months Ended
                    December 31,2009
                  
                  
                  2008
                  
                  
                  Change(in thousands)Interest
      income
                  
                  $
                  25
                  
                  
                  $
                  40
                  
                  
                  $
                  (15
                  )Interest
      expense
                  
                  
                  (287
                  )
                  
                  
                  (524
                  )
                  
                  
                  237Amortization
      of debt issuance costs
                  
                  
                  (79
                  )
                  
                  
                  (169
                  )
                  
                  
                  90Accelerated
      amortization of debt issuance costsdue
      to the early retirement of Notes
                  
                  
                  –
                  
                  
                  
                  (233
                  )
                  
                  
                  233Gain
      on early retirement of Notes
                  
                  
                  –
                  
                  
                  
                  1,192
                  
                  
                  
                  (1,192
                  )Other
      income (expense)
                  
                  
                  –
                  
                  
                  
                  (21
                  )
                  
                  
                  21Total
      other income (expense)
                  
                  $
                  (341
                  )
                  
                  $
                  285
                  
                  
                  $
                  (626
                  )





During
the three months ended December 31, 2008, we repurchased $15.6 million of Notes
before their maturity date and accordingly expensed $0.2 million of related
unamortized debt issuance costs and recognized $1.2 million of gain on the early
retirement of the Notes. No similar early repurchases were made during the three
months ended December 31, 2009.





Interest expense decreased $0.2
million, or 45.2%, due to the December 1, 2009 maturity of the Notes. The Notes
accrued interest at 5.75%. At December 31, 2009, we had $6.9 million outstanding
under the New Credit Agreement, as defined below. Ongoing interest expense will
depend on borrowings under the New Credit Agreement, which accrues interest at
an effective rate of 1.73% as of December 31, 2009.





Income Taxes. Income tax
expense for the quarter ended December 31, 2009 was $0.6 million, approximately
38.6% of our income before income taxes, compared to income tax expense of $0.7
million, approximately 39.7% of our income before income taxes, for the quarter
ended December 31, 2008. The decrease in tax expense is primarily due to the
decrease in operating profit before tax. The effective tax rate for the quarter
ended December 31, 2008 was higher due to an update in our projected permanent
differences.





Net Income. Net income for
the quarters ended December 31, 2009 and 2008 was $0.9 million and $1.1 million,
respectively.


- 16
-


Six
Months Ended December 31, 2009 Compared to Six Months Ended December 31,
2008





Net Sales. Net sales for the
six months ended December 31, 2009 were $133.0 million compared to $126.8
million for the six months ended December 31, 2008, an increase of $6.2 million,
or 4.9%. The following schedule provides the components of net
sales:





For the Six Months Ended
                            December 31,2009
                          
                          
                          2008(in thousands)Sporting
      goods equipment
                          
                          $
                          75,004
                          
                          
                          $
                          72,444Soft
      goods
                          
                          
                          51,619
                          
                          
                          
                          47,453Freight
                          
                          
                          6,376
                          
                          
                          
                          6,855Net
      sales
                          
                          $
                          132,999
                          
                          
                          $
                          126,752





Sporting
goods equipment sales and the sales of soft goods increased 3.5% and 8.8%,
respectively, for the six months ended December 31, 2009 as compared to the six
months ended December 31, 2008. The increases are primarily due to increased
penetration into the government sector, the business to consumer internet
business and the integration of the three new team dealer operations. Freight
billed to our customers declined 7.0% year-over-year as we increased our free
freight promotions to stimulate customer orders. We believe there may 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 six months ended December 31, 2009 increased $2.3 million to $47.9
million, or 36.0% of net sales, compared with $45.7 million, or 36.0% of net
sales, for the six months ended December 31, 2008. Sporting goods equipment and
soft goods gross profit as a percentage of net sales decreased 0.2% and 0.3%,
respectively, for the six months ended December 31, 2009 compared to the six
months ended December 31, 2008. Freight costs were $1.9 million and $1.8
million, respectively, in excess of freight revenues for the six months ended
December 31, 2009 compared to the six months ended December 31, 2008. The
decrease in our gross profit percentages for the six months ended December 31,
2009 was primarily a result of our first quarter pricing and promotional
programs used to increase sales in response to the competitive market pressures
we have experienced. This decrease was offset by the positive growth in our
gross profit percentages in our second quarter. We believe the continuing
competitive and customer budgetary challenges discussed above may continue to
challenge our ability to improve 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 Six Months Ended December 31,2009
                  
                  
                  2008Cost of
                    Sales
                    (thousands)
                  
                  
                  Gross
                    Profit as
                    % of Net
                    Sales
                  
