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 March 31, 2010





OR


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


For
the transition period from ______ to __________





Commission
File No. 1-15289





Sport
Supply Group, Inc.


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
                    22-2795073(State
      or Other Jurisdiction of
                    (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  o




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes  o      No  o





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





Large
accelerated filer o                                                                                    
Accelerated filer  o





Non-accelerated
filer   o                                                                                     Smaller
reporting company   þ


(Do not
check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act).                     Yes  o      No  þ





As of May
6, 2010, there were 12,520,926 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 March 31, 2010 and June 30,
      2009
                    1Condensed
      Consolidated Statements of Income for the three and nine months ended
      March 31, 2010 and 2009
                    2Condensed
      Consolidated Statements of Cash Flows for the nine months ended March 31,
      2010 and 2009
                    3Notes
      to Unaudited Condensed Consolidated Financial Statements
                    4Item
      2.
                    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations.
                    13Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    29Item
      4.
                    Controls
      and Procedures
                    30PART
      II:
                    OTHER
      INFORMATIONItem
      1.
                    Legal
      Proceedings
                    32Item
      1A.
                    Risk
      Factors
                    32Item
      6.
                    Exhibits
                    35SIGNATURES
                    37Exhibits








PART  I.
FINANCIAL INFORMATION


Item
1. Consolidated Financial Statements.





SPORT
SUPPLY GROUP, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)


(in
thousands, except share and per share amounts)





March
      31,
                    
                    
                    June
      30,2010
                    
                    
                    2009ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                    
                    $
                    2,191
                    
                    
                    $
                    10,743Accounts
      receivable, net of allowance for doubtful accounts of $1,576 and $1,457,
      respectively
                    
                    
                    37,240
                    
                    
                    
                    32,276Inventories
                    
                    
                    28,897
                    
                    
                    
                    33,872Current
      portion of deferred income taxes
                    
                    
                    4,375
                    
                    
                    
                    4,040Prepaid
      income taxes
                    
                    
                    302
                    
                    
                    
                    1,828Prepaid
      expenses and other current assets
                    
                    
                    2,196
                    
                    
                    
                    1,821Total
      current assets
                    
                    
                    75,201
                    
                    
                    
                    84,580PROPERTY
      AND EQUIPMENT, net of accumulated depreciation of $10,374 and $9,128,
      respectively
                    
                    
                    7,507
                    
                    
                    
                    8,504DEFERRED
      DEBT ISSUANCE COSTS, net of accumulated amortization of $59 and $1,823,
      respectively
                    
                    
                    97
                    
                    
                    
                    291INTANGIBLE
      ASSETS, net of accumulated amortization of $5,722 and $5,195,
      respectively
                    
                    
                    5,765
                    
                    
                    
                    6,226GOODWILL
                    
                    
                    54,121
                    
                    
                    
                    53,426OTHER
      ASSETS, net
                    
                    
                    80
                    
                    
                    
                    76Total
      assets
                    
                    $
                    142,771
                    
                    
                    $
                    153,103LIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                    
                    $
                    23,267
                    
                    
                    $
                    20,132Accrued
      liabilities
                    
                    
                    8,554
                    
                    
                    
                    7,602Dividends
      payable
                    
                    
                    314
                    
                    
                    
                    311Current
      portion of long-term debt
                    
                    
                    21
                    
                    
                    
                    28,892Total
      current liabilities
                    
                    
                    32,156
                    
                    
                    
                    56,937DEFERRED
      INCOME TAX LIABILITIES
                    
                    
                    4,336
                    
                    
                    
                    4,331OTHER
      LIABILITIES
                    
                    
                    531
                    
                    
                    
                    –NOTES
      PAYABLE AND OTHER LONG-TERM DEBT
                    
                    
                    3,000
                    
                    
                    
                    –Total
      liabilities
                    
                    
                    40,023
                    
                    
                    
                    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;12,624,552
      and 12,490,756 shares issued and12,520,926
      and 12,386,830 shares outstanding, respectively
                    
                    
                    126
                    
                    
                    
                    125Additional
      paid-in capital
                    
                    
                    69,186
                    
                    
                    
                    66,526Retained
      earnings
                    
                    
                    34,239
                    
                    
                    
                    25,987Treasury
      stock at cost, 103,626 and 103,926 shares, respectively
                    
                    
                    (803
                    )
                    
                    
                    (803
                    )Total
      stockholders' equity
                    
                    
                    102,748
                    
                    
                    
                    91,835Total
      liabilities and stockholders' equity
                    
                    $
                    142,771
                    
                    
                    $
                    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
                            
                            
                            Nine Months EndedMarch 31,
                            
                            
                            March 31,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Net
      sales
                            
                            $
                            65,539
                            
                            
                            $
                            63,761
                            
                            
                            $
                            198,539
                            
                            
                            $
                            190,513Cost
      of sales
                            
                            
                            41,849
                            
                            
                            
                            41,186
                            
                            
                            
                            126,915
                            
                            
                            
                            122,287Gross
      profit
                            
                            
                            23,690
                            
                            
                            
                            22,575
                            
                            
                            
                            71,624
                            
                            
                            
                            68,226Selling,
      general and administrative expenses
                            
                            
                            17,533
                            
                            
                            
                            15,998
                            
                            
                            
                            54,786
                            
                            
                            
                            51,523Merger
      related expenses
                            
                            
                            1,133
                            
                            
                            
                            –
                            
                            
                            
                            1,218
                            
                            
                            
                            2Operating
      profit
                            
                            
                            5,024
                            
                            
                            
                            6,577
                            
                            
                            
                            15,620
                            
                            
                            
                            16,701Other
      income (expense):Interest
      income
                            
                            
                            –
                            
                            
                            
                            2
                            
                            
                            
                            26
                            
                            
                            
                            118Interest
      expense
                            
                            
                            (57
                            )
                            
                            
                            (887
                            )
                            
                            
                            (933
                            )
                            
                            
                            (2,801
                            )Gain
      on early retirement of Notes
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            –
                            
                            
                            
                            1,443Other
      income
                            
                            
                            7
                            
                            
                            
                            19
                            
                            
                            
                            7
                            
                            
                            
                            19Total
      other expense, net
                            
                            
                            (50
                            )
                            
                            
                            (866
                            )
                            
                            
                            (900
                            )
                            
                            
                            (1,221
                            )Income
      before income taxes
                            
                            
                            4,974
                            
                            
                            
                            5,711
                            
                            
                            
                            14,720
                            
                            
                            
                            15,480Income
      tax provision
                            
                            
                            1,764
                            
                            
                            
                            2,201
                            
                            
                            
                            5,530
                            
                            
                            
                            5,857Net
      income
                            
                            $
                            3,210
                            
                            
                            $
                            3,510
                            
                            
                            $
                            9,190
                            
                            
                            $
                            9,623Weighted
      average number of shares outstanding:Basic
                            
                            
                            12,527,368
                            
                            
                            
                            12,444,198
                            
                            
                            
                            12,488,800
                            
                            
                            
                            12,438,882Diluted
                            
                            
                            12,922,303
                            
                            
                            
                            14,445,737
                            
                            
                            
                            13,833,103
                            
                            
                            
                            15,029,850Net
      income per share common stock – basic
                            
                            $
                            0.26
                            
                            
                            $
                            0.28
                            
                            
                            $
                            0.74
                            
                            
                            $
                            0.77Net
      income per share common stock – diluted
                            
                            $
                            0.25
                            
                            
                            $
                            0.26
                            
                            
                            $
                            0.70
                            
                            
                            $
                            0.68Dividends
      declared per share common stock
                            
                            $
                            0.025
                            
                            
                            $
                            0.050
                            
                            
                            $
                            0.075
                            
                            
                            $
                            0.075





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)


Nine Months EndedMarch 31,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                9,190
                
                
                $
                9,623Adjustments
      to reconcile net income to cash provided by operating
      activities:Provision
      for uncollectible accounts receivable
                
                
                730
                
                
                
                711Depreciation
      and amortization
                
                
                1,974
                
                
                
                2,120Amortization
      of deferred debt issuance costs
                
                
                204
                
                
                
                1,133Gain
      on early retirement of Notes
                
                
                –
                
                
                
                (1,443
                )Gain
      on disposals of property and equipment
                
                
                (8
                )
                
                
                –Deferred
      income taxes
                
                
                (330
                )
                
                
                78Stock-based
      compensation expense
                
                
                1,739
                
                
                
                853Changes
      in operating assets and liabilities (net of effects of
      acquisitions):Accounts
      receivable
                
                
                (5,152
                )
                
                
                (4,114
                )Inventories
                
                
                5,345
                
                
                
                1,777Prepaid
      expenses and other current assets
                
                
                (375
                )
                
                
                (1,160
                )Other
      assets, net
                
                
                (4
                )
                
                
                22Accounts
      payable
                
                
                3,135
                
                
                
                (807
                )Income
      taxes payable / prepaid income taxes
                
                
                1,526
                
                
                
                (1,592
                )Accrued
      liabilities
                
                
                935
                
                
                
                (4,044
                )Net
      cash provided by operating activities:
                
                
                18,909
                
                
                
                3,157CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                
                
                (436
                )
                
                
                (520
                )Proceeds
      from disposals of property and equipment
                
                
                62
                
                
                
                –Cash
      used in business acquisitions
                
                
                (1,192
                )
                
                
                –Net
      cash used in investing activities:
                
                
                (1,566
                )
                
                
                (520
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Retirement
      of long term debt
                
                
                (28,856
                )
                
                
                (19,701
                )Deferred
      debt issuance cost
                
                
                (10
                )
                
                
                (128
                )Proceeds
      from line of credit
                
                
                22,125
                
                
                
                36,773Payments
      on notes payable and line of credit
                
                
                (19,140
                )
                
                
                (36,103
                )Payment
      of dividends
                
                
                (936
                )
                
                
                (931
                )Tax
      benefit related to the exercise of stock options
                
                
                161
                
                
                
                249Proceeds
      from issuance of common stock
                
                
                761
                
                
                
                230Net
      cash used in financing activities:
                
                
                (25,895
                )
                
                
                (19,611
                )Net
      change in cash and cash equivalents
                
                
                (8,552
                )
                
                
                (16,974
                )Cash
      and cash equivalents, beginning of period
                
                
                10,743
                
                
                
                20,531Cash
      and cash equivalents, end of period
                
                $
                2,191
                
                
                $
                3,557SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash
      paid for interest
                
                $
                868
                
                
                $
                1,371Cash
      paid for income taxes
                
                $
                4,299
                
                
                $
                7,207





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.  Recent
Accounting Pronouncements:





In
February 2010, the Financial Accounting Standards Board issued Accounting
Standards Update No. 2010-09 which amends the guidance of Accounting Standards
Codification Topic 855, Subsequent Events.The
amendment removes the requirement for a Securities and Exchange Commission
(“SEC”)
registrant to disclose the date through which subsequent events are evaluated.
It did not change the accounting for or disclosure of events that occur after
the balance sheet date but before the financial statements are issued. This
amendment was effective upon issuance.





