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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended December 31, 2005



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from             To



Commission file number 333-126486



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Gregg Appliances, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Indiana                                                        |  | 35-1049508                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|4151 East 96thStreet Indianapolis, IN                          |  | 46240                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants
telephone number, including area code: (317) 848-8710



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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.    x  Yes ̈No



Indicate by check mark whether the
registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). ̈Yes    x  No



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



The number of shares of Gregg Appliances, Inc.s common stock outstanding as of February 14, 2006 was 14,243,550.



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GREGG APPLIANCES, INC. AND SUBSIDIARIES

Report on Form 10-Q

Quarter Ended December 31, 2005



Index



|         |  |                       |  |                                                                                                            |  |     
|-------- |  | --------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ----
|         |  |                       |  |                                                                                                            |  | Page
|Part I.  |  | Financial Information |  |                                                                                                           
|         |  |                       | 
|         |  | Item 1.               |  | Condensed Consolidated Financial Statements:                                                               |  |     
|         |  |                       | 
|         |  |                       |  | Condensed Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2005 and 2004 |  | 3   
|         |  |                       | 
|         |  |                       |  | Condensed Consolidated Balance Sheets as of December 31, 2005 and March 31, 2005                           |  | 4   
|         |  |                       | 
|         |  |                       |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2005 and 2004       |  | 5   
|         |  |                       | 
|         |  |                       |  | Notes to Condensed Consolidated Financial Statements                                                       |  | 6   
|         |  |                       | 
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 11  
|         |  |                       | 
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                                                 |  | 20  
|         |  |                       | 
|         |  | Item 4.               |  | Controls and Procedures                                                                                    |  | 21  
|         |  |                      
|Part II. |  | Other Information     |  |                                                                                                           
|         |  |                       | 
|         |  | Item 1.               |  | Legal Proceedings                                                                                          |  | 22  
|         |  |                       | 
|         |  | Item 5.               |  | Other Information                                                                                          |  | 22  
|         |  |                       | 
|         |  | Item 6.               |  | Exhibits                                                                                                   |  | 22  



2



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Part I: Financial Information



|ITEM 1. | Condensed Consolidated Financial Statements
|------- | -------------------------------------------



GREGG APPLIANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME



|                                                     |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|---------------------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                     |  | Three Months Ended |         |   | Nine Months Ended |  
|                                                     |  | December 31, 2005  |         |   | December 31, 2004 |   |         | December 31, 2005 |  |   | December 31, 2004 |  
|                                                     |  | (Unaudited)        |        
|                                                     |  | (In thousands)     |        
|Net sales                                            |  | $                  | 281,201 |   |                   | $ | 254,175 |                   |  | $ | 679,115           |   |  | $ | 597,648 |  
|Cost of goods sold                                   |  |                    | 198,989 |   |                   |   | 178,159 |                   |  |   | 468,272           |   |  |   | 411,011 |  
|                                                     |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Gross profit                                         |  |                    | 82,212  |   |                   |   | 76,016  |                   |  |   | 210,843           |   |  |   | 186,637 |  
|Selling, general and administrative expenses         |  |                    | 67,266  |   |                   |   | 57,892  |                   |  |   | 188,368           |   |  |   | 160,942 |  
|Stock-based compensation                             |  |                    |        |   |                   |   |        |                   |  |   |                  |   |  |   | 6,721   |  
|Gain on transfer of extended maintenance obligations |  |                    | (27,850 | ) |                   |   |        |                   |  |   | (27,850           | ) |  |   |        |  
|Restructuring and asset impairment charges           |  |                    |        |   |                   |   |        |                   |  |   | 1,320             |   |  |   |        |  
|                                                     |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Income from operations                               |  |                    | 42,796  |   |                   |   | 18,124  |                   |  |   | 49,005            |   |  |   | 18,974  |  
|                                                     |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Other expense (income):                              |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Interest expense                                     |  |                    | 4,957   |   |                   |   | 320     |                   |  |   | 14,495            |   |  |   | 854     |  
|Interest income                                      |  |                    | (20     | ) |                   |   | (315    | )                 |  |   | (189              | ) |  |   | (813    | )
|Minority interest                                    |  |                    |        |   |                   |   | 3,475   |                   |  |   |                  |   |  |   | 3,786   |  
|                                                     |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Total other expense                                  |  |                    | 4,937   |   |                   |   | 3,480   |                   |  |   | 14,306            |   |  |   | 3,827   |  
|                                                     |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Income before income taxes                           |  |                    | 37,859  |   |                   |   | 14,644  |                   |  |   | 34,699            |   |  |   | 15,147  |  
|Income tax expense                                   |  |                    | 15,273  |   |                   |   |        |                   |  |   | 16,230            |   |  |   |        |  
|                                                     |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  
|Net income                                           |  | $                  | 22,586  |   |                   | $ | 14,644  |                   |  | $ | 18,469            |   |  | $ | 15,147  |  
|                                                     |  |                    |         |   |                   |   |         |                   |  |   |                   |   |  |   |         |  



See accompanying notes to condensed
consolidated financial statements.