                  
                  Cost of
                    Sales
                    (thousands)
                  
                  
                  Gross
                    Profit as
                    % of Net
                    Sales
                  
                  
                  Change
                    in
                    Gross
                    Profit
                    %Sporting
      goods equipment
                  
                  $
                  44,036
                  
                  
                  
                  41.3
                  %
                  
                  $
                  42,395
                  
                  
                  
                  41.5
                  %
                  
                  
                  (0.2
                  )%Soft
      goods
                  
                  
                  32,791
                  
                  
                  
                  36.4
                  %
                  
                  
                  30,035
                  
                  
                  
                  36.7
                  %
                  
                  
                  (0.3
                  )%Freight
      costs
                  
                  
                  8,238
                  
                  
                  
                  
                  
                  
                  
                  8,671Cost
      of sales
                  
                  $
                  85,065
                  
                  
                  
                  36.0
                  %
                  
                  $
                  81,101
                  
                  
                  
                  36.0
                  %
                  
                  
                  –


- 17
-





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 six months ended December
31, 2009 was $85.1 million, or 64.0% of net sales, compared to $81.1 million, or
64.0% of net sales, for the six months ended December 31, 2008.





Selling, General and Administrative
Expenses. SG&A expenses for the six months ended December 31, 2009
were $37.3 million, or 28.1 % of net sales, compared with $35.5 million, or
28.0% of net sales, for the six months ended December 31, 2008. The increase in
SG&A expenses was primarily attributable to $0.7 million of SG&A
expenses related to the increased operating costs from the June 2009 and July
2009 acquisitions of the three new team dealer operations and a $0.8 million
increase in stock-based compensation related to the awards issued in June 2009
on an accelerated vesting schedule in lieu of cash bonuses.





Operating Profit. Operating
profit for the six months ended December 31, 2009 increased to $10.6 million, or
8.0% of net sales, compared to $10.1 million, or 8.0% of net sales, for the six
months ended December 31, 2008. The $0.5 million increase in operating profit
was attributable to the increase in gross profit of $2.3 million being partially
offset by increased SG&A expenses of $1.8 million.





Other Expense. Other expense
was $0.9 million for the six months ended December 31, 2009, compared to $0.4
million for the six months ended December 31, 2008. The table below shows the
components of other expense.


For the Six Months Ended
                    December 31,2009
                  
                  
                  2008
                  
                  
                  Change(in
      thousands)Interest
      income
                  
                  $
                  42
                  
                  
                  $
                  117
                  
                  
                  $
                  (75
                  )Interest
      expense
                  
                  
                  (703
                  )
                  
                  
                  (1,201
                  )
                  
                  
                  498Amortization
      of debt issuance costs
                  
                  
                  (190
                  )
                  
                  
                  (378
                  )
                  
                  
                  188Accelerated
      amortization of debt issuance costs due to the early retirement of
      Notes
                  
                  
                  –
                  
                  
                  
                  (335
                  )
                  
                  
                  335Gain
      on early retirement of Notes
                  
                  
                  –
                  
                  
                  
                  1,443
                  
                  
                  
                  (1,443
                  )Other
      income
                  
                  
                  1
                  
                  
                  
                  –
                  
                  
                  
                  1Total
      other expense
                  
                  $
                  (850
                  )
                  
                  $
                  (354
                  )
                  
                  $
                  (496
                  )





During
the six months ended December 31, 2008, we repurchased $21.1 million of Notes
before their maturity date and accordingly expensed $0.3 million of related
unamortized debt issuance costs and recognized $1.4 million of gain on the early
retirement of the Notes. No similar early repurchases were made during the six
months ended December 31, 2009.





Interest expense decreased $0.5
million, or 41.5%, due to the December 1, 2009 maturity of the Notes. The Notes
accrued interest at 5.75%. At December 31, 2009, we had $6.9 million outstanding
under the New Credit Agreement. Ongoing interest expense will depend on
borrowings under the New Credit Agreement, which accrues interest at an
effective rate of 1.73% as of December 31, 2009.





Income Taxes. Income tax
expense for the six months ended December 31, 2009 was $3.8 million,
approximately 38.6% of our income before income taxes, compared to income tax
expense of $3.7 million, approximately 37.4% of our income before income taxes,
for the six months ended December 31, 2008. The increase in tax expense is
primarily the result of a higher effective tax rate due to a $0.1 million
benefit recorded in the six months ended December 31, 2008 to true up our
deferred taxes.


- 18
-


Net Income. Net income for
the six months ended December 31, 2009 and 2008 was $6.0 million and $6.1
million, respectively.