3.  Proposed
      Merger:





On March
15, 2010, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”)
with Sage Parent Company, Inc., a Delaware corporation (“Parent”), and Sage
Merger Company, Inc., a wholly-owned subsidiary of Parent (“Sub”), providing for
the merger of Sub with and into the Company, with the Company surviving the
merger (the “Merger”) as a
wholly-owned subsidiary of Parent.  Parent and Sub are affiliates of
ONCAP Investment Partners II L.P (“ONCAP”),.





At the
effective time of the Merger, each outstanding share of common stock of the
Company (other than treasury shares, shares held by Parent and Sub, shares with
respect to which dissenters rights are properly exercised and shares held by
certain persons that have entered into agreements to exchange their common stock
and options, as applicable, in the Company for equity of Parent) will be
cancelled and converted into the right to receive $13.55 per share in cash (the
“Merger
Consideration”).  At the effective time of the Merger, each
outstanding option to acquire shares of common stock of the Company (other than
options being exchanged for shares of the Parent’s common stock by certain
officers of the Company), whether vested or unvested, will be cancelled and
converted into the right to receive an amount in cash equal to the excess, if
any, of the Merger Consideration over the exercise price per share for each
share subject to the applicable option.  At the effective time of the
Merger, each unvested restricted share of the common stock of the Company
awarded under the Company’s stock incentive plan will be cancelled and converted
into the right to receive the Merger Consideration





The
Merger Agreement contains detailed representations, warranties and
covenants.  These representations, warranties and covenants were made
solely for purposes of the Merger Agreement and should not be relied upon by any
investor in the Company, nor should any investor rely upon any descriptions
thereof as characterizations of the actual state of facts or condition of the
Company, Parent, Sub, or any of their respective subsidiaries or
affiliates.  Investors in the Company are not third-party
beneficiaries under the Merger Agreement.


- 4
-





In
accordance with the Merger Agreement, the Company was entitled to solicit
alternative takeover proposals from third parties for a period of 30 days after
March 15, 2010 (which period could have been extended for an additional 15 days
for certain parties meeting certain additional requirements).  Since
no person submitted a bona fide written takeover proposal to the Company prior
to April 15, 2010, the “go-shop” period permitted by the Merger Agreement
ended.





After the
end of the “go-shop” period, the Company is subject to certain “no-shop”
restrictions on its abilities to solicit alternative takeover proposals from
third parties and to provide information to and engage in discussions with third
parties regarding alternative takeover proposals.  The no-shop
provision is subject to a “fiduciary-out” provision that allows the Board of
Directors of the Company (the “Board”) or the
Special Committee of the Board (the “Special Committee”)
under certain circumstances to change its recommendation to the Company’s
stockholders and terminate the Merger Agreement to enter into a definitive
agreement with respect to an alternative takeover proposal that is determined to
be superior to the Merger Agreement (subject to Parent’s rights to match the
alternative takeover proposal).





Consummation
of the Merger is subject to various customary closing conditions, including
adoption of the Merger Agreement by the holders of a majority of the outstanding
shares of the Company’s common stock.  The transaction is not subject
to any financing condition; however, Parent has the unilateral option to
terminate the Merger Agreement by paying the Company a termination fee of either
$6 million or $10 million (which is further described below).  To
support its obligations under the Merger Agreement, Parent has obtained equity
and debt financing commitments for the transactions contemplated by the Merger
Agreement.





The
Merger Agreement contains certain termination rights for the Company and Parent
as follows:





·
            The
      Company would be obligated to pay Parent a termination fee of $6 million
      (plus reimbursement of up to $1 million for certain reasonable
      out-of-pocket expenses) if:





(i)
            the
      Merger Agreement is terminated by either party in connection with an
      alternative takeover proposal that is determined to be superior to the
      Merger Agreement;





(ii)
            the
      Merger Agreement is terminated by Parent in response to (a) a change by
      the Board or the Special Committee of its recommendation in favor of the
      Merger (other than under certain circumstances), (b) the Board’s or the
      Special Committee’s failure to recommend to the Company’s stockholders
      that they approve the Merger Agreement, (c) a material breach of the
      “no-shop” provisions of the Merger Agreement by the Company or any of its
      officers, directors, employees, representatives or affiliates, (d) notice
      of a “superior company proposal” given by the Company to Parent, or (e)
      the Board’s or the Special Committee’s failure to publicly reaffirm its
      recommendation in favor of the Merger when required to do so;
      or





(iii)
            the
      Merger Agreement is terminated either because the Merger has not closed on
      or before September 11, 2010 or the approval of the Company’s stockholders
      has not been obtained, and the Company enters into an agreement with
      respect to, or consummates, a transaction constituting a takeover proposal
      of 50% or more of the Company within 101⁄2 months after the termination of
      the Merger Agreement.





·
            The
      Company would be obligated to pay Parent a termination fee of $6 million
      if the Merger Agreement is terminated by Parent in response to an uncured
      material breach by the Company of its representations, warranties and
      covenants in the Merger
Agreement.


- 5
-




·
            Parent
      would be obligated to pay the Company a termination fee of $10 million
      (plus reimbursement of up to $2 million for certain reasonable
      out-of-pocket expenses) if the Company terminates the Merger Agreement as
      a result of Parent failing to consummate the Merger within three business
      days after all of the conditions to Parent’s obligations to consummate the
      Merger are satisfied or waived and Parent’s failure to consummate the
      Merger is not due to a failure to receive the debt financing contemplated
      by the debt commitments that Sub received in connection with the
      Merger.





·
            Parent
      would be obligated to pay the Company a breakup fee of $6 million (plus
      reimbursement of up to $2 million for certain reasonable out-of-pocket
      expenses) if the Company terminates the Merger Agreement in response to an
      uncured material breach by Parent and Sub of their obligations under the
      financing covenant in the Merger
Agreement.





·
            Parent
      would be obligated to pay the Company a breakup fee of $6 million
      if:





(i)
            the
      Company terminates the Merger Agreement in response to a material breach
      by Parent and Sub of their representations, warranties and covenants under
      the Merger Agreement (other than a breach of their obligations under the
      financing covenant in the Merger Agreement);
or





(ii)
            the
      Company terminates the Merger Agreement as a result of Parent failing to
      consummate the Merger within three business days after all of the
      conditions to Parent’s obligation to consummate the Merger are satisfied
      or waived and the debt financing contemplated by the debt commitments that
      Sub received in connection with the Merger is unavailable to Parent (other
      than primarily because Parent and its affiliates fail to fund the equity
      financing contemplated by the Merger Agreement or the rollover
      participants fail to comply with their obligations under the relevant
      rollover agreements).





·
            Parent
      would be obligated to reimburse the Company for up to $2 million for
      certain reasonable out-of-pocket expenses if Parent terminates the Merger
      Agreement at a time when 10% or more of the holders of the Company’s
      common stock have validly made and not withdrawn demands for the appraisal
      of their shares pursuant to Section 262 of the Delaware General
      Corporation Law.





·
            The
      Company would be obligated to pay Parent a withdrawal fee of $10 million
      (plus reimbursement of up to $2 million for certain reasonable
      out-of-pocket expenses) if the Merger Agreement is terminated by Parent in
      response to the Board or the Special Committee changing its recommendation
      for the Merger (other than a change of recommendation in connection with a
      material favorable change to the business of the Company or a superior
      takeover proposal).





Parent is
entitled to seek specific performance against the Company in order to enforce
the Company’s obligations under the Merger Agreement and can also sue for
monetary damages if the Company willfully and maliciously breaches the Merger
Agreement.  The Company can sue for monetary damages if Parent or Sub
willfully and materially breaches the Merger Agreement; however, the Company’s
ability to recover for such damages is generally limited to its protections
under a limited guarantee provided by ONCAP, subject to certain limits (plus
interest and costs in certain circumstances), the highest of which would be $12
million.


- 6
-


The
Company continues to work with ONCAP to complete the Merger in a timely manner,
subject to satisfaction of the conditions set forth in the Merger
Agreement.





Merger
related expenses of $1.1 million for the three months ended March 31, 2010 and
$1.2 million for the nine months ended March 31, 2010 are primarily related to
legal and financial advisory fees and other expenses incurred in connection with
the Merger.





For
further information related to the Merger, see the Company’s Preliminary Proxy
Statement on Schedule 14A as filed with the SEC on April 12,
2010.  The foregoing description of the Merger Agreement is only a
summary, does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement, which is attached as Exhibit 2.1 to the
Company’s Current Report on Form 8-K as filed with the SEC on March 17,
2010.