3



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GREGG APPLIANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------------------------------- | -------- | - | -------------- | - | -------- | -
|                                                                                                                                                             |  | December 31, 2005                 |          |   | March 31, 2005 |  
|                                                                                                                                                             |  | (Unaudited)                       |         
|                                                                                                                                                             |  | (In thousands, except share data) |         
|ASSETS                                                                                                                                                       |  |                                   |          |   |                |   |          |  
|Current assets:                                                                                                                                              |  |                                   |          |   |                |   |          |  
|Cash and cash equivalents                                                                                                                                    |  | $                                 | 5,857    |   |                | $ | 8,642    |  
|Accounts receivable  trade                                                                                                                                  |  |                                   | 16,340   |   |                |   | 5,907    |  
|Accounts receivable - other                                                                                                                                  |  |                                   | 18,121   |   |                |   | 8,892    |  
|Merchandise inventories                                                                                                                                      |  |                                   | 116,668  |   |                |   | 76,817   |  
|Deferred commissions                                                                                                                                         |  |                                   |         |   |                |   | 3,670    |  
|Land held for sale                                                                                                                                           |  |                                   |         |   |                |   | 1,359    |  
|Prepaid expenses and other current assets                                                                                                                    |  |                                   | 4,325    |   |                |   | 3,431    |  
|Deferred income taxes                                                                                                                                        |  |                                   | 1,984    |   |                |   | 6,999    |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|Total current assets                                                                                                                                         |  |                                   | 163,295  |   |                |   | 115,717  |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|Property and equipment:                                                                                                                                      |  |                                   |          |   |                |   |          |  
|Land                                                                                                                                                         |  |                                   | 936      |   |                |   | 936      |  
|Building and improvements                                                                                                                                    |  |                                   | 3,519    |   |                |   | 3,519    |  
|Machinery and equipment                                                                                                                                      |  |                                   | 7,069    |   |                |   | 7,903    |  
|Office furniture and equipment                                                                                                                               |  |                                   | 37,230   |   |                |   | 31,719   |  
|Vehicles                                                                                                                                                     |  |                                   | 6,636    |   |                |   | 7,790    |  
|Signs                                                                                                                                                        |  |                                   | 3,461    |   |                |   | 2,824    |  
|Leasehold improvements                                                                                                                                       |  |                                   | 25,162   |   |                |   | 22,047   |  
|Construction in progress                                                                                                                                     |  |                                   | 4,421    |   |                |   | 3,062    |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|                                                                                                                                                             |  |                                   | 88,434   |   |                |   | 79,800   |  
|Less accumulated depreciation and amortization                                                                                                               |  |                                   | 40,243   |   |                |   | 35,974   |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|Net property and equipment                                                                                                                                   |  |                                   | 48,191   |   |                |   | 43,826   |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|Other assets:                                                                                                                                                |  |                                   |          |   |                |   |          |  
|Deferred commissions                                                                                                                                         |  |                                   |         |   |                |   | 6,265    |  
|Deposits                                                                                                                                                     |  |                                   | 2,456    |   |                |   | 7,858    |  
|Cash surrender value of life insurance                                                                                                                       |  |                                   |         |   |                |   | 1,096    |  
|Deferred financing costs                                                                                                                                     |  |                                   | 10,456   |   |                |   | 10,997   |  
|Deferred income taxes                                                                                                                                        |  |                                   | 98,513   |   |                |   | 106,724  |  
|Other                                                                                                                                                        |  |                                   | 475      |   |                |   | 621      |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|                                                                                                                                                             |  |                                   | 111,900  |   |                |   | 133,561  |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|Total assets                                                                                                                                                 |  | $                                 | 323,386  |   |                | $ | 293,104  |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                                                        |  |                                   |          |   |                |   |          |  
|Current liabilities:                                                                                                                                         |  |                                   |          |   |                |   |          |  
|Accounts payable  third party                                                                                                                               |  | $                                 | 6,317    |   |                | $ |         |  
|Accounts payable  vendors                                                                                                                                   |  |                                   | 80,833   |   |                |   | 28,651   |  
|Customer deposits                                                                                                                                            |  |                                   | 15,034   |   |                |   | 12,562   |  
|Accrued liabilities                                                                                                                                          |  |                                   | 39,210   |   |                |   | 32,980   |  
|Deferred revenue on extended maintenance agreements                                                                                                          |  |                                   |         |   |                |   | 22,844   |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|Total current liabilities                                                                                                                                    |  |                                   | 141,394  |   |                |   | 97,037   |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|Long-term liabilities:                                                                                                                                       |  |                                   |          |   |                |   |          |  
|Long-term debt                                                                                                                                               |  |                                   | 182,633  |   |                |   | 182,285  |  
|Deferred revenue on extended maintenance agreements                                                                                                          |  |                                   | 131      |   |                |   | 38,805   |  
|Other long-term liabilities                                                                                                                                  |  |                                   | 8,255    |   |                |   | 7,824    |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|Total longterm liabilities                                                                                                                                  |  |                                   | 191,019  |   |                |   | 228,914  |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|Total liabilities                                                                                                                                            |  |                                   | 332,413  |   |                |   | 325,951  |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|Stockholders deficit:                                                                                                                                       |  |                                   |          |   |                |   |          |  
|Preferred stock; no par value; 10,000,000 shares authorized; no shares issued and outstanding as of December 31, 2005 and March 31,
2005                     |  |                                   |         |   |                |   |         |  
|Common stock; no par value; 52,500,000 shares authorized; 14,243,550 and 13,970,000 shares issued and outstanding as of December 31, 2005
and March 31, 2005 |  |                                   | 113,696  |   |                |   | 111,054  |  
|Accumulated deficit                                                                                                                                          |  |                                   | (122,485 | ) |                |   | (143,901 | )
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|                                                                                                                                                             |  |                                   | (8,789   | ) |                |   | (32,847  | )
|Less: Note receivable for common stock                                                                                                                       |  |                                   | 238      |   |                |   |         |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|Total stockholders deficit                                                                                                                                  |  |                                   | (9,027   | ) |                |   | (32,847  | )
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  
|Total liabilities and stockholders deficit                                                                                                                  |  | $                                 | 323,386  |   |                | $ | 293,104  |  
|                                                                                                                                                             |  |                                   |          |   |                |   |          |  



See accompanying notes to condensed
consolidated financial statements.



4



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GREGG APPLIANCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                  |  |                   |         |   |                   |   |         |  
|--------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                  |  | Nine Months Ended |        
|                                                                                  |  | December 31, 2005 |         |   | December 31, 2004 |  
|                                                                                  |  | (Unaudited)       |        
|                                                                                  |  | (In thousands)    |        
|Operating activities:                                                             |  |                   |         |   |                   |   |         |  
|Net income                                                                        |  | $                 | 18,469  |   |                   | $ | 15,147  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                   |         |   |                   |   |         |  
|Depreciation and amortization of property and equipment                           |  |                   | 7,803   |   |                   |   | 7,286   |  
|Amortization of deferred financing costs                                          |  |                   | 1,186   |   |                   |   |        |  
|Accretion of original issue discount                                              |  |                   | 348     |   |                   |   |        |  
|Stockbased compensation                                                          |  |                   |        |   |                   |   | 6,721   |  
|(Gain) loss on disposal of assets                                                 |  |                   | 166     |   |                   |   | (3,240  | )
|Deferred income taxes                                                             |  |                   | 16,173  |   |                   |   |        |  
|Restructuring and asset impairment charges                                        |  |                   | 1,320   |   |                   |   |        |  
|Gain on transfer of extended maintenance obligations                              |  |                   | (27,850 | ) |                   |   |        |  
|Payments for transfer of extended maintenance obligations                         |  |                   | (21,467 | ) |                   |   |        |  
|Minority interest                                                                 |  |                   |        |   |                   |   | 3,786   |  
|Changes in operating assets and liabilities:                                      |  |                   |         |   |                   |   |         |  
|Accounts receivable  trade                                                       |  |                   | (10,433 | ) |                   |   | (4,346  | )
|Accounts receivable  other                                                       |  |                   | (7,790  | ) |                   |   | (5,809  | )
|Merchandise inventories                                                           |  |                   | (39,851 | ) |                   |   | (56,361 | )
|Prepaid expenses and other current assets                                         |  |                   | (748    | ) |                   |   | (715    | )
|Deferred commissions                                                              |  |                   | 448     |   |                   |   | (686    | )
|Deposits                                                                          |  |                   | 5,402   |   |                   |   | 1,520   |  
|Accounts payable  third parties                                                  |  |                   | 6,317   |   |                   |   | 13,687  |  
|Accounts payable  vendors                                                        |  |                   | 52,182  |   |                   |   | 44,249  |  
|Deferred revenue on extended maintenance agreements                               |  |                   | (2,714  | ) |                   |   | 3,951   |  
|Customer deposits                                                                 |  |                   | 2,472   |   |                   |   | 3,475   |  
|Other accrued liabilities                                                         |  |                   | 6,015   |   |                   |   | 4,877   |  
|Other longterm liabilities                                                       |  |                   | 431     |   |                   |   | 1,603   |  
|                                                                                  |  |                   |         |   |                   |   |         |  
|Net cash provided by operating activities                                         |  |                   | 7,879   |   |                   |   | 35,145  |  
|                                                                                  |  |                   |         |   |                   |   |         |  
|Investing activities:                                                             |  |                   |         |   |                   |   |         |  
|Purchases of property and equipment                                               |  |                   | (13,805 | ) |                   |   | (10,516 | )
|Proceeds from note receivable for common stock                                    |  |                   |        |   |                   |   | 230     |  
|Advances on note receivable  related parties                                     |  |                   |        |   |                   |   | (16,808 | )
|Purchase of land held for sale                                                    |  |                   |        |   |                   |   | (963    | )
|(Increase) decrease in cash surrender value of life insurance                     |  |                   | 1,096   |   |                   |   | (196    | )
|Proceeds from sales of property and equipment                                     |  |                   | 386     |   |                   |   | 10,989  |  
|                                                                                  |  |                   |         |   |                   |   |         |  
|Net cash used in investing activities                                             |  |                   | (12,323 | ) |                   |   | (17,264 | )
|                                                                                  |  |                   |         |   |                   |   |         |  
|Financing activities:                                                             |  |                   |         |   |                   |   |         |  
|Repayments of mortgage notes payable                                              |  |                   |        |   |                   |   | (6,964  | )
|Proceeds from line of credit                                                      |  |                   |        |   |                   |   | 8,200   |  
|Proceeds from notes payable  related parties                                     |  |                   |        |   |                   |   | 23,336  |  
|Payments on notes payable  related parties                                       |  |                   |        |   |                   |   | (31,754 | )
|                                                                                  |  |                  
|Payment of financing costs                                                        |  |                   | (739    | ) |                   |   |        |  
|Proceeds from issuance of common stock                                            |  |                   | 2,398   |   |                   |   |        |  
|Distributions to stockholders                                                     |  |                   |        |   |                   |   | (14,284 | )
|Minority interest                                                                 |  |                   |        |   |                   |   | (5,063  | )
|                                                                                  |  |                   |         |   |                   |   |         |  
|Net cash provided by (used in) financing activities                               |  |                   | 1,659   |   |                   |   | (26,529 | )
|                                                                                  |  |                   |         |   |                   |   |         |  
|Net increase (decrease) in cash and cash equivalents                              |  |                   | (2,785  | ) |                   |   | (8,648  | )
|Cash and cash equivalents:                                                        |  |                   |         |   |                   |   |         |  
|Beginning of period                                                               |  |                   | 8,642   |   |                   |   | 8,648   |  
|                                                                                  |  |                   |         |   |                   |   |         |  
|End of period                                                                     |  | $                 | 5,857   |   |                   | $ |        |  
|                                                                                  |  |                   |         |   |                   |   |         |  
|Supplemental disclosure of cash flow information:                                 |  |                   |         |   |                   |   |         |  
|Interest paid                                                                     |  | $                 | 8,145   |   |                   | $ | 502     |  
|Non cash item  note receivable for common stock                                  |  |                   | 238     |   |                   |   |        |  
|Non cash item  land held for sale for current note receivable                    |  |                   | 1,359   |   |                   |   |        |  