Liquidity
and Capital Resources





The Company’s primary sources of
liquidity and capital resources are its operating cash flow, working capital,New Credit Agreementand, prior to December 1,
2009, the Notes. Each is discussed below.





Liquidity





Cash and
cash equivalents decreased $8.7 million during the six months ended December 31,
2009 due primarily to $22.2 million cash used in financing activities partially
offset by $13.9 million of cash generated by operating activities. Net cash
flows for the six month periods ended December 31, 2009 and 2008 are summarized
below.




Six Months Ended December 31,2009
                      
                      
                      2008(in
      thousands)Operating
      activities
                      
                      $
                      13,901
                      
                      
                      $
                      (2,661
                      )Investing
      activities
                      
                      $
                      (391
                      )
                      
                      $
                      (330
                      )Financing
      activities
                      
                      $
                      (22,238
                      )
                      
                      $
                      (14,458
                      )





Operating Activities. Net
cash flows generated by operating activities was $13.9 million for the six
months ended December 31, 2009, as compared to $2.7 million net cash flows used
in operating activities for the six months ended December 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 six months ended December 31, 2009 were
attributable to:





·
            Net
      income of $6.0 million;





·
            A
      $5.1 million decrease in inventories due to inventories sold during the
      six months ended December 31, 2009 and improvements in managing
      inventories;





·
            A
      $0.8 million net increase in accrued liabilities, which was primarily due
      to the timing of payments related to our commission programs;
      and





·
            A
      $0.6 million increase in taxes payable due to the timing and amount of our
      estimated tax payments.





These
increases in operating cash flows were partially offset by:





·
            A
      $0.7 million increase in accounts receivable from June 30, 2009 to
      December 31, 2009 due to the timing of
  collections;





·
            A
      $0.5 million increase in prepaid expenses primarily related to prepaid
      advertising costs related to unamortized catalog expenses as of December
      31, 2009; and





·
            A
      $0.7 million decrease in accounts payable due to timing of payments and
      less inventory purchases.


- 19
-


For the
six months ended December 31, 2008, our decreases in operating cash flows were
attributable to:





·
            A
      $1.1 million increase in accounts receivable from June 30, 2008 to
      December 31, 2008 due to the timing of
  collections;





·
            A
      $1.7 million increase in inventories as we purchased more inventory during
      the six months ended December 31, 2008 in anticipation of cost
      increases;





·
            An
      increase in prepaid expenses and other assets of $0.7 million due
      primarily to prepaid advertising costs related to unamortized catalog
      expenses as of December 31, 2008;





·
            A
      $5.8 million decrease in accounts payable and accrued liabilities due to
      the timing of payments and the increase in our inventory purchases as
      noted above; and





·
            A
      $1.4 million decrease in taxes payable due to the timing and amount of our
      estimated tax payments.





These
decreases in operating cash flows were partially offset by net income of $6.1
million.





Investing Activities. Net
cash used in investing activities during the six months ended December 31, 2009
and six months ended December 31, 2008 were $0.4 million and $0.3 million,
respectively, and consisted primarily of purchases of computer equipment and
software. Investing activities during the six months ended December 31, 2009
also included the acquisition of a team dealer operation.





Financing Activities. Net
cash used in financing activities during the six months ended December 31, 2009
was $22.2 million, compared to net cash used in financing activities of $14.5
million during the six months ended December 31, 2008. The Notes matured on
December 1, 2009. We used cash on hand and borrowed $8.3 million under the New
Credit Agreement to pay-off the $28.9 million balance of Notes and related
accrued interest. We continued to utilize the New Credit Agreement during the
remainder of the second quarter ended December 31, 2009 and had $6.9 million
outstanding under the New Credit Agreement at December 31, 2009. During the six
months ended December 31, 2008, we used cash on hand to retire, at a $1.4
million discount, $21.1 million of Notes.





Capital
Resources





During the fiscal quarter ended December
31, 2004, we sold $50.0 million principal amount of 5.75% Convertible Senior
SubordinatedNotes that
maturedDecember 1, 2009(the “Notes”).





During
the year ended June 30, 2009, the Company used cash on hand and proceeds from
the Revolving Facility, as defined below, to repurchase approximately $21.1
million of the Notes. The Notes were repurchased in private transactions 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 remaining balance of Notes matured December 1, 2009 and, together
with accrued interest, was paid in full with cash on hand of $21.4 million and
$8.3 million in borrowings under the New Credit Agreement.





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.


- 20
-




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. As of December 31, 2009, the effective
interest rate was 1.73%.





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 allowed the Company to refinance the Notes with borrowings
under the facility at or prior to maturity and allows the Company to purchase up
to $5,000,000 of its common stock, each provided certain conditions are
met.