4.  Net
Sales:





The
Company’s net sales to external customers are attributable to sales of sporting
goods equipment and soft good athletic apparel and footwear products (“soft goods”), as well
as freight, through the Company’s catalog and team dealer divisions. The
following table details the Company’s consolidated net sales by these product
groups and divisions for the three and nine months ended March 31, 2010 and
2009:





Three Months Ended March 31,2010
                  
                  
                  2009Catalog
                    Group
                  
                  
                  Team
                    Dealer
                  
                  
                  Total
                  
                  
                  Catalog
                    Group
                  
                  
                  Team
                    Dealer
                  
                  
                  Total(in
      thousands)Sporting
      goods equipment
                  
                  $
                  34,196
                  
                  
                  $
                  7,248
                  
                  
                  $
                  41,444
                  
                  
                  $
                  34,647
                  
                  
                  $
                  6,753
                  
                  
                  $
                  41,400Soft
      goods
                  
                  
                  5,117
                  
                  
                  
                  15,694
                  
                  
                  
                  20,811
                  
                  
                  
                  5,177
                  
                  
                  
                  13,772
                  
                  
                  
                  18,949Freight
                  
                  
                  2,397
                  
                  
                  
                  887
                  
                  
                  
                  3,284
                  
                  
                  
                  2,630
                  
                  
                  
                  782
                  
                  
                  
                  3,412Net
      sales
                  
                  $
                  41,710
                  
                  
                  $
                  23,829
                  
                  
                  $
                  65,539
                  
                  
                  $
                  42,454
                  
                  
                  $
                  21,307
                  
                  
                  $
                  63,761





Nine Months Ended March 31,2010
                  
                  
                  2009Catalog
                    Group
                  
                  
                  Team
                    Dealer
                  
                  
                  Total
                  
                  
                  Catalog
                    Group
                  
                  
                  Team
                    Dealer
                  
                  
                  Total(in
      thousands)Sporting
      goods equipment
                  
                  $
                  93,877
                  
                  
                  $
                  22,571
                  
                  
                  $
                  116,448
                  
                  
                  $
                  92,167
                  
                  
                  $
                  21,684
                  
                  
                  $
                  113,851Soft
      goods
                  
                  
                  8,925
                  
                  
                  
                  63,504
                  
                  
                  
                  72,429
                  
                  
                  
                  8,214
                  
                  
                  
                  58,182
                  
                  
                  
                  66,396Freight
                  
                  
                  6,511
                  
                  
                  
                  3,151
                  
                  
                  
                  9,662
                  
                  
                  
                  7,315
                  
                  
                  
                  2,951
                  
                  
                  
                  10,266Net
      sales
                  
                  $
                  109,313
                  
                  
                  $
                  89,226
                  
                  
                  $
                  198,539
                  
                  
                  $
                  107,696
                  
                  
                  $
                  82,817
                  
                  
                  $
                  190,513





5.  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.


- 7
-





Inventories
at March 31, 2010 and June 30, 2009 consisted of the following:





March 31, 2010
                  
                  
                  June 30, 2009(in
      thousands)Raw
      materials
                  
                  $
                  1,667
                  
                  
                  $
                  1,898Work
      in progress
                  
                  
                  139
                  
                  
                  
                  200Finished
      goods
                  
                  
                  27,091
                  
                  
                  
                  31,774Inventories
                  
                  $
                  28,897
                  
                  
                  $
                  33,872





6.  Allowance
for Doubtful Accounts:




Changes
in the Company’s allowance for doubtful accounts for the nine months ended March
31, 2010 and the fiscal year ended June 30, 2009, are as follows:





Nine Months Ended
                  
                  
                  Fiscal Year EndedMarch 31, 2010
                  
                  
                  June 30, 2009(in
      thousands)Balance
      at beginning of period
                  
                  $
                  1,457
                  
                  
                  $
                  1,320Provision
      for uncollectible accounts receivable
                  
                  
                  730
                  
                  
                  
                  851Accounts
      written off, net of recoveries
                  
                  
                  (611
                  )
                  
                  
                  (714
                  )Balance
      at end of period
                  
                  $
                  1,576
                  
                  
                  $
                  1,457





7.  Accrued
Liabilities:





Accrued
liabilities at March 31, 2010 and June 30, 2009 included the
following:





March 31, 2010
                  
                  
                  June 30, 2009(in
      thousands)Accrued
      compensation and benefits
                  
                  $
                  2,951
                  
                  
                  $
                  2,639Customer
      deposits
                  
                  
                  1,869
                  
                  
                  
                  1,582Taxes
      other than income taxes
                  
                  
                  1,534
                  
                  
                  
                  1,700Accrued
      legal and professional expenses
                  
                  
                  798
                  
                  
                  
                  236Other
                  
                  
                  1,402
                  
                  
                  
                  1,445Total
      accrued liabilities
                  
                  $
                  8,554
                  
                  
                  $
                  7,602





8.  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. 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.





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.


- 8
-


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.





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.


- 9
-


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 March
31, 2010, the Company had $3.0 million outstanding under the New Credit
Agreement, leaving the Company with $37.0 million of availability under the
terms of the New Credit Agreement. At March 31, 2010, the Company was in
compliance with all of its financial covenants under the New Credit
Agreement.





Notes
payable and other long-term debt at March 31, 2010 and June 30, 2009 consisted
of the following:





March 31, 2010
                  
                  
                  June 30, 2009(in
      thousands)New
      Credit Agreement
                  
                  $
                  3,000
                  
                  
                  $
                  –Notes
                  
                  
                  –
                  
                  
                  
                  28,856Other
      notes payable
                  
                  
                  21
                  
                  
                  
                  36Total
      notes payable
                  
                  
                  3,021
                  
                  
                  
                  28,892Less
      current portion
                  
                  
                  21
                  
                  
                  
                  (28,892
                  )Notes
      payable and other long-term debt
                  
                  $
                  3,000
                  
                  
                  $
                  –





As of
March 31, 2010, the New Credit Agreement is classified as a non-current
liability due to the February 8, 2012 maturity date.





9.  Income
Per Share:





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





For the Three Months Ended
                
                
                For the Nine Months EndedMarch 31,
                
                
                March 31,2010
                
                
                2009
                
                
                2010
                
                
                2009(in
      thousands except share and per share data)Numerator:Net
      income
                
                $
                3,210
                
                
                $
                3,510
                
                
                $
                9,190
                
                
                $
                9,623Effect
      of Notes
                
                
                –
                
                
                
                316
                
                
                
                524
                
                
                
                523Diluted
      income
                
                $
                3,210
                
                
                $
                3,826
                
                
                $
                9,714
                
                
                $
                10,146Denominator:Basic
      weighted average shares outstanding
                
                
                12,527,368
                
                
                
                12,444,198
                
                
                
                12,488,800
                
                
                
                12,438,882Add
      effect of:Stock
      options
                
                
                394,935
                
                
                
                31,846
                
                
                
                244,438
                
                
                
                74,119Notes
                
                
                –
                
                
                
                1,969,693
                
                
                
                1,099,865
                
                
                
                2,516,849Diluted
      weighted average shares outstanding
                
                
                12,922,303
                
                
                
                14,445,737
                
                
                
                13,833,103
                
                
                
                15,029,850Basic
      income per share
                
                $
                0.26
                
                
                $
                0.28
                
                
                $
                0.74
                
                
                $
                0.77Diluted
      income per share
                
                $
                0.25
                
                
                $
                0.26
                
                
                $
                0.70
                
                
                $
                0.68


- 10
-





For the
three months ended March 31, 2010 and 2009, stock options to purchase 168,500
and 1,374,174 shares, respectively, and for the nine months ended March 31, 2010
and 2009, stock options to purchase 373,491 and 1,098,066 shares, respectively,
were excluded in the computations of diluted income per share because their
effect was anti-dilutive due to their exercise prices being above the average
stock prices for the respective periods.





For the
three and nine months ended March 31, 2009, the assumed conversion of the Notes
into 1,969,693 and 2,516,849 shares, respectively, is included in the diluted
weighted average shares under the if-converted method of US GAAP. During the
nine months ended March 31, 2010, the assumed conversion of the Notes into
1,099,865 shares was dilutive and is included in the weighted average share
calculation above until their December 1, 2009 maturity date.




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 outstanding unvested restricted shares of its common stock in the basic
weighted average shares outstanding calculation. Adoption of this provision had
no effect on previously reported basic income per share for the three months
ended March 31, 2009 and reduced previously reported basic income per share for
the nine months ended March 31, 2009 by $0.01 to $0.77.





10.  Stockholders’
Equity:





Changes
in stockholders’ equity during the nine months ended March 31, 2010, were as
follows:





(in thousands)Stockholders’
      equity at June 30, 2009
                    
                    $
                    91,835Issuance
      of stock for cash
                    
                    
                    761Stock-based
      compensation
                    
                    
                    1,739Tax
      benefit related to the exercise of stock options
                    
                    
                    161Net
      income
                    
                    
                    9,190Dividends
      declared
                    
                    
                    (938
                    )Stockholders’
      equity at March 31, 2010
                    
                    $
                    102,748





11.   Legal
      Proceedings:





On March
15, 2010, Waterford Township Police & Fire Retirement System filed a
purported class-action lawsuit against the Company and the Board of Directors in
the County Court of the State of Texas, Dallas County, captioned Waterford Township Police & Fire
Retirement System v. Sport Supply Group Inc., et al. (Cause No.
CC-10-01793-B). The plaintiff filed the action on its own behalf and on behalf
of all others similarly situated stockholders of the Company, excluding the
defendants and their affiliates. The plaintiff claims to have been a stockholder
of the Company at all relevant times, and alleges that the Company’s directors
breached their fiduciary duties to the Company’s public stockholders in
connection with the proposed acquisition of the Company by an affiliate of ONCAP
by, among other things, failing to maximize shareholder value and failing to
disclose all material information that would permit the Company’s stockholders
to cast a duly informed vote on the acquisition. The petition further alleges
that the Company and affiliates of ONCAP aided and abetted the Company’s
directors’ breach of fiduciary duties. The plaintiff seeks, among other things:
(1) a declaration that the action is properly maintainable as a class-action;
(2) to enjoin the consummation of the proposed acquisition of the Company; (3)
the implementation of a constructive trust, in favor of the plaintiff, upon any
benefits improperly received by defendants as a result of their allegedly
unlawful conduct; (4) an award of attorneys and other fees incurred by the
plaintiff in connection with the lawsuit; and (5) such other equitable relief to
which the plaintiff is deemed justly entitled.  The suit was amended
on April 26, 2010 to add CBT Holdings, LLC, ONCAP Management Partners, L.P.,
Terrence M. Babilla, Kurt Hagen, Tevis Martin and John Pitts as defendants and
raise new allegations concerning the Company’s preliminary proxy statement filed
in connection with the Merger.  Additional lawsuits pertaining to the
Merger could be filed in the future.