See accompanying notes to condensed
consolidated financial statements.



5



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GREGG APPLIANCES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



1. Nature of Organization



Description of Business



On October 19, 2004, Gregg Appliances, Inc., an Indiana corporation, (the Company), entered into an Agreement and Plan of Merger, as amended, with
Gregg Investment Corporation, LLC (GIC), an entity formed by an affiliate of Freeman Spogli & Co. V, L.P. to consummate a recapitalization of the Company. The recapitalization was effected on February 3, 2005. Under the terms of the
Agreement and Plan of Merger, a wholly-owned subsidiary of GIC merged with and into Gregg Appliances, Inc. and Gregg Appliances, Inc. survived the merger.



Gregg Appliances, Inc. is a specialty retailer of consumer electronics, home appliances and related services operating under the names hhgregg® and
Fine Lines®. As of December 31, 2005, the Company had 67 stores located in Alabama, Georgia, Indiana, Kentucky, North Carolina, Ohio, South Carolina and Tennessee. The Company operates in one reportable segment.



Interim Financial Information



The accompanying unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the SEC). In the opinion of the Companys management, these unaudited condensed consolidated financial statements reflect all necessary
adjustments, which are of a normal recurring nature, for a fair presentation of such data. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in
the United States have been condensed or omitted pursuant to such rules and regulations. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto as
of and for the year ended March 31, 2005 included in our Registration Statement on Form S-4, as filed with the SEC on September 30, 2005. The condensed consolidated results of operations and financial position for interim periods are not
necessarily indicative of those to be expected for a full year. Further, the Company has made a number of estimates and assumptions relating to the assets and liabilities and the reporting of revenue and expenses to prepare these financial
statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates.



Principles of Consolidation



The condensed consolidated financial statements include the accounts of Gregg Appliances, Inc. and its wholly-owned subsidiary, HHG Distributing, LLC
(HHG). HHG is inactive and its assets consist of a 5% ownership interest in a distributing company, totaling $100,000, accounted for on the cost method.



The condensed consolidated financial statements also include the financial statements of certain special-purpose entities owned by related parties through
the date of the Companys recapitalization on February 3, 2005. The special-purpose entities all had fiscal years ended December 31. The Company believes that use of the different fiscal periods for these entities has not had a
material impact on the Companys consolidated financial position, results of operations, or liquidity. All significant intercompany balances and transactions have been eliminated in consolidation. Effective as of the recapitalization, Gregg
Appliances, Inc., is no longer required to consolidate the special-purpose entities as an implicit guarantee no longer exists due to changes in majority ownership and corporate governance of the Company.



Reclassifications



Certain amounts shown in the prior-period condensed consolidated financial statements have been reclassified to conform with
the current period condensed consolidated financial statement presentation. These reclassifications had no effect on net income or stockholders deficit as previously presented.



6



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2. Recent Accounting Pronouncements



In October 2005, the FASB issued FASB Staff Position (FSP) No. FAS 13-1, Accounting for Rental Costs Incurred
During a Construction Period. FSP No. FAS 13-1 requires companies to expense rent payments for building or ground leases incurred during a construction period. FSP No. FAS 13-1 is effective for all interim or annual reporting periods
beginning after December 15, 2005. Retrospective application is permitted, but not required. The Company does not believe that the adoption of FSP No. FAS 13-1 will have a material impact on its results of operations or financial position.



In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment, which establishes standards for transactions in which an entity exchanges its equity instruments for goods or services. This standard requires all entities to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award. This eliminates the exception to account for such awards using the intrinsic value-based method previously allowable under APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS No. 123R is effective for annual reporting periods beginning on or after June 15, 2005. The Company will adopt SFAS No. 123R effective April 1, 2006 and expects
that the adoption will have a material impact on its results of operations.



3. Common Stock and Stock Options



The Company
accounts for activity under its stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25. Accordingly, the Company does not recognize compensation expense in connection with employee stock
option grants because stock options are granted at exercise prices not less than fair value of the common stock at the date of grant. FASB Statement No. 123, Accounting for Stock-Based Compensation, and FASB Statement No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee
compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of FASB Statement
No. 123, as amended.