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 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 fee
would be payable.





On June
19, 2009, the Company entered into Amendment No. 1 to the New Credit Agreement,
which permitted the Company to make acquisitions up to $2.0 million in the
aggregate and subject to certain conditions, prior to the repayment of the Notes
on December 1, 2009.





On July
30, 2009, the Company entered into Amendment No. 2 to the New Credit Agreement,
which permitted the Company to make acquisitions up to $5.0 million in the
aggregate and subject to certain conditions, prior to the repayment of the Notes
on December 1, 2009.





At
December 31, 2009, the Company had $6.9 million outstanding under the New Credit
Agreement, leaving the Company with $27.0 million of availability under the
terms of the New Credit Agreement based on eligible accounts receivable and
inventories. At December 31, 2009, the Company was in compliance with all of its
financial covenants under the New Credit Agreement.


- 21
-




The
Company may experience periods of higher borrowings under the New Credit
Agreement due to the seasonal nature of its business cycle. If the Company 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 or may not be available to
the Company on acceptable terms.





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.





Long-Term
Financial Obligations and Other Commercial Commitments





The
following table summarizes the outstanding borrowings and long-term contractual
obligations of the Company at December 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
                  
                  $
                  6,924
                  
                  
                  $
                  24
                  
                  
                  $
                  6,900
                  
                  
                  $
                  –
                  
                  
                  $
                  –Operating
      leases
                  
                  
                  4,378
                  
                  
                  
                  2,868
                  
                  
                  
                  1,457
                  
                  
                  
                  53
                  
                  
                  
                  –Interest
      expense on long-term debt
                  
                  
                  3
                  
                  
                  
                  –
                  
                  
                  
                  3
                  
                  
                  
                  –
                  
                  
                  
                  –Total
      contractual cash obligations
                  
                  $
                  11,305
                  
                  
                  $
                  2,892
                  
                  
                  $
                  8,360
                  
                  
                  $
                  53
                  
                  
                  $
                  –





Purchase Commitments. The
Company currently has no purchase commitments other than purchase orders issued
in the ordinary course of business.





Long-Term Debt (including current
portion) and Advances Under Credit Facilities.As of December 31, 2009,
we had no Notes outstanding. The Company maintains the New Credit Agreement with
Bank of America, N.A. Outstanding advances under the New Credit Agreement
totaled $6.9 million as of December 31, 2009.





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. At December 31, 2009, the total future minimum
lease payments under various operating leases we are a party to totaled
approximately $4.4 million and are payable through fiscal 2014. As disclosed in
our Form 10-K for the year ended June 30, 2009, the leases on our three
facilities in Farmers Branch, Texas expire on December 31, 2010.  We may
sublease the facility located on Senlac Drive as this facility is no longer
being utilized.  We are currently discussing renewal options with the
landlords of our facilities on Diplomat Drive and Benchmark.  In addition,
we are reviewing the possibility of consolidating these two facilities into a
new facility.





Off-Balance Sheet Arrangements.We do not utilize off-balance sheet financing arrangements.





Subsequent
Events





On
December 17, 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 second quarter of fiscal 2010, which ended December 31,
2009. The quarterly cash dividend was paid on January 29, 2010, to all
stockholders of record on the close of business on January 12,
2010.


- 22
-




The
Company evaluated its December 31, 2009 condensed consolidated financial
statements for subsequent events through February 3, 2010, the date the
financial statements were issued, and is not aware of any other subsequent
events that would require recognition or disclosure in its condensed
consolidated financial statements.




Item 3. Quantitative and Qualitative Disclosures About Market
Risk.





Interest Rates. Changes in
interest rates would affect the fair value of our fixed rate debt instruments
but would not have an impact on our earnings or cash flow. At December 31, 2009,
we had no fixed rate debt instruments outstanding and $6.9 million of variable
rate debt outstanding. Our revolving credit facility carries a variable interest
rate. A fluctuation of 100 basis points in interest rates, which are tied to
LIBOR, would affect our pretax earnings and cash flows by $10 thousand for each
$1.0 million outstanding for 12 months, but would not affect the fair value of
the variable rate debt.





At
December 31, 2009, up to $27.0 million of variable rate borrowings were
available under our revolving credit facility based on eligible accounts
receivable and inventories. We may use derivative financial instruments, where
appropriate, to manage our interest rate risk. However, as a matter of policy,
we do not enter into derivative or other financial investments for trading or
speculative purposes. At December 31, 2009, the Company had no such derivative
financial instruments outstanding.





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.