- 11
-


The
Company is a party to various other 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.





12.  Business
      Combinations:





On July
30, 2009, the Company purchased certain assets of Har-Bell Athletic Goods
located in Missouri. On March 24, 2010, the Company purchased certain assets of
Coach’s Sports Corner located in Ohio. These purchases expanded the Company’s
road sales force in the respective geographic regions. On April 26, 2010, the
Company announced that it had acquired certain operating assets of Greg Larson
Sports located in Minnesota. The Company paid $3.4 million in the aggregate for
these asset purchases during fiscal year 2010. These acquisitions, individually
or in the aggregate, are not material per Accounting Standards Codification
Topic 805, Business
Combinations.





13.  Subsequent
      Events:





On March
26, 2010, the Company announced that its Board approved and declared a quarterly
cash dividend of $0.025 per share on the Company's common stock for the third
quarter of fiscal 2010, which ended March 31, 2010. The quarterly cash dividend
was paid on April 16, 2010, to all stockholders of record on the close of
business on April 6, 2010.





On April
26, 2010, the Company announced that it had acquired certain operating assets of
Greg Larson Sports located in Minnesota. This transaction, individually or when
aggregated with the Company’s other acquisitions, is not material per Accounting
Standards Codification Topic 805, Business
Combinations.





The
Company evaluated its March 31, 2010 condensed consolidated financial statements
for subsequent events through 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.


- 12
-





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.





Proposed
Merger





On March
15, 2010, we entered into an Agreement and Plan of Merger (the “Merger Agreement”)
with Sage Parent Company, Inc., a Delaware corporation (“Parent”), and Sage
Merger Company, Inc., a wholly-owned subsidiary of Parent (“Sub”), providing for
the merger of Sub with and into the Company, with the Company surviving the
merger (the “Merger”) as a
wholly-owned subsidiary of Parent.  Parent and Sub are affiliates of
ONCAP Investment Partners II L.P (“ONCAP”).


- 13
-





At the
effective time of the Merger, each outstanding share of our common stock (other
than treasury shares, shares held by Parent and Sub, shares with respect to
which dissenters rights are properly exercised and shares held by certain
persons that have entered into agreements to exchange their common stock and
options, as applicable, in the Company for equity of Parent) will be cancelled
and converted into the right to receive $13.55 per share in cash (the “Merger
Consideration”).  At the effective time of the Merger, each
outstanding option to acquire shares of our common stock (other than options
being exchanged for shares of the Parent’s common stock by certain officers of
the Company), whether vested or unvested, will be cancelled and converted into
the right to receive an amount in cash equal to the excess, if any, of the
Merger Consideration over the exercise price per share for each share subject to
the applicable option.  At the effective time of the Merger, each
unvested restricted share of our common stock awarded under our stock incentive
plan will be cancelled and converted into the right to receive the Merger
Consideration.





The
Merger Agreement contains detailed representations, warranties and
covenants.  These representations, warranties and covenants were made
solely for purposes of the Merger Agreement and should not be relied upon by any
investor in the Company, nor should any investor rely upon any descriptions
thereof as characterizations of the actual state of facts or condition of the
Company, Parent, Sub, or any of their respective subsidiaries or
affiliates.  Investors in the Company are not third-party
beneficiaries under the Merger Agreement.





In
accordance with the Merger Agreement, we were entitled to solicit alternative
takeover proposals from third parties for a period of 30 days after March 15,
2010 (which period could have been extended for an additional 15 days for
certain parties meeting certain additional requirements).  Since no
person submitted a bona fide written takeover proposal to the Company prior to
April 15, 2010, the “go-shop” period permitted by the Merger Agreement
ended.





After the
end of the “go-shop” period, we are subject to certain “no-shop”
restrictions on our ability to solicit alternative takeover proposals from third
parties and to provide information to and engage in discussions with third
parties regarding alternative takeover proposals.  The no-shop
provision is subject to a “fiduciary-out” provision that allows our Board of
Directors (the “Board”) or the
Special Committee of our Board (the “Special Committee”)
under certain circumstances to change its recommendation to our stockholders and
terminate the Merger Agreement to enter into a definitive agreement with respect
to an alternative takeover proposal that is determined to be superior to the
Merger Agreement (subject to Parent’s rights to match the alternative takeover
proposal).





Consummation
of the Merger is subject to various customary closing conditions,
including adoption of the Merger Agreement by the holders of a majority of
the outstanding shares of our common stock.  The transaction is not
subject to any financing condition; however, Parent has the unilateral option to
terminate the Merger Agreement by paying us a termination fee of either $6
million or $10 million (which is further described below).  To support
its obligations under the Merger Agreement, Parent has obtained equity and debt
financing commitments for the transactions contemplated by the Merger
Agreement.





The
Merger Agreement contains certain termination rights for us and Parent as
follows:





·
            We
      would be obligated to pay Parent a termination fee of $6 million (plus
      reimbursement of up to $1 million for certain reasonable out-of-pocket
      expenses) if:





(i)
            the
      Merger Agreement is terminated by either party in connection with an
      alternative takeover proposal that is determined to be superior to the
      Merger Agreement;


- 14
-


(ii)
            the
      Merger Agreement is terminated by Parent in response to (a) a change by
      the Board or the Special Committee of its recommendation in favor of the
      Merger (other than under certain circumstances), (b) the Board’s or the
      Special Committee’s failure to recommend to our stockholders that they
      approve the Merger Agreement, (c) a material breach of the “no-shop”
      provisions of the Merger Agreement by us or any of our officers,
      directors, employees, representatives or affiliates, (d) notice of a
      “superior company proposal” given by us to Parent, or (e) the Board’s or
      the Special Committee’s failure to publicly reaffirm its recommendation in
      favor of the Merger when required to do so;
or





(iii)
            the
      Merger Agreement is terminated either because the Merger has not closed on
      or before September 11, 2010 or the approval of our stockholders has not
      been obtained, and we enter into an agreement with respect to, or
      consummate, a transaction constituting a takeover proposal of 50% or more
      of the Company within 101⁄2 months after the termination of the Merger
      Agreement.





·
            We
      would be obligated to pay Parent a termination fee of $6 million if the
      Merger Agreement is terminated by Parent in response to an uncured
      material breach by us of our representations, warranties and covenants in
      the Merger Agreement.




·
            Parent
      would be obligated to pay us a termination fee of $10 million (plus
      reimbursement of up to $2 million for certain reasonable out-of-pocket
      expenses) if we terminate the Merger Agreement as a result of Parent
      failing to consummate the Merger within three business days after all of
      the conditions to Parent’s obligations to consummate the Merger are
      satisfied or waived and Parent’s failure to consummate the Merger is not
      due to a failure to receive the debt financing contemplated by the debt
      commitments that Sub received in connection with the
    Merger.





·
            Parent
      would be obligated to pay us a breakup fee of $6 million (plus
      reimbursement of up to $2 million for certain reasonable out-of-pocket
      expenses) if we terminate the Merger Agreement in response to an uncured
      material breach by Parent and Sub of their obligations under the financing
      covenant in the Merger Agreement.





·
            Parent
      would be obligated to pay us a breakup fee of $6 million
    if:





(i)
            we
      terminate the Merger Agreement in response to a material breach by Parent
      and Sub of their representations, warranties and covenants under the
      Merger Agreement (other than a breach of their obligations under the
      financing covenant in the Merger Agreement);
or





(ii)
            we
      terminate the Merger Agreement as a result of Parent failing to consummate
      the Merger within three business days after all of the conditions to
      Parent’s obligation to consummate the Merger are satisfied or waived and
      the debt financing contemplated by the debt commitments that Sub received
      in connection with the Merger is unavailable to Parent (other than
      primarily because Parent and its affiliates fail to fund the equity
      financing contemplated by the Merger Agreement or the rollover
      participants fail to comply with their obligations under the relevant
      rollover agreements).


- 15
-


·
            Parent
      would be obligated to reimburse us for up to $2 million for certain
      reasonable out-of-pocket expenses if Parent terminates the Merger
      Agreement at a time when 10% or more of the holders of our common stock
      have validly made and not withdrawn demands for the appraisal of their
      shares pursuant to Section 262 of the Delaware General Corporation
      Law.





·
            We
      would be obligated to pay Parent a withdrawal fee of $10 million (plus
      reimbursement of up to $2 million for certain reasonable out-of-pocket
      expenses) if the Merger Agreement is terminated by Parent in response to
      the Board or the Special Committee changing its recommendation for the
      Merger (other than a change of recommendation in connection with a
      material favorable change to the business of the Company or a superior
      takeover proposal).





Parent is
entitled to seek specific performance against us in order to enforce our
obligations under the Merger Agreement and can also sue for monetary damages if
we willfully and maliciously breach the Merger Agreement.  We can sue
for monetary damages if Parent or Sub willfully and materially breaches the
Merger Agreement; however, our ability to recover for such damages is generally
limited to its protections under a limited guarantee provided by ONCAP, subject
to certain limits (plus interest and costs in certain circumstances), the
highest of which would be $12 million.





We
continue to work with ONCAP to complete the Merger in a timely manner, subject
to satisfaction of the conditions set forth in the Merger
Agreement.





For
further information related to the Merger, see our Preliminary Proxy Statement
on Schedule 14A as filed with the Securities and Exchange Commission (the “SEC”) on April 12,
2010.  The foregoing description of the Merger Agreement is only a
summary, does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement, which is attached as Exhibit 2.1 to our
Current Report on Form 8-K as filed with the SEC on March 17, 2010.





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. While the economy
appears to be improving, the United States continues to experience challenging
economic times. The worsened economy and turbulent financial and credit markets
over the past couple of years have resulted in 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 recovers from the
recent recession.