The following table shows the effect
on net income had the Company applied the fair value expense recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (in thousands):



|                                                                                                                           |  |                                 |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                           |  | Three Months Ended December 31, |       
|                                                                                                                           |  | 2005                            |        |   | 2004 |  
|Net income, as reported                                                                                                    |  | $                               | 22,586 |   |      | $ | 14,644 |  
|Add stock-based employee compensation expense included in reported net income, net of tax                                  |  |                                 |       |   |      |   |       |  
|Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax |  |                                 | (84    | ) |      |   |       |  
|                                                                                                                           |  |                                 |        |   |      |   |        |  
|Pro forma net income                                                                                                       |  | $                               | 22,502 |   |      | $ | 14,644 |  
|                                                                                                                           |  |                                 |        |   |      |   |        |  
|                                                                                                                           | 
|                                                                                                                           |  | Nine Months Ended December 31,  |       
|                                                                                                                           |  | 2005                            |        |   | 2004 |  
|Net income, as reported                                                                                                    |  | $                               | 18,469 |   |      | $ | 15,147 |  
|Add stock-based employee compensation expense included in reported net income, net of tax                                  |  |                                 |       |   |      |   | 6,721  |  
|Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax |  |                                 | (137   | ) |      |   | (3,188 | )
|                                                                                                                           |  |                                 |        |   |      |   |        |  
|Pro forma net income                                                                                                       |  | $                               | 18,332 |   |      | $ | 18,680 |  
|                                                                                                                           |  |                                 |        |   |      |   |        |  



7



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4. Inventories



Inventories as of December 31, 2005 and March 31, 2005 were comprised as follows (in thousands):



|              |  |                   |         |                |   |       
|------------- |  | ----------------- | ------- | -------------- | - | ------
|              |  | December 31, 2005 |         | March 31, 2005
|Appliances    |  | $                 | 34,843  |                | $ | 25,934
|Electronics   |  |                   | 81,806  |                |   | 49,290
|Service parts |  |                   | 19      |                |   | 1,593 
|              |  |                   |         |                |   |       
|              |  | $                 | 116,668 |                | $ | 76,817
|              |  |                   |         |                |   |       



5. Debt



Debt outstanding consisted of the following at December 31, 2005 and
March 31, 2005 (in thousands):



|                                                                                                                                                               |  |                   |         |                |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | -------------- | - | -------
|                                                                                                                                                               |  | December 31, 2005 |         | March 31, 2005
|Revolving credit facility                                                                                                                                      |  | $                 |        |                | $ |       
|9% senior notes, due in arrears on a semi-annual basis on February 1 and August 1 through February 3, 2013                                                     |  |                   | 165,000 |                |   | 165,000
|6% junior notes, due in arrears on a semi-annual basis on February 1 and August 1 through February 3, 2015, net of discount of
$7,367 and $7,715, respectively |  |                   | 17,633  |                |   | 17,285 
|                                                                                                                                                               |  |                   |         |                |   |        
|Total debt                                                                                                                                                     |  | $                 | 182,633 |                | $ | 182,285
|                                                                                                                                                               |  |                   |         |                |   |        



In connection with its
recapitalization on February 3, 2005, the Company issued $165 million in unsecured 9% senior notes. Interest on the notes is payable in arrears twice a year on February 1 and August 1. The notes will mature on February 3, 2013.
On September 1, 2005, the interest on the senior notes increased to 9.25% per annum pursuant to section 4 of the Registration Rights Agreement dated February 3, 2005 between the Company and the initial purchasers of the notes. The
interest rate increase remained in effect until the Registration Statement covering the exchange offer with respect to the notes was declared effective by the Securities and Exchange Commission (the SEC) and the exchange offer was consummated. On
November 4, 2005, the exchange offer was consummated and the interest rate consequently decreased to 9.0% per annum.



On February 3, 2005 the Company also issued to certain of its stockholders, $25 million in unsecured 6% junior subordinated notes, with a fair value
of $17.2 million at the time of issue, based on an effective interest rate of 11%. These notes are subordinated to the unsecured senior notes and any payment of principal thereof directly or indirectly is deferred until the payment in full of all of
the senior debt. Unless there is a default or an event of default under any senior debt, interest on the junior subordinated debt is payable in arrears on February 1 and August 1. The junior notes will mature on February 1, 2015. The
original discount on the notes will be accreted to interest expense through the maturity date. Accretion of the discount was approximately $0.3 million during the first nine months of fiscal 2006 and is included in interest expense in the
accompanying condensed consolidated statements of income.



The
Company has a revolving credit agreement with a bank group for up to $75 million. The facility includes a $25 million sub-limit for letters of credit. Borrowings under the revolving credit agreement are subject to a borrowing base calculation based
on specified percentages of eligible accounts receivable and inventories. Interest on borrowings is payable monthly at a fluctuating rate based on the banks prime rate or LIBOR plus an applicable margin. The Company pays an annual commitment
fee of 3/8% on the unused portion of the facility.



The
interest rate based on the banks prime rate as of December 31, 2005 was 7.50%. As of December 31, 2005, under the revolving credit facility, the Company had no cash borrowings outstanding and $5.7 million of letters of credit
outstanding which expire through June 30, 2006. As of December 31, 2005, the total borrowing availability under the revolving credit facility was $53.8 million.



8



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The unsecured senior notes and the revolving credit are guaranteed by the Companys wholly-owned
subsidiary, HHG which has substantially no assets or operations. The guarantee is full and unconditional and the Company has no other subsidiaries. In addition, there are no restrictions on HHGs ability to pay dividends under the arrangement.



The debt agreements contain restrictions on mergers, incurring
additional debt or liens, making investments, selling assets or making equity repurchases, debt prepayments and transactions with affiliates. The revolving credit agreement also contains a financial covenant requiring maintenance of a minimum fixed
charge coverage ratio. The debt agreements also restrict payment of dividends unless the Company achieves a specific fixed charge coverage ratio as defined in the debt agreements. Any such dividends are limited to the lesser of 50% of consolidated
net income and 100% of equity contributions since the date of the recapitalization. The Company was in compliance with the restrictions and covenants at December 31, 2005.



6. Restructuring and Asset Impairments



In September 2005, the Company announced that it would outsource its product service and repair offerings. The charges related to this restructuring
initiative were recorded as the various stages of the initiative took effect in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.SFAS No. 146 requires that a liability for
costs associated with an exit or disposal activity be recognized when a liability is incurred.



In connection with this restructuring, the Company recorded pre-tax charges of approximately $1.3 million during the nine months ended December 31, 2005 representing asset impairments of $1.0 million and
severance and benefits costs of $0.3 million, respectively. Asset impairments relate primarily to the write-down of property, plant and equipment, resulting from the outsourcing of the Companys product service and repair offerings. The fair
values of the impaired long-lived assets were determined primarily using probability weighted expected cash flows in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The severance
and benefits costs relate to a reduction in the Companys product service and repair workforce of approximately 240 employees. These severance and benefits costs were recorded as of the announcement date in accordance with SFAS No. 146.



In addition to the restructuring charges, the Company also
incurred additional charges resulting from the decision to exit the product service and repair work during the nine months ended December 31, 2005. These charges represented $0.9 million of markdowns of service parts inventory recorded within
cost of goods sold and $0.3 million of bad debt charges recorded within selling, general and administrative expenses in the accompanying condensed consolidated statements of income.



7. Income Taxes



Prior to February 3, 2005, Gregg Appliances, Inc. was organized as an S corporation. Accordingly, the allocable share of taxable income or loss was
includable in the tax returns of the stockholders and income taxes were not reflected in the Companys consolidated financial statements. Following the recapitalization, Gregg Appliances, Inc. no longer qualified as an S corporation and became
subject to U.S. federal and certain state and local income taxes applicable to C corporations.