- 23
-





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 December 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 December 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 December 31, 2009 that has materially affected, or
is reasonably likely to materially affect, the Company’s internal control over
financial reporting.


- 24
-





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 and domestic political and
economic conditions, competitive conditions in our industry, reduced product
demand, increased product costs, reductions in school, municipal, state and
national government budgets, financial market performance, the ability to obtain
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, 2009. 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.




- 25
-




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.





Item 4.   Submission of Matters to a Vote of Security
Holders.





As
contemplated in the Company’s proxy statement, which was mailed to stockholders
beginning on October 7, 2009, the Company’s stockholders re-elected Adam
Blumenfeld, Jeff Davidowitz, Richard Ellman, William M. Lockhart and William H.
Watkins, Jr. as directors of the Company, each to serve until the next annual
meeting of stockholders.  The Company’s stockholders also considered a
proposal to ratify the selection of Grant Thornton LLP as the independent
auditor of the Company for the fiscal year ending June 30, 2010 and a proposal
to approve the First Amendment to the Company’s Amended and Restated 2007
Long-Term Incentive Plan which increases the number of shares issuable under the
Company’s 2007 Long-Term Incentive Plan by 500,000 shares of the Company’s
common stock.





Each of
the foregoing proposals was approved at the Company’s annual meeting of
stockholders on November 19, 2009.  Each Board nominee received the
number of votes indicated below.





No. of Votes Cast
                          
                          
                          No. of Votes CastNominee for
                            Election
                          
                          
                          Against or
                            WithheldAdam
      Blumenfeld
                          
                          
                          10,358,076
                          
                          
                          
                          1,046,807Jeff
      Davidowitz
                          
                          
                          8,271,561
                          
                          
                          
                          3,133,321Richard
      Ellman
                          
                          
                          8,452,058
                          
                          
                          
                          2,952,824William
      M. Lockhart
                          
                          
                          8,193,032
                          
                          
                          
                          3,211,850William
      H. Watkins, Jr.
                          
                          
                          10,293,740
                          
                          
                          
                          1,111,143





With
respect to the approval of the proposal to ratify the selection of Grant
Thornton LLP, the votes for, against and abstentions, as well as broker
non-votes, were as follows:





Votes
      For
                    
                    
                    10,989,553Votes
      Against
                    
                    
                    414,649Abstentions
                    
                    
                    679Broker
      Non-Votes
                    
                    
                    –





With respect to the
approval to increase the number of shares issuable under the Company’s Amended
and Restated 2007 Long-Term Incentive Plan by 500,000 shares of the Company’s
common stock, the votes for, against and abstentions, as well as the broker
non-votes, were as follows:





Votes
      For
                  
                  
                  6,687,311Votes
      Against
                  
                  
                  3,593,486Abstentions
                  
                  
                  52,814Broker
      Non-Votes
                  
                  
                  1,071,272


- 26
-


Item 6.   Exhibits.





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





Exhibit
                                      Number
                                    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 the
      Registrant.
                                    
                                    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 the Registrant.
                                    
                                    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 the Registrant.
                                    
                                    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 the Registrant.
                                    
                                    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 the
      Registrant.
                                    
                                    Exhibit
      4.1 to the Registrant’s Annual Report on Form 10-K filed on September 13,
      2007.10.1
                                    First
      Amendment to the Sport Supply Group, Inc. Amended and Restated 2007
      Long-Term Incentive Plan, dated November 19, 2009.
                                    
                                    Exhibit 10.1
      to the Registrant’s Current Report on Form 8-K filed on November 20,
      2009.31.1
                                    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 E. 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 E. 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


- 27
-


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:
      February 3, 2010
                  /s/
      Adam BlumenfeldAdam
      Blumenfeld, Chief Executive Officer/s/
      John E. PittsJohn
      E. Pitts, Chief Financial Officer(Principal
      Financial and Accounting
Officer)




- 28
-




EXHIBIT INDEX




The
following exhibits are filed as part of this report:





Exhibit
                                    Number
                                  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 the
      Registrant.
                                  
                                  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 the Registrant.
                                  
                                  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 the Registrant.
                                  
                                  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 the Registrant.
                                  
                                  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 the
      Registrant.
                                  
                                  Exhibit
      4.1 to the Registrant’s Annual Report on Form 10-K filed on September 13,
      2007.10.1
                                  First
      Amendment to the Sport Supply Group, Inc. Amended and Restated 2007
      Long-Term Incentive Plan, dated November 19, 2009.
                                  
                                  Exhibit 10.1
      to the Registrant’s Current Report on Form 8-K filed on November 20,
      2009.31.1
                                  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 E. 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 E. 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