As part
of our strategy to increase our market penetration and limit the possible impact
the current economy may have on our business, we have acquired four businesses
that have been integrated into our team dealer operations through March 31,
2010. On June 24, 2009, we purchased the assets of Webster’s Team Sports located
in Florida. On June 30, 2009, we acquired certain assets of Doerner’s Team
Sports Division located in Indiana. On July 30, 2009, we acquired certain assets
of Har-Bell Athletic Goods located in Missouri. On March 24, 2010, we acquired
certain assets of Coach’s Sports Corner located in Ohio. These transactions
increased our road sales force in the respective geographic regions by 20.
Subsequent to March 31, 2010, we acquired certain operating assets of Greg
Larson Sports located in Minnesota which will be integrated into our catalog
operations during the fourth quarter of our fiscal year.





As we
report the results of our third quarter ended March 31, 2010 and move into our
fourth quarter ending June 30, 2010, institutional sporting goods customers and
suppliers continue to face adverse economic pressures. For the three and nine
months ended March 31, 2010, after factoring in our fiscal 2010 merger related
expenses and the fiscal 2009 reductions in our sales and use tax reserves, we
are reporting year-over-year revenue, gross profit and gross profit percentage
increases.


- 16
-


·
            Net
      sales for the third quarter ended March 31, 2010 increased $1.8
      million, or 2.8%, to $65.5 million. Net sales for the nine months ended
      March 31, 2010 increased $8.0 million, or 4.2%, to $198.5 million.
      The net sales increases were primarily attributable to the
      acquisition of four team dealer operations which were fully integrated
      into our operations prior to March 31, 2010, increased penetration into
      the government sector and our business to consumer internet
      business.




·
            Gross
      profit for the third quarter ended March 31, 2010 increased $1.1 million,
      or 4.9%, to $23.7 million. Gross profit for the nine months ended March
      31, 2010 increased $3.4 million, or 5.0%, to $71.6 million. As a
      percentage of net sales, gross profit increased 70 basis points to 36.1%
      for the three months ended March 31, 2010. Our gross profit percentage
      increase is primarily the result of fewer special discounts than those
      offered in the three months ended March 31, 2009. For the nine months
      ended March 31, 2010, gross profit as a percentage of net sales increased
      30 basis points to 36.1%.




·
            Operating
      profit for the third quarter ended March 31, 2010 decreased $1.6 million
      or 23.6%, to $5.0 million. Operating profit for the nine months ended
      March 31, 2010 decreased $1.1 million, or 6.5%, to $15.6 million. The
      decrease in operating profit is primarily due to $1.1 million of legal,
      professional and other expenses incurred in the three months ended March
      31, 2010 related to the Merger, as well as a $0.9 million decrease in our
      reserves for unpaid sales and use tax incurred during the three months
      ended March 31, 2009 related to a tax assessment that was settled in
      February 2009.




·
            Net
      income for the third quarter ended March 31, 2010 decreased $0.3 million,
      or 8.5%, to $3.2 million. Net income for the nine months ended March 31,
      2010 decreased $0.4 million, or 4.5%, to $9.2 million. The primary
      contributor to the reduction in net income is the $1.1 million of legal,
      professional and other expenses incurred in the three months ended March
      31, 2010 related to the Merger. Additionally, we recognized a $0.9 million
      reduction in our sales and use tax reserves related to the settlement of a
      tax assessment during the three months ended March 31, 2009. We also
      recognized a $1.4 million gain on the early retirement of the Notes, as
      defined below, during the nine months ended March 31,
      2009.




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.





We intend
to navigate the present general economic downturn by remaining focused on
improving areas within our control and on achieving further progress on four
primary goals: maintaining a strong balance sheet; making strategic acquisitions
to increase our market penetration; 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 nine months, among other things, we:
(i) paid off the remaining $28.9 million of Notes, reducing our outstanding debt
by $25.9 million and reducing our effective borrowing rate from 5.75% to 1.5% as
of March 31, 2010; (ii) fully integrated four team dealer operations into
our operations as well as acquired an additional catalog operation during April
2010; and (iii) implemented additional marketing programs designed to
address our institutional customers’ needs and affordability concerns. Our key
business strategies and plans for the remainder of fiscal 2010 will continue to
reflect these priorities.


- 17
-





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 $0.2
million and $0.6 million for the three and nine months ended March 31, 2010 and
$0.2 million and $0.6 million for the three and nine months ended March 31,
2009, respectively.  Inventory adjustments are due to the identification of
additional excess and obsolete inventories during the nine months ended March
31, 2010. We evaluate our inventory value each quarter based on the criteria
discussed above.




A 10%
change in our inventory write-downs for the nine months ended March 31, 2010
would result in a change in our inventories of approximately $60 thousand and a
change in pre-tax earnings by the same amount. Our adjustments are estimates,
which could vary significantly, either favorably or unfavorably, from actual
results if future economic conditions, consumer demand and competitive
environments differ from our expectations. At this time, we do not believe there
is a reasonable likelihood there will be a material change in the future
estimates or assumptions that we use to determine our inventory
adjustments.




Allowance for Doubtful
Accounts. We evaluate the 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 March
31, 2010, our total allowance for doubtful accounts increased $0.1 million to
$1.6 million as compared to $1.5 million at June 30, 2009, but decreased to
approximately 4.1% of our March 31, 2010 accounts receivable as compared to 4.3%
of our June 30, 2009 accounts receivable. This decrease as a percent of accounts
receivable is primarily attributable to the normal cyclical growth in our
current accounts receivable balance at the end of our third fiscal quarter. We
evaluate our allowance for doubtful accounts each quarter based on the criteria
discussed above.


- 18
-


A 10%
change in our allowance for doubtful accounts at March 31, 2010 would result in
a change in reserves of approximately $158 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 with US 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 with US GAAP. No impairment of intangible
assets was required for the year ended June 30, 2009 or for the nine months
ended March 31, 2010.





Goodwill
represents the excess of the purchase price paid and liabilities assumed over
the estimated fair market value of assets acquired and identifiable intangible
assets. Goodwill is tested for impairment annually as of March 31, or when there
is a triggering event, in accordance with US GAAP. No impairment of goodwill was
required for the year ended June 30, 2009 or for the nine months ended March 31,
2010.





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, 2009 or for the nine months ended March 31,
2010.


- 19
-





Consolidated
Results of Operations





Results
for the three and nine months ended March 31, 2010 are not necessarily
indicative of results for the entire fiscal year. The following table compares
selected financial data from the Condensed Consolidated Statements of Income for
the three and nine months ended March 31, 2010 and 2009 (dollars in thousands,
except per share amounts):


For the Three Months Ended March 31,
                      
                      
                      For the Nine Months Ended March 31,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Dollars
                      
                      
                      Percent
                      
                      
                      Dollars
                      
                      
                      Percent
                      
                      
                      Dollars
                      
                      
                      Percent
                      
                      
                      Dollars
                      
                      
                      PercentNet
      sales
                      
                      $
                      65,539
                      
                      
                      
                      100.0
                      %
                      
                      $
                      63,761
                      
                      
                      
                      100.0
                      %
                      
                      $
                      198,539
                      
                      
                      
                      100.0
                      %
                      
                      $
                      190,513
                      
                      
                      
                      100.0
                      %Cost
      of sales (1)
                      
                      
                      41,849
                      
                      
                      
                      63.9
                      %
                      
                      
                      41,186
                      
                      
                      
                      64.6
                      %
                      
                      
                      126,915
                      
                      
                      
                      63.9
                      %
                      
                      
                      122,287
                      
                      
                      
                      64.2
                      %Gross
      profit
                      
                      
                      23,690
                      
                      
                      
                      36.1
                      %
                      
                      
                      22,575
                      
                      
                      
                      35.4
                      %
                      
                      
                      71,624
                      
                      
                      
                      36.1
                      %
                      
                      
                      68,226
                      
                      
                      
                      35.8
                      %Selling,
      generaland
      administrative expenses (2)
                      
                      
                      17,533
                      
                      
                      
                      26.8
                      %
                      
                      
                      15,998
                      
                      
                      
                      25.1
                      %
                      
                      
                      54,786
                      
                      
                      
                      27.6
                      %
                      
                      
                      51,523
                      
                      
                      
                      27.0
                      %Merger
      related expenses (3)
                      
                      
                      1,133
                      
                      
                      
                      1.7
                      %
                      
                      
                      –
                      
                      
                      
                      –
                      
                      
                      
                      1,218
                      
                      
                      
                      0.6
                      %
                      
                      
                      2
                      
                      
                      
                      –Operating
      profit
                      
                      
                      5,024
                      
                      
                      
                      7.6
                      %
                      
                      
                      6,577
                      
                      
                      
                      10.3
                      %
                      
                      
                      15,620
                      
                      
                      
                      7.9
                      %
                      
                      
                      16,701
                      
                      
                      
                      8.8
                      %Other
      expense (4)
                      
                      
                      50
                      
                      
                      
                      0.1
                      %
                      
                      
                      866
                      
                      
                      
                      1.4
                      %
                      
                      
                      900
                      
                      
                      
                      0.5
                      %
                      
                      
                      1,221
                      
                      
                      
                      0.6
                      %Income
      tax provision
                      
                      
                      1,764
                      
                      
                      
                      2.7
                      %
                      
                      
                      2,201
                      
                      
                      
                      3.5
                      %
                      
                      
                      5,530
                      
                      
                      
                      2.8
                      %
                      
                      
                      5,857
                      
                      
                      
                      3.1
                      %Net
      income
                      
                      $
                      3,210
                      
                      
                      
                      4.9
                      %
                      
                      $
                      3,510
                      
                      
                      
                      5.5
                      %
                      
                      $
                      9,190
                      
                      
                      
                      4.6
                      %
                      
                      $
                      9,623
                      
                      
                      
                      5.1
                      %Net
      income per share – basic
                      
                      $
                      0.26
                      
                      
                      
                      
                      
                      
                      $
                      0.28
                      
                      
                      
                      
                      
                      
                      $
                      0.74
                      
                      
                      
                      
                      
                      
                      $
                      0.77Net
      income per share - diluted
                      
                      $
                      0.25
                      
                      
                      
                      
                      
                      
                      $
                      0.26
                      
                      
                      
                      
                      
                      
                      $
                      0.70
                      
                      
                      
                      
                      
                      
                      $
                      0.68





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, non-merger related
      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)
            Merger
      related expenses include legal, financial advisory and Special Committee
      fees and other expenses related to the Merger and the acquisition of
      several team dealer operations.