Subsequent to the recapitalization and change to C corporation status, the Company began recognizing deferred tax assets and liabilities for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Following the recapitalization, GIC and the former stockholders of the Company made an election
under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended, to treat the recapitalization as an asset purchase for tax purposes. In accordance with Emerging Issues Task Force (EITF) 94-10, Accounting by a Company for the
Income Tax Effects of Transactions among or with Its Shareholders under FASB Statement No.109, the tax benefit of this election was recorded as an equity transaction. During the three months ended December 31, 2005, the deferred tax
asset related to goodwill for tax purposes was finalized and an additional $2.9 million was recorded as an equity transaction. Deferred tax assets and liabilities are measured using enacted tax rates



9



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expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. During the nine months ended December 31, 2005, tax law changes were enacted to change the tax rates of certain states in
which the Company operates. These changes have been recognized in income tax expense during the nine months ended December 31, 2005 and are included within the income tax rate reconciliation below.



For the nine months ended December 31, 2005, the income tax expense
differs from the amount of income tax determined by applying the U.S. federal income tax rate of 35% to income before income taxes due to the following (in thousands):



|                                                        |  |                                      |        |                                     |   |       
|------------------------------------------------------- |  | ------------------------------------ | ------ | ----------------------------------- | - | ------
|                                                        |  | Three Months Ended December 31, 2005 |        | Nine Months Ended December 31, 2005
|Computed expected tax expense                         |  | $                                    | 13,251 |                                     | $ | 12,145
|State income tax expense, net of federal income benefit |  |                                      | 1,893  |                                     |   | 1,735 
|Change in state income tax rates and apportionment      |  |                                      |       |                                     |   | 2,057 
|Non-deductible permanent differences                    |  |                                      | 93     |                                     |   | 259   
|Other, net                                              |  |                                      | 36     |                                     |   | 34    
|                                                        |  |                                      |        |                                     |   |       
|                                                        |  | $                                    | 15,273 |                                     | $ | 16,230
|                                                        |  |                                      |        |                                     |   |       



In assessing the
realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which temporary differences are expected to reverse, management believes it is more likely than not that the Company will
realize the benefits of these deductible differences.



8. Related Party
Transactions



In September 2005, the Chairman and Chief
Executive Officer of the Company, along with certain members of his immediate family, acquired the whole life insurance policy benefiting the Company. No gain or loss was recognized on the sale of the policy as the purchase price of $1.1 million was
equal to the book value and cash surrender value on the date of sale.



In December 2005, the Chairman and Chief Executive Officer of the Company, along with certain members of his immediate family, acquired the Companys land held for sale at its estimated fair market value in exchange for a current note
receivable. No gain or loss was recognized on the sale of the land as the purchase price of approximately $1.4 million was equal to the book value on the date of sale. On February 3, 2006, the Company received cash of approximately $1.4 million
in exchange for the related party receivable.



9. Transfer of Extended
Service Obligations



In October 2005, General Electric
Company (GE) assumed the Companys product service obligations for its previously sold extended service plans (ESPs). In November 2005, the Company paid cash of approximately $21.5 million to GE for GEs assumption of these obligations.
The Company recognized a pre-tax gain on the transfer of the obligations of approximately $27.9 million for the elimination of the obligations (net of deferred commissions) under its previously sold ESPs. On a prospective basis, GE will be the
obligor on all appliance and electronics ESPs sold by the Company. The Company will remain the obligor on certain small electronics ESPs.



10



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Forward-Looking Statements



Some of the statements in this document and any documents incorporated by reference constitute forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other
factors that may cause our businesses or our industries actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. Such statements include, in
particular, statements about our plans, strategies, prospects, changes, outlook and trends in our business and the markets in which we operate under the heading Managements Discussion and Analysis of Financial Condition and Results of
Operations. In some cases, you can identify forward-looking statements by terminology such as may, will, could, would, should, expect, plan,
anticipate, intend, tends, believe, estimate, predict, potential or continue or the negative of those terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially because of market conditions in our industries or other factors. All of the forward-looking statements are qualified in their entirety by reference to the factors
discussed under Managements Discussion and Analysis of Financial Condition and Results of Operations herein and Managements Discussion and Analysis of Financial Condition and Results of Operations in our
Registration Statement on Form S-4, as filed with the SEC on September 30, 2005 and any documents incorporated by reference that describe risks and factors that could cause results to differ materially from those projected in these
forward-looking statements. The forward-looking statements are made as of the date of this document or the date of the documents incorporated by reference in this document, as the case may be, and we assume no obligation to update the
forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations



Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide a reader of our financial
statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. We believe it is helpful to read our MD&A in
conjunction with the Consolidated Financial Statements contained in our Registration Statement on Form S-4, as filed with the SEC on September 30, 2005 as well as the unaudited interim condensed consolidated financial statements included
herein.



Our Recapitalization



On October 19, 2004, we entered into an Agreement and Plan of Merger,
as amended, with Gregg Investment Corporation, or GIC, an entity formed by an affiliate of Freeman Spogli & Co. V, L.P. to recapitalize our company. Immediately following the consummation of our recapitalization on February 3, 2005,
GIC owned 80.01% of our outstanding common stock and the remaining 19.99% of our common stock was held by three of our management stockholders. GIC and our former stockholders made an election under Section 338(h)(10) of the Internal Revenue
Code of 1986, as amended, to treat the recapitalization as an asset purchase for tax purposes. This had the effect of significantly increasing the tax basis of our assets and thereby lowering our cash taxes. In accordance with EITF 94-10,
Accounting by a Company for the Income Tax Effect of Transactions among or with Its Shareholders, under FASB Statement No. 109, the tax benefit of the recapitalization transaction was recorded as an equity transaction. For
all periods prior to the recapitalization, we operated as an S corporation for federal and state income tax purposes and our taxable income was taxed at the stockholder level rather than at the corporate level. Following the recapitalization, we no
longer qualified as an S corporation, and we became subject to U.S. federal and certain state and local income taxes applicable to C corporations. In addition, as a result of the accounting treatment for the recapitalization, our stockholders
equity account was negative because the payments to our stockholders, whose shares of our capital stock were redeemed in the recapitalization, served to reduce retained earnings.



11



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Consolidation of Certain Related Party Entities



Prior to the consummation of our recapitalization, we had certain relationships and related party transactions requiring
consolidation for accounting purposes under Financial Accounting Standards Board Interpretation No. 46R (FIN 46R), Consolidation of Variable Interest Entities. A detailed description of these relationships and related party
transactions can be found in our Registration Statement on Form S-4, filed with the SEC on September 30, 2005.



Effective upon the closing of the recapitalization on February 3, 2005, we were no longer required to consolidate these entities because we were no
longer under common control with them and there was no longer an implicit guarantee.



As a result of the consolidation of the related party entities, our historical consolidated statements of operations reflect:



| |  |  | a decrease in rent expense included in selling, general and administrative expenses due to the elimination of rent expense owed to the variable interest entities;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an increase in depreciation and amortization expense included in selling, general and administrative expense related to the properties leased to us by the variable interest
entities;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an increase in gain on sale of property related to the leased properties owned by the related party entities;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | an increase in interest expense related to the third-party secured debt on properties that we leased from related party entities; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a minority interest by related party entities.
| | - |  | ----------------------------------------------



For a more complete description of the impact of the adoption of FIN 46R on our historical consolidated financial statements, see footnotes 1(s) and 10 in
the notes to our Condensed Consolidated Financial Statements and the table of selected statement of income data for our company in Results of Operations in our Registration Statement on Form S-4, filed with the SEC on September 30,
2005.