4)
            Other
      expense includes interest expense and debt acquisition costs, net of
      interest income and gains realized from the early retirement of
      Notes.





Three
Months Ended March 31, 2010 Compared to Three Months Ended March 31,
2009





Net Sales. Net sales for the
quarter ended March 31, 2010 were $65.5 million compared to $63.7 million for
the quarter ended March 31, 2009, an increase of $1.8 million, or 2.8%. The
following schedule provides the components of net sales:


- 20
-





For the Three Months Ended
                    March 31,2010
                  
                  
                  2009(in
      thousands)Sporting
      goods equipment
                  
                  $
                  41,444
                  
                  
                  $
                  41,400Soft
      goods
                  
                  
                  20,811
                  
                  
                  
                  18,949Freight
                  
                  
                  3,284
                  
                  
                  
                  3,412Net
      sales
                  
                  $
                  65,539
                  
                  
                  $
                  63,761





Sales of
soft goods increased 9.8% for the quarter ended March 31, 2010 as compared to
the quarter ended March 31, 2009. The increase is primarily due to the success
of integrating the four new team dealer operations, continued penetration of the
institutional market with all-school deals and an increase in our sales and
service staff. Sporting goods equipment sales for the quarter ended March 31,
2010 remained flat as compared to the quarter ended March 31, 2009. Freight
billed to our customers declined 3.8% 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 recovers from the recent
recession.





Gross Profit. Gross profit
for the quarter ended March 31, 2010 increased $1.1 million to $23.7 million, or
36.1% of net sales, compared with $22.6 million, or 35.4% of net sales, for the
quarter ended March 31, 2009. Sporting goods equipment and soft goods gross
profit as a percentage of net sales increased 0.3% and 2.2%, respectively, for
the quarter ended March 31, 2010 compared to the quarter ended March 31, 2009.
Freight costs were $1.1 million and $1.0 million, respectively, in excess of
freight revenues for the quarter ended March 31, 2010 compared to the quarter
ended March 31, 2009. 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
recovers from the recent recession.





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





For the Three Months Ended March 31,2010
                    
                    
                    2009Cost 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
                    
                    $
                    24,126
                    
                    
                    
                    41.8
                    %
                    
                    $
                    24,229
                    
                    
                    
                    41.5
                    %
                    
                    
                    0.3
                    %Soft
      goods
                    
                    
                    13,386
                    
                    
                    
                    35.7
                    %
                    
                    
                    12,592
                    
                    
                    
                    33.5
                    %
                    
                    
                    2.2
                    %Freight
      costs
                    
                    
                    4,337
                    
                    
                    
                    
                    
                    
                    
                    4,365Cost
      of sales
                    
                    $
                    41,849
                    
                    
                    
                    36.1
                    %
                    
                    $
                    41,186
                    
                    
                    
                    35.4
                    %
                    
                    
                    0.7
                    %





The
acquisition and manufacturing costs of inventories, the cost of shipping and
handling (freight costs) and any decrease in the value of inventories due to
obsolescence or lower of cost or market adjustments are included in the
determination of cost of sales. Cost of sales for the quarter ended March 31,
2010 was $41.8 million, or 63.9% of net sales, compared to $41.2 million, or
64.6% of net sales, for the quarter ended March 31, 2009.


- 21
-





Selling, General and Administrative
Expenses. Selling, general and administrative (“SG&A”) expenses
for the quarter ended March 31, 2010 were $17.5 million, or 26.8% of net sales,
compared with $16.0 million, or 25.1% of net sales, for the quarter ended March
31, 2009. The increase in SG&A expenses was primarily attributable $0.3
million of SG&A expenses related to the increased operating costs from the
June 2009 and July 2009 acquisitions of three team dealer operations and a $0.5
million increase in performance bonus awards related to meeting established
financial targets. Additionally, other tax expense for the quarter ended March
31, 2009 was reduced by $0.9 million due to the settlement of a tax assessment,
which reduced a previously established reserve.





Merger Related Expenses.
Merger related expenses for the quarter ended March 31, 2010 were $1.1 million,
or 1.7% of net sales. There were no merger related expenses incurred in the
comparable period for the quarter ended March 31, 2009. The merger related
expenses are primarily related to the expenses incurred as a result of the
Merger as discussed above and consist primarily of legal, financial advisory and
Special Committee fees.





Operating Profit. Operating
profit for the quarter ended March 31, 2010 decreased 23.6% to $5.0 million, or
7.7% of net sales, compared to $6.6 million, or 10.3% of net sales, for the
quarter ended March 31, 2009. The $1.6 million decrease in operating profit was
attributable to the increases in SG&A expenses of $1.5 million and merger
related expenses of $1.1 million being partially offset by increased gross
profit of $1.1 million.





Other Expense. Other expense
was $0.1 million for the quarter ended March 31, 2010, compared to $0.9 million
for the quarter ended March 31, 2009. The table below shows the components of
other expense.


For the Three Months Ended
                        March 31,2010
                      
                      
                      2009
                      
                      
                      Change(in
      thousands)Interest
      income
                      
                      $
                      –
                      
                      
                      $
                      2
                      
                      
                      $
                      (2
                      )Interest
      expense
                      
                      
                      (44
                      )
                      
                      
                      (440
                      )
                      
                      
                      396Amortization
      of debt issuance costs
                      
                      
                      (13
                      )
                      
                      
                      (125
                      )
                      
                      
                      112Accelerated
      amortization of debt issuance costs due to the early termination of the
      Revolving Facility
                      
                      
                      –
                      
                      
                      
                      (322
                      )
                      
                      
                      322Other
      income
                      
                      
                      7
                      
                      
                      
                      19
                      
                      
                      
                      (12
                      )Total
      other expense
                      
                      $
                      (50
                      )
                      
                      $
                      (866
                      )
                      
                      $
                      816





During
the three months ended March 31, 2009, we terminated the Revolving Facility, as
defined below, before its term had expired and accordingly expensed the
remaining $0.3 million of related unamortized debt issuance costs.





Interest
expense decreased $0.4 million, or 90.0%, due to the December 1, 2009 maturity
of the Notes. The Notes accrued interest at 5.75%. At March 31, 2010, we had
$3.0 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 1.5% as of March 31,
2010.





Income Taxes. Income tax
expense for the quarter ended March 31, 2010 was $1.8 million, approximately
35.5% of our income before income taxes, compared to income tax expense of $2.2
million, approximately 38.5% of our income before income taxes, for the quarter
ended March 31, 2009. The decrease in tax expense is primarily due to the
decrease in operating profit before tax. The effective tax rate for the quarter
ended March 31, 2010 was lower due to a benefit realized related to our state
taxes payable.


- 22
-


Net Income. Net income for
the quarters ended March 31, 2010 and 2009 was $3.2 million and $3.5 million,
respectively.





Nine
Months Ended March 31, 2010 Compared to Nine Months Ended March 31,
2009





Net Sales. Net sales for the
nine months ended March 31, 2010 were $198.5 million compared to $190.5 million
for the nine months ended March 31, 2009, an increase of $8.0 million, or 4.2%.
The following schedule provides the components of net sales:


For the Nine Months Ended
                      March 31,2010
                    
                    
                    2009(in
      thousands)Sporting
      goods equipment
                    
                    $
                    116,448
                    
                    
                    $
                    113,851Soft
      goods
                    
                    
                    72,429
                    
                    
                    
                    66,396Freight
                    
                    
                    9,662
                    
                    
                    
                    10,266Net
      sales
                    
                    $
                    198,539
                    
                    
                    $
                    190,513





Sporting
goods equipment sales and the sales of soft goods increased 2.3% and 9.1%,
respectively, for the nine months ended March 31, 2010 as compared to the nine
months ended March 31, 2009. The increases are primarily due to the integration
of four new team dealer operations, increased penetration into the government
sector and the business to consumer internet business. Freight billed to our
customers declined 5.9% 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 recovers from the recent recession.





Gross Profit. Gross profit
for the nine months ended March 31, 2010 increased $3.4 million to $71.6
million, or 36.1% of net sales, compared with $68.2 million, or 35.8% of net
sales, for the nine months ended March 31, 2009. Soft goods gross profit as a
percentage of net sales increased 0.6% for the nine months ended March 31, 2010
compared to the nine months ended March 31, 2009. Freight costs were $2.9
million and $2.8 million, respectively, in excess of freight revenues for the
nine months ended March 31, 2010 compared to the nine months ended March 31,
2009. The increase in our gross profit percentages for the nine months ended
March 31, 2010 was primarily a result of offering fewer product discounts. 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 recovers from the recent
recession.





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





For the Nine Months Ended March 31,2010
                  
                  
                  2009Cost 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
                  
                  $
                  68,162
                  
                  
                  
                  41.5
                  %
                  
                  $
                  66,495
                  
                  
                  
                  41.6
                  %
                  
                  
                  (0.1
                  )%Soft
      goods
                  
                  
                  46,177
                  
                  
                  
                  36.2
                  %
                  
                  
                  42,756
                  
                  
                  
                  35.6
                  %
                  
                  
                  0.6
                  %Freight
      costs
                  
                  
                  12,576
                  
                  
                  
                  
                  
                  
                  
                  13,036Cost
      of sales
                  
                  $
                  126,915
                  
                  
                  
                  36.1
                  %
                  
                  $
                  122,287
                  
                  
                  
                  35.8
                  %
                  
                  
                  0.3
                  %


- 23
-





The
acquisition and manufacturing costs of inventories, the cost of shipping and
handling (freight costs) and any decrease in the value of inventories due to
obsolescence or lower of cost or market adjustments are included in the
determination of cost of sales. Cost of sales for the nine months ended March
31, 2010 was $126.9 million, or 63.9% of net sales, compared to $122.3 million,
or 64.2% of net sales, for the nine months ended March 31, 2009.





Selling, General and Administrative
Expenses. SG&A expenses for the nine months ended March 31, 2010 were
$54.8 million, or 27.6% of net sales, compared with $51.5 million, or 27.0% of
net sales, for the nine months ended March 31, 2009. The increase in SG&A
expenses was primarily attributable to $1.0 million of SG&A expenses related
to the increased operating costs from the June 2009 and July 2009 acquisitions
of three new team dealer operations, a $0.9 million increase in stock-based
compensation related to option awards issued in June 2009 on an accelerated
vesting schedule in lieu of cash bonuses, and an increase of $0.6 million in
commissions related to achieving net sales targets. Additionally, other tax
expense for the nine months ended March 31, 2009 was reduced by $0.9 million due
to the settlement of a tax assessment, which reduced a previously established
reserve.





Merger Related Expenses.
Merger related expenses for the nine months ended March 31, 2010 were $1.2
million, or 0.6% of net sales. There were minimal merger related expenses
incurred in the comparable period for the quarter ended March 31, 2009. The
merger related expenses are primarily related to the expenses incurred as a
result of the Merger as discussed above and consist primarily of legal,
financial advisory and Special Committee fees.





Operating Profit. Operating
profit for the nine months ended March 31, 2010 decreased to $15.6 million, or
7.9% of net sales, compared to $16.7 million, or 8.8% of net sales, for the nine
months ended March 31, 2009. The $1.1 million decrease in operating profit was
attributable to the increases in SG&A expenses of $3.3 million and merger
related expenses of $1.2 million being partially offset by increased gross
profit of $3.4 million.





Other Expense. Other expense
was $0.9 million for the nine months ended March 31, 2010, compared to $1.2
million for the nine months ended March 31, 2009. The table below shows the
components of other expense.


For the Nine Months Ended
                        March 31,2010
                      
                      
                      2009
                      
                      
                      Change(in
      thousands)Interest
      income
                      
                      $
                      26
                      
                      
                      $
                      118
                      
                      
                      $
                      (92
                      )Interest
      expense
                      
                      
                      (729
                      )
                      
                      
                      (1,640
                      )
                      
                      
                      911Amortization
      of debt issuance costs
                      
                      
                      (204
                      )
                      
                      
                      (504
                      )
                      
                      
                      300Accelerated
      amortization of debt issuance costs due to the early retirement of Notes
      and early termination of the Revolving Facility
                      
                      
                      –
                      
                      
                      
                      (657
                      )
                      
                      
                      657Gain
      on early retirement of Notes
                      
                      
                      –
                      
                      
                      
                      1,443
                      
                      
                      
                      (1,443
                      )Other
      income
                      
                      
                      7
                      
                      
                      
                      19
                      
                      
                      
                      (12
                      )Total
      other expense
                      
                      $
                      (900
                      )
                      
                      $
                      (1,221
                      )
                      
                      $
                      321





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





·
            we
      repurchased $21.1 million of Notes before their December 1, 2009 maturity
      date and accordingly expensed $0.3 million of related unamortized debt
      issuance costs; and


- 24
-


·
            we
      terminated the Revolving Facility before its term had expired and
      accordingly expensed the remaining $0.3 million of related unamortized
      debt issuance costs.





As a
result of the partial repurchase of the Notes during the nine months ended March
31, 2009, we recognized $1.4 million of gain on the early retirement of the
Notes. No similar early repurchases were made during the nine months ended March
31, 2010.





Interest
expense decreased $0.9 million, or 55.5%, due to the December 1, 2009 maturity
of the Notes. The Notes accrued interest at 5.75%. At March 31, 2010, we had
$3.0 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 1.5% as of March 31, 2010.





Income Taxes. Income tax
expense for the nine months ended March 31, 2010 was $5.5 million, approximately
37.6% of our income before income taxes, compared to income tax expense of $5.9
million, approximately 37.8% of our income before income taxes, for the nine
months ended March 31, 2009.





Net Income. Net income for
the nine months ended March 31, 2010 and 2009 was $9.2 million and $9.6 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 Agreement and, prior to December 1,
2009, the Notes. Each is discussed below.





Liquidity





Cash and
cash equivalents decreased $8.6 million during the nine months ended March 31,
2010 due primarily to $25.9 million cash used in financing activities partially
offset by $18.9 million of cash generated by operating activities. Net cash
flows for the nine month periods ended March 31, 2010 and 2009 are summarized
below.


Nine Months Ended March 31,2010
                      
                      
                      2009(in
      thousands)Operating
      activities
                      
                      $
                      18,909
                      
                      
                      $
                      3,157Investing
      activities
                      
                      $
                      (1,566
                      )
                      
                      $
                      (520
                      )Financing
      activities
                      
                      $
                      (25,895
                      )
                      
                      $
                      (19,611
                      )





Operating Activities. Net
cash flows generated by operating activities were $18.9 million for the nine
months ended March 31, 2010, as compared to $3.2 million for the nine months
ended March 31, 2009, and resulted primarily from net income generated, non-cash
charges related to depreciation, amortization, stock-based compensation and
taxes, and increases and decreases in working capital.





Increases
in operating cash flows during the nine months ended March 31, 2010 were
attributable to:





·
            Net
      income of $9.2 million;





·
            A
      $5.3 million decrease in inventories due to inventories sold during the
      nine months ended March 31, 2010 and improvements in managing
      inventories;


- 25
-


·
            A
      $4.1 million net increase in accounts payable and accrued liabilities,
      which was primarily due to the timing of payments;
  and





·
            A
      $1.5 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
      $5.2 million increase in accounts receivable due to the timing of
      collections; and





·
              A
      $0.4 million increase in prepaid expenses primarily related to prepaid
      advertising costs related to unamortized catalog expenses as of March 31,
      2010.





For the
nine months ended March 31, 2009, our increases in operating cash flows were
attributable to:





·
            Net
      income of $9.6 million; and





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





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





·
            An
      increase in accounts receivable of $4.1 million due to the timing of
      collections;





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





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





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





Investing Activities. Net
cash used in investing activities during the nine months ended March 31, 2010
and nine months ended March 31, 2009 were $1.6 million and $0.5 million,
respectively, and consisted primarily of purchases of computer equipment and
software. Investing activities during the nine months ended March 31, 2010 also
included the acquisition of two team dealer operations, one of which closed in
March 2010.





Financing Activities. Net
cash used in financing activities during the nine months ended March 31, 2010
was $25.9 million, compared to net cash used in financing activities of $19.6
million during the nine months ended March 31, 2009. 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 third quarter ended March 31, 2010 and had $3.0 million
outstanding under the New Credit Agreement at March 31, 2010. During the nine
months ended March 31, 2009, 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 Subordinated Notes that matured December 1,
2009 (the “Notes”).


- 26
-


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.





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 March 31, 2010, the effective
interest rate was 1.5%.





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.


- 27
-


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 March
31, 2010, the Company had $3.0 million outstanding under the New Credit
Agreement, leaving the Company with $37.0 million of availability under the
terms of the New Credit Agreement. At March 31, 2010, the Company was in
compliance with all of its financial covenants under the New Credit
Agreement.





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 sales of
our 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 March 31, 2010, 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
                  
                  $
                  3,021
                  
                  
                  $
                  21
                  
                  
                  $
                  3,000
                  
                  
                  $
                  –
                  
                  
                  $
                  –Operating
      leases
                  
                  
                  3,963
                  
                  
                  
                  2,606
                  
                  
                  
                  1,357
                  
                  
                  
                  –
                  
                  
                  
                  –Interest
      expense on long-term debt
                  
                  
                  1
                  
                  
                  
                  1
                  
                  
                  
                  –
                  
                  
                  
                  –
                  
                  
                  
                  –Total
      contractual cash obligations
                  
                  $
                  6,985
                  
                  
                  $
                  2,628
                  
                  
                  $
                  4,357
                  
                  
                  $
                  –
                  
                  
                  $
                  –





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.The Company maintains the
New Credit Agreement with Bank of America, N.A. Outstanding advances under the
New Credit Agreement totaled $3.0 million as of March 31, 2010. Interest
expense on long-term debt is payable on a monthly basis at an effective rate of
1.5% as of March 31, 2010.





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 March 31, 2010, the total future minimum lease
payments under various operating leases we are a party to totaled approximately
$4.0 million and are payable through fiscal 2014. As disclosed in our Annual
Report on 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.


- 28
-


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





Subsequent
      Events





On March
26, 2010, the Company announced that its Board approved and declared a quarterly
cash dividend of $0.025 per share on the Company's common stock for the third
quarter of fiscal 2010, which ended March 31, 2010. The quarterly cash dividend
was paid on April 16, 2010, to all stockholders of record on the close of
business on April 6, 2010.





On April
26, 2010, the Company announced that it had acquired certain operating assets of
Greg Larson Sports located in Minnesota. This transaction, individually or when
aggregated with our other acquisitions, is not material per Accounting Standards
Codification Topic 805, Business
Combinations.





The
Company evaluated its March 31, 2010 condensed consolidated financial statements
for subsequent events through 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 March 31, 2010, we
had no fixed rate debt instruments outstanding and $3.0 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 March
31, 2010, up to $37.0 million of variable rate borrowings were available under
the terms of the New Credit Agreement. 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 March 31, 2010, 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.





- 29
-





Item
4. Controls and Procedures.





Evaluation of Disclosure Controls
and Procedures. An evaluation was carried out under the supervision and
with the participation of the Company’s management, including the Chief
Executive Officer (“CEO”) and Chief
Financial Officer (“CFO”), of the
effectiveness of the Company’s disclosure controls and procedures (as defined in
§240.13a–15(e) or §240.15d–15(e) of the General Rules and Regulations of the
Securities Exchange Act of 1934, as amended (the “1934 Act”)) as of the
end of the period covered by this Quarterly Report. Based on that evaluation,
management, including the CEO and CFO, has concluded that, as of March 31, 2010,
the Company’s disclosure controls and procedures were effective.





Changes in Internal Control Over
Financial Reporting. Sport Supply Group’s management, with the
participation of Sport Supply Group’s CEO and CFO, has evaluated whether any
change in Sport Supply Group’s internal control over financial reporting
occurred during the three months ended March 31, 2010. Based on its evaluation,
management, including the CEO and CFO, has concluded that there has been no
change in Sport Supply Group’s internal control over financial reporting during
the three months ended March 31, 2010 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.