Overview



We are a specialty retailer of premium video products, including digital
televisions and home theater systems, brand name appliances, audio products and accessories. As of December 31, 2005, our stores averaged approximately 30,000 square feet and generated annualized net sales per store of approximately $13.7
million, or annualized sales per square foot of approximately $416, for stores open at least 14 months. As of December 31, 2005, we operated 67 retail stores located in major urban and suburban areas in Alabama, Georgia, Indiana, Kentucky,
North Carolina, Ohio, South Carolina and Tennessee.



Over the
past several years, we have added stores in existing markets where we believe we can gain market share from our competitors and leverage our distribution network and advertising costs. We have also expanded into new markets where we believe there is
significant underlying demand for our product mix and customer services as well as an attractive demographic profile. For example, to capitalize on the growth and strong demographics of the Southeastern United States, we entered the Atlanta market
in April 2003 with the opening of five stores and entered the Charlotte market in April 2005, initially opening two stores. Consistent with our initial market development plan, we have continued building out the Georgia, North Carolina and South
Carolina markets where we operated 19 stores as of December 31, 2005.



We plan to continue to add stores in existing markets and expand into high-growth contiguous regions. We target markets that meet our demographic and competitive criteria, including areas that demonstrate
above-average economic growth, strong new housing starts and remodeling activity and a favorable percentage of our target consumers. Our markets typically include most or all of our major competitors. Consistent with our expansion in the past, we
plan to continue to follow our disciplined approach to build store density in each major market and distribution area in order to establish critical mass, which in the past has helped us to achieve strong market share and realize operating
efficiencies.



12



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For each new market, we develop a market plan that establishes annual revenue and market share targets
for the entire market and includes a store roll-out plan aimed at achieving those targets. As we build out a market, our most recently opened stores may reduce the comparable store sales performance of other stores. This occurs because a
newly-opened store may be more convenient for a customer than an existing store, thus drawing some sales away from the existing store. This potential impact on comparable store performance is acceptable to us as long as our total share of a market
and our total market sales are meaningfully increasing over the prior period. After we have completed building out a market and our stores have reached targeted performance levels, which together usually has taken 18 to 30 months, we focus more on
comparable store sales for that market.



Both the consumer
electronics and home appliance industries have grown over the past several years, driven by new product innovations and introductions particularly in the premium segment that we target. In general, average selling prices for major appliances have
remained relatively constant for the last three fiscal years because appliance prices have not been as impacted by technological advancements as have been electronics prices. This aspect has added stability to our sales performance relative to our
consumer electronics-focused competitors. In contrast, the consumer electronics industry depends on new products to drive sales and profitability. Typically, these new products are introduced at relatively high price points, which are then gradually
reduced to drive consumption. As an illustration, customer demand for advanced digital and high definition video products, notably flat screen, plasma and thin profile LCD and DLP televisions, has increased dramatically as price points for these
products have fallen from their initial levels in excess of $10,000. As prices for these products fall below $3,000, more of our customers are purchasing them, with the result that the average selling price of the televisions we carry and the
quantity we sell have risen in each of the last three fiscal years.



As this trend in consumer electronic products has occurred mature categories such as DVD players, camcorders and audio products have become commoditized and therefore experienced price declines and reduced margins. As certain of our
products become commodities, we focus on the next generation of products, such as plasma and LCD televisions, while carefully managing the selection of commoditized products that we offer. We must continue to shift our sales mix to newer,
higher-margin items or increase our unit sales at a rate greater than the decline in product prices. Our past experience is that we have been able to shift our product mix to newer, higher-margin products.



Digital products, such as home theater systems, have become increasingly
complex and require sophisticated instruction and, in many cases, home installation. Consequently, our strategy of employing knowledgeable sales personnel and providing superior post-sale support is well-suited to meet customer demand for these
products. Additionally, most major appliances require home delivery and installation, further leveraging our delivery and installation expertise. The majority of our large screen television and major appliance customers purchase our delivery or
installation service.



Critical Accounting Policies



The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We
base our estimates on historical experience and on other assumptions that we believe to be relevant under the circumstances and these estimates form the basis for judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from these estimates under different assumptions and/or conditions. We continually evaluate the information used to make these estimates as our business and the economic environment changes.
We use estimates throughout our financial statements, but the accounting policies and estimates we consider most critical, in addition to the policy discussed above under Consolidation of Certain Related Party Entities, are described
below.



Vendor Allowances. We receive funds from our
vendors for volume rebates, marketing support, training and other discount and promotional programs, which we record on an accrual basis as a reduction of either the related expense or the related product cost. The majority of our vendors support us
with cooperative advertising. The programs are typically negotiated at least annually and are generally based on purchases of product. If an individual vendor were to discontinue its support of us through cooperative advertising, we would purchase
our products through vendors who would support us through allowances and we would expect to incur a similar level of advertising expenditures.



13



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We accrue allowances based on the satisfaction of terms of the program and sales of qualifying products
even though we may not receive the allowances until the end of a quarter or year. When we record vendor allowances we must determine the period in which they should be recognized in the statements of income and whether they should be reflected as
adjustments to cost of goods sold or the related expense, as provided in EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor. If the programs provide reimbursement for
specific, incremental and identifiable costs incurred to promote a vendors products, the allowances, credits, or payments are recorded as a reduction of the related expense in the period in which the cost is incurred.We also deduct
amounts for cooperative advertising from our payments to manufacturers for inventory purchases based on individual agreements with our manufacturers. For all other vendor programs, the allowances, credits or payments are recorded as a reduction to
the related inventory cost (rather than as a reduction to advertising expense) and recognized in cost of goods sold when the product is sold. Net advertising expense for the nine months ended December 31, 2005 and 2004 was $30.1 million and
$26.5 million, respectively.



Self-Insured Liabilities.We are self-insured for certain losses related to workers compensation, general and auto liability, and health insurance. We obtain third-party insurance coverage to limit our exposure to certain of these claims. When estimating our
self-insurance liabilities, we consider a number of factors, including historical claims experience, loss estimates and information provided by third-party administrators. We periodically review our assumptions, estimates and the information
provided by third-party administrators to determine the adequacy of our reserves for our self-insured liabilities. Our reserves for self-insurance were $4.5 million and $3.5 million as of December 31, 2005 and March 31, 2005, respectively.



Key Operating Measures



We use the following key measures to evaluate and assess our business.



Comparable Store Sales. Our comparable store sales base
includes net sales for all store locations including remodeled and relocated stores, as well as our e-commerce site, that have been operating for at least 14 full months. As of December 31, 2005, we included 54 stores in our comparable store
base. We monitor comparable store sales daily, weekly, monthly and annually by product category, region, store and sales associate. Our analysis of comparable store sales provides us with the information to make strategic merchandising and marketing
decisions.



Gross Profit. Gross profit measures the
profitability of our sales, and is defined by us as net sales less cost of goods sold. We analyze gross profit at every level of our business, from the company as a whole to individual sales personnel and specific products and categories. We use
gross profit measurements to focus our advertising and to manage our product offerings.



Description of Certain Line Items



Following
is a description of additional components of certain line items from our condensed consolidated financial statements.



Net Sales. Net sales consists of gross revenues from sales of products, delivery and installation and other services, net of promotions, rebates
and discounts. Net sales also include revenues from sales of our extended service plans (ESPs). In October 2005, a third party assumed our obligations related to our previously sold ESPs. See footnote 9 in our condensed consolidated financial
statements for further discussion of the transaction related to our ESPs. When we were the obligor on the ESP, we recognized revenue from the sale of the ESP ratably over the life of the contract. When the obligor on the ESP is a third party, we
recognize commission revenue from the sale of the ESP at the time of sale, net of the portion paid to the third-party obligor.



Cost of Goods Sold. Cost of goods sold is defined as the cost of gross inventory sold, including any handling charges, in-bound freight expenses
and physical inventory losses, less the amortized portion of certain vendor allowances. Because we do not include costs related to our distribution facilities in cost of goods sold, our gross profit may not be comparable to that of other retailers
that include these costs in cost of goods sold and in the calculation of gross profit.



14



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Selling, General & Administrative Expense (SG&A). SG&A includes all our costs
(other than cost of goods sold) including wages, rent, net advertising costs, depreciation and amortization, taxes (other than income taxes), insurance, utilities, delivery costs, distribution costs, service expense, repairs and maintenance of
stores and equipment, and other general administrative expenses.



Other Expense (Income). Other expense (income) includes interest expense, interest income, minority interest and other, net.



Deferred Revenue on Extended Maintenance Agreements. Deferred revenue on ESPs represents the liability recognized on our balance sheet with respect
to sales of ESPs for which we are the obligor. We amortize the deferred revenue on these extended maintenance agreements ratably over the life of the ESP.



Results of Operations



Summary of Key Operating Trends on a Consolidated and De-consolidated Basis



As discussed in Consolidation of Certain Related Party Entities, Gregg Appliances was required, pursuant to generally accepted accounting
principles in the United States of America, to consolidate certain variable interest entities controlled by a former director and principal stockholder of Gregg Appliances or members of his immediate family prior to its recapitalization on
February 3, 2005. Following the recapitalization, Gregg Appliances was no longer required to consolidate these related party entities for accounting purposes because these entities were no longer under common control. As a result of the
consolidation of the related party entities, Gregg Appliances accompanying condensed consolidated statements of operations are not comparable. A detailed description of these related party transactions can be found in Gregg Appliances
Registration Statement on Form S-4 as filed with the Securities and Exchange Commission (SEC) on September 30, 2005. The following condensed statements of income for the three-month and nine-month periods ended December 31, 2004 have been
presented on a consolidated basis, as well as on a de-consolidated basis, for comparative purposes.



Certain Operating Information



The following table reflects our operating results on a consolidated basis including the variable interest entities for the periods indicated as a percentage of net sales.



|                                                     |  |                                |   |  |                               |   |  |       |   |  |       |  
|---------------------------------------------------- |  | ------------------------------ | - |  | ----------------------------- | - |  | ----- | - |  | ----- | -
|                                                     |  | Three Months EndedDecember 31, |   |  | Nine Months EndedDecember 31, |  
|                                                     |  | 2005                           |   |  | 2004                          |   |  | 2005  |   |  | 2004  |  
|Net sales                                            |  | 100.0                          | % |  | 100.0                         | % |  | 100.0 | % |  | 100.0 | %
|Cost of goods sold                                   |  | 70.8                           |   |  | 70.1                          |   |  | 69.0  |   |  | 68.8  |  
|                                                     |  |                                |   |  |                               |   |  |       |   |  |       |  
|Gross profit                                         |  | 29.2                           |   |  | 29.9                          |   |  | 31.0  |   |  | 31.2  |  
|Selling, general and administrative expenses         |  | 23.9                           |   |  | 22.8                          |   |  | 27.7  |   |  | 26.9  |  
|Stock-based compensation                             |  |                               |   |  |                              |   |  |      |   |  | 1.1   |  
|Gain on transfer of extended maintenance obligations |  | (9.9                           | ) |  |                              |   |  | (4.1  | ) |  |      |  
|Restructuring and asset impairment charges           |  |                               |   |  |                              |   |  | 0.2   |   |  |      |  
|                                                     |  |                                |   |  |                               |   |  |       |   |  |       |  
|Income from operations                               |  | 15.2                           |   |  | 7.1                           |   |  | 7.2   |   |  | 3.2   |  
|Other expense (income)                               |  | 1.8                            |   |  | 1.4                           |   |  | 2.1   |   |  | 0.6   |  
|Income tax expense                                   |  | 5.4                            |   |  |                              |   |  | 2.4   |   |  |      |  
|                                                     |  |                                |   |  |                               |   |  |       |   |  |       |  
|Net income                                           |  | 8.0                            | % |  | 5.8                           | % |  | 2.7   | % |  | 2.5   | %
|                                                     |  |                                |   |  |                               |   |  |       |   |  |       |  



Certain percentage amounts do not
sum to total due to rounding.



The following table
reflects our operating results on a de-consolidated basis excluding the variable interest entities for the periods indicated as a percentage of net sales.



|                                                     |  |                                |   |  |                               |   |  |       |   |  |       |  
|---------------------------------------------------- |  | ------------------------------ | - |  | ----------------------------- | - |  | ----- | - |  | ----- | -
|                                                     |  | Three Months EndedDecember 31, |   |  | Nine Months EndedDecember 31, |  
|                                                     |  | 2005                           |   |  | 2004                          |   |  | 2005  |   |  | 2004  |  
|Net sales                                            |  | 100.0                          | % |  | 100.0                         | % |  | 100.0 | % |  | 100.0 | %
|Cost of goods sold                                   |  | 70.8                           |   |  | 70.1                          |   |  | 69.0  |   |  | 68.8  |  
|                                                     |  |                                |   |  |                               |   |  |       |   |  |       |  
|Gross profit                                         |  | 29.2                           |   |  | 29.9                          |   |  | 31.0  |   |  | 31.2  |  
|Selling, general and administrative expenses         |  | 23.9                           |   |  | 24.2                          |   |  | 27.7  |   |  | 27.6  |  
|Stock-based compensation                             |  |                               |   |  |                              |   |  |      |   |  | 1.1   |  
|Gain on transfer of extended maintenance obligations |  | (9.9                           | ) |  |                              |   |  | (4.1  | ) |  |      |  
|Restructuring and asset impairment charges           |  |                               |   |  |                              |   |  | 0.2   |   |  |      |  
|                                                     |  |                                |   |  |                               |   |  |       |   |  |       |  
|Income from operations                               |  | 15.2                           |   |  | 5.7                           |   |  | 7.2   |   |  | 2.5   |  
|Other expense (income)                               |  | 1.8                            |   |  | (0.1                          | ) |  | 2.1   |   |  | (0.1  | )
|Income tax expense                                   |  | 5.4                            |   |  |                              |   |  | 2.4   |   |  |      |  
|                                                     |  |                                |   |  |                               |   |  |       |   |  |       |  
|Net income                                           |  | 8.0                            | % |  | 5.8                           | % |  | 2.7   | % |  | 2.5   | %
|                                                     |  |                                |   |  |                               |   |  |       |   |  |       |  



15



---

Certain percentage amounts do not sum to total due to rounding.