- 30
-





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
statements regarding, including the anticipated consummation of, the Merger; 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, costs and other risks associated with Sport Supply
Group’s possible consolidation and relocation of its headquarters facilities,
costs and other risks associated with the transfer of Sport Supply Group’s DOKS
business onto a new ERP software platform, 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. Other risks specific to the anticipated consummation of the Merger may
include: (1) changes in investor perceptions of the Company; (2) unexpected
costs, liabilities or delays in connection with the Merger; (3) legislative
developments, changes in tax and other laws adversely affecting the Merger; (4)
the occurrence of any event, change or other circumstances that could give rise
to the termination of the Merger Agreement; (5) the failure to obtain the
necessary debt financing set forth in commitment letters received in connection
with the Merger; and (6) other risks to consummation of the Merger, including
the risk that the Merger will not be consummated within the expected time
period, or at all. 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.




- 31
-




PART
II.  OTHER INFORMATION





Item
1.   Legal Proceedings.





On March
15, 2010, Waterford Township Police & Fire Retirement System filed a
purported class-action lawsuit against the Company and the Board of Directors in
the County Court of the State of Texas, Dallas County, captioned Waterford Township Police & Fire
Retirement System v. Sport Supply Group Inc., et al. (Cause No.
CC-10-01793-B). The plaintiff filed the action on its own behalf and on behalf
of all others similarly situated stockholders of the Company, excluding the
defendants and their affiliates. The plaintiff claims to have been a stockholder
of the Company at all relevant times, and alleges that the Company’s directors
breached their fiduciary duties to the Company’s public stockholders in
connection with the proposed acquisition of the Company by an affiliate of ONCAP
by, among other things, failing to maximize shareholder value, and failing to
disclose all material information that would permit the Company’s stockholders
to cast a duly informed vote on the acquisition. The petition further alleges
that the Company and affiliates of ONCAP aided and abetted the Company’s
directors’ breach of fiduciary duties. The plaintiff seeks, among other things:
(1) a declaration that the action is properly maintainable as a class-action;
(2) to enjoin the consummation of the proposed acquisition of the Company; (3)
the implementation of a constructive trust, in favor of the plaintiff, upon any
benefits improperly received by defendants as a result of their allegedly
unlawful conduct; (4) an award of attorneys and other fees incurred by the
plaintiff in connection with the lawsuit; and (5) such other equitable relief to
which the plaintiff is deemed justly entitled. The suit was amended on April 26,
2010 to add CBT Holdings, LLC, ONCAP Management Partners, L.P., Terrence M.
Babilla, Kurt Hagen, Tevis Martin and John Pitts as defendants and raise new
allegations concerning the Company’s preliminary proxy statement filed in
connection with the Merger.  Additional lawsuits pertaining to the
Merger could be filed in the future.





The
Company is a party to various other 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
1A.   Risk Factors





In
addition to the risk factors set forth below and the other information set forth
in this Quarterly Report on Form 10-Q, you should carefully consider the risk
factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form
10-K for the year ended June 30, 2009, which could materially affect our
business, financial condition or future results. The risks described below and
in our Annual Report on Form 10-K are not the only risks facing us. Additional
risks and uncertainties not currently known to us or that we currently deem to
be immaterial also may materially adversely affect our business, financial
condition and/or operating results. The information below amends, updates and
should be read in conjunction with the risk factors and information disclosed in
our Annual Report on Form 10-K for the year ended June 30, 2009.





Completion of the
Merger is subject to various conditions, and the Merger may not occur even if we
obtain stockholder approval.





Consummation
of the Merger is subject to various closing conditions including:




·
              approval
      of the adoption of the Merger Agreement by the holders of a majority of
      the outstanding shares of Sport Supply Group common stock entitled to vote
      on the Merger Agreement; and




·
              the
      absence of any law, order or injunction prohibiting the
      Merger.


- 32
-


Moreover,
each party’s obligation to consummate the Merger is subject to certain other
conditions including:




·
              the
      accuracy of the other party’s representations and warranties in the Merger
      Agreement (subject to certain materiality qualifiers, including in certain
      cases of Sport Supply Group’s representations and warranties, a company
      material adverse effect (as defined in the Merger Agreement) qualifier);
      and




·
              the
      other party’s compliance in all material respects with its covenants and
      agreements contained in the Merger
Agreement.




The
obligations of Parent and Sub to consummate the Merger are further subject to
the satisfaction (or waiver) of certain other conditions including:




·
              the
      absence of any company material adverse effect (as defined in the Merger
      Agreement); and




·
              the
      absence of any action by a governmental entity challenging or seeking to
      prohibit the Merger.





Further,
Parent has the unilateral option to terminate the Merger
Agreement.  As a result of these risks, there can be no assurance that
the Merger will be completed even if we obtain stockholder approval. If our
stockholders do not approve the adoption of the Merger Agreement or if the
Merger is not completed for any other reason, we expect that our current
management, under the direction of our Board, will continue to manage Sport
Supply Group.





Failure to
complete the Merger could negatively impact the market price of Sport Supply
Group’s common stock.





If the
Merger is not completed for any reason, we will be subject to a number of
material risks, including the following:





·
              the
      market price of Sport Supply Group’s common stock will likely decline to
      the extent that the current market price of the stock reflects a market
      assumption that the Merger will be
completed;


·
              we
      must pay certain costs related to the Merger even if the Merger is not
      completed, such as legal fees, Special Committee fees and certain
      investment banking fees, and, in specified circumstances, termination fees
      and expense reimbursements;
and


·
              the
      diversion of management’s attention from the day-to-day business of Sport
      Supply Group and the unavoidable disruption to our employees and our
      relationships with customers and suppliers during the period before
      completion of the Merger may make it difficult for us to regain our
      financial and market position if the Merger does not
  occur.





The
Merger Agreement also restricts us from taking certain actions prior to closing
of the Merger without Parent’s consent, which consent in certain circumstances
may be withheld, conditioned or delayed in Parent’s sole
discretion.  As such, we may be prevented from responding to changes
in market conditions, funding necessary or desirable capital expenditures,
obtaining financing, or otherwise taking advantage of business opportunities,
each of which may be detrimental to our stockholders should the Merger not be
consummated.





If the
Merger Agreement is terminated and our Board seeks another merger or business
combination, we cannot offer any assurance that we will be able to find an
acquiror willing to pay an equivalent or better price than the consideration to
be paid by Parent for Sport Supply Group common stock under the Merger
Agreement.


- 33
-





We may lose key
personnel, customers and suppliers as a result of uncertainties associated with
the Merger.





Our
current and prospective employees, customers and suppliers may be uncertain
about their future roles and relationships with Sport Supply Group following
completion of the Merger. This uncertainty may adversely affect our ability to
attract and retain key management, sales, marketing and operational personnel
and our ongoing business relationships with our customers and
suppliers.


- 34
-





Item
6.   Exhibits.





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





Exhibit
                                        Number
                                      
                                      Description
                                      
                                      Incorporated by Reference From2.1
                                      
                                      Agreement
      and Plan of Merger, dated March 15, 2010, by and among Sport Supply Group,
      Inc., Sage Parent Company, Inc., and Sage Merger Company,
    Inc.
                                      
                                      Exhibit 2.1
      to the Registrant’s Current Report on Form 8-K filed on March 17,
      2010.3.1
                                      
                                      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
                                      
                                      Limited
      Guarantee dated March 15, 2010 by and among Sport Supply Group, Inc., and
      ONCAP Investment Partners II L.P.
                                      
                                      Exhibit 99.1
      to the Registrant’s Current Report on Form 8-K filed on March 17,
      2010.10.2
                                      
                                      Stockholder
      Voting Agreement, dated March 15, 2010, among Sage Parent Company, Inc.,
      CBT Holdings, LLC, Black Diamond Offshore Ltd. and Double Black Diamond
      Offshore Ltd.
                                      
                                      Exhibit 99.2
      to the Registrant’s Current Report on Form 8-K filed on March 17,
      2010.10.3
                                      
                                      License
      Agreement dated January 1, 2010 by and among Voit Corporation and Sport
      Supply Group, Inc. *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.*


- 35
-





Exhibit
                    Number
                  
                  Description
                  
                  Incorporated by Reference From31.2
                  
                  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


- 36
-


SIGNATURES





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





SPORT
      SUPPLY GROUP, INC.Dated:
      May 6, 2010
              /s/ Adam BlumenfeldAdam
      Blumenfeld, Chief Executive Officer/s/ John E. PittsJohn
      E. Pitts, Chief Financial Officer(Principal
      Financial and Accounting
Officer)


- 37
-


EXHIBIT
INDEX





The
following exhibits are filed as part of this report:





Exhibit
                                        Number
                                      
                                      Description
                                      
                                      Incorporated by Reference From2.1
                                      
                                      Agreement
      and Plan of Merger, dated March 15, 2010, by and among Sport Supply Group,
      Inc., Sage Parent Company, Inc., and Sage Merger Company,
    Inc.
                                      
                                      Exhibit 2.1
      to the Registrant’s Current Report on Form 8-K filed on March 17,
      2010.3.1
                                      
                                      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
                                      
                                      Limited
      Guarantee dated March 15, 2010 by and among Sport Supply Group, Inc., and
      ONCAP Investment Partners II L.P.
                                      
                                      Exhibit 99.1
      to the Registrant’s Current Report on Form 8-K filed on March 17,
      2010.10.2
                                      
                                      Stockholder
      Voting Agreement, dated March 15, 2010, among Sage Parent Company, Inc.,
      CBT Holdings, LLC, Black Diamond Offshore Ltd. and Double Black Diamond
      Offshore Ltd.
                                      
                                      Exhibit 99.2
      to the Registrant’s Current Report on Form 8-K filed on March 17,
      2010.10.3
                                      
                                      License
      Agreement dated January 1, 2010 by and among Voit Corporation and Sport
      Supply Group, Inc. *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.*








Exhibit
                    Number
                  
                  Description
                  
                  Incorporated by Reference From32
                  
                  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