The following table reflects our operating results on a de-consolidated
basis excluding the variable interest entities for the periods indicated (in thousands).



|                                                     |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------- |  | ------------------------------ | ------- | - | ----------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                     |  | Three Months EndedDecember 31, |         |   | Nine Months EndedDecember 31, |  
|                                                     |  | 2005                           |         |   | 2004                          |   |         | 2005 |  |   | 2004    |  
|Net sales                                            |  | $                              | 281,201 |   |                               | $ | 254,175 |      |  | $ | 679,115 |   |  | $ | 597,648 |  
|Cost of goods sold                                   |  |                                | 198,989 |   |                               |   | 178,159 |      |  |   | 468,272 |   |  |   | 411,011 |  
|                                                     |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Gross profit                                         |  |                                | 82,212  |   |                               |   | 76,016  |      |  |   | 210,843 |   |  |   | 186,637 |  
|Selling, general and administrative expenses         |  |                                | 67,266  |   |                               |   | 61,512  |      |  |   | 188,368 |   |  |   | 165,160 |  
|Stock-based compensation                             |  |                                |        |   |                               |   |        |      |  |   |        |   |  |   | 6,721   |  
|Gain on transfer of extended maintenance obligations |  |                                | (27,850 | ) |                               |   |        |      |  |   | (27,850 | ) |  |   |        |  
|Restructuring and asset impairment charges           |  |                                |        |   |                               |   |        |      |  |   | 1,320   |   |  |   |        |  
|                                                     |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Income from operations                               |  |                                | 42,796  |   |                               |   | 14,504  |      |  |   | 49,005  |   |  |   | 14,756  |  
|Other expense (income)                               |  |                                | 4,937   |   |                               |   | (140    | )    |  |   | 14,306  |   |  |   | (391    | )
|Income tax expense                                   |  |                                | 15,273  |   |                               |   |        |      |  |   | 16,230  |   |  |   |        |  
|                                                     |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  
|Net income                                           |  | $                              | 22,586  |   |                               | $ | 14,644  |      |  | $ | 18,469  |   |  | $ | 15,147  |  
|                                                     |  |                                |         |   |                               |   |         |      |  |   |         |   |  |   |         |  



Three Months Ended
December 31, 2005 Compared to Three Months Ended December 31, 2004



Net Sales.Net sales for the three months ended December 31, 2005 increased 10.6% as sales increased to $281.2 million compared to $254.2 million for the comparable prior year period. This increase in
sales was primarily attributable to the net addition of eight stores during the past twelve months coupled with a 1.7% increase in comparable stores sales for the third quarter of fiscal 2006. During the past twelve months, there have been four new
store openings in North Carolina, four in South Carolina, and one in Ohio, as well as one store closing in Ohio as a result of its lease expiration. The comparable store sales performance was primarily driven by sales growth in the major appliance
and video categories, with gains in flat panel televisions outpacing the sales decline in projection and tube television sales.



Gross Profit.As a percentage of sales, our gross profit margin decreased by 0.7% to 29.2% for the three months ended December 31, 2005 from
29.9% for the three months ended December 31, 2004. Approximately 0.3% of the decline in gross profit as a percentage of sales was attributable to our decision to outsource our product service and repair work to third party providers as well as
to sell third party extended service plans (ESPs). The remainder of the decline in gross margin percentage was primarily attributable to the timing of excess advertising rebates received from vendors which were treated as a reduction in inventory in
accordance with EITF 02-16, Accounting by a Customer (including a Reseller) for Cash Consideration Received from a Vendor.



Selling, General and Administrative Expenses.On a consolidated basis, SG&A expenses increased by 1.1%, as a percentage of sales, from the
comparable prior year period to 23.9% for the three months ended December 31, 2005. As adjusted to remove the impact of the consolidation of our variable interest entities, SG&A expenses decreased by 0.3%, as a percentage of sales, from the
comparable prior year period to 23.9% for the three months ended December 31, 2005. The decrease in SG&A expense as a percentage of sales, on a de-consolidated basis, for the three months ended December 31, 2005 was primarily
attributable to a decrease of approximately 1.1% from the outsourcing of our product service and repair work to third party providers and our decision to sell third party ESPs, partially offset by increases in professional fees, utilities and
insurance expense.



Gain on Transfer of Extended Maintenance
Obligations.In connection with our efforts to exit our product service and repair offerings, we entered into an agreement with a third party in October 2005 to transfer our product service obligations for previously sold ESPs. We paid the third
party $21.5 million to assume our product service obligation and recognized a $27.9 million gain on the sale. On a prospective basis, the unrelated third party is the obligor on virtually all of the extended service plans sold by the Company.



16



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Other Expense (Income). On both a consolidated and a de-consolidated basis, the increase in other
expense for the three months ended December 31, 2005 versus the comparable prior year period was primarily comprised of interest expense on the notes issued in connection with our recapitalization.



Income Tax Expense. Prior to February 3, 2005, our company was
organized as an S corporation. Accordingly, the allocable share of taxable income or loss was includable in the tax returns of the stockholders and income taxes were not reflected in our financial statements. Following the recapitalization, we no
longer qualify as an S corporation and are now subject to U.S. federal and certain state and local income taxes applicable to C corporations. During the three months ended December 31, 2005, we recorded deferred income tax expense of $15.3
million, primarily the result of an increase in income before income taxes.



Nine Months Ended December 31, 2005 Compared to Nine Months Ended December 31, 2004



Net Sales.Net sales for the nine months ended December 31, 2005 increased 13.6% to $679.1 million from $597.6 million for the nine months
ended December 31, 2004. This increase in sales was largely due to the net addition of eight stores during the past twelve months coupled with a 3.2% increase in comparable store sales for the first nine months of fiscal 2006. The comparable
store sales improvement was largely due to strong performance in the major appliance and video categories, particularly in flat panel televisions, partially offset by weaker tube television sales.



Gross Profit.Our gross profit margin, as a percentage of sales,
decreased by 0.2% to 31.0% for the nine months ended December 31, 2005 from 31.2% for the nine months ended December 31, 2004. The decrease in gross profit margin was primarily due to our decision to outsource our product service and
repair work to third party providers as well as to sell third party extended service plans.



Selling, General and Administrative Expenses.On a consolidated basis, SG&A expenses increased by 0.8%, as a percentage of sales, to 27.7% for the nine months ended December 31, 2005 versus the
comparable prior year period. On a de-consolidated basis, SG&A expenses increased by 0.1%, as a percentage of sales, to 27.7% for the nine months ended December 31, 2005 versus the comparable prior year period. The increase in SG&A
expense on a de-consolidated basis as a percentage of sales for the nine months ended December 31, 2005 resulted primarily from increases in professional fees, utilities, delivery expenses, and travel and entertainment expenses, partially
offset by an approximate 0.5% decrease resulting from the outsourcing of our product service and repair work to third party providers as well as our decision to sell third party ESPs.



Stock-Based Compensation. During the nine months ended December 31, 2004, the Company recognized stock-based
compensation expense of $6.7 million related to the outstanding stock issued in exchange for a non-recourse note and stock appreciation rights representing variable awards under APB Opinion No. 25 and related interpretations. Accordingly,
stock-based compensation expense was recorded to reflect the increase in fair value of the Companys common stock prior to our recapitalization. No stock-based compensation expense was recognized for the nine months ended December 31, 2005
in accordance with APB Opinion No, 25 as the stock options granted were fixed awards and the exercise price of the stock options granted was equal to or greater than the fair value of the common stock on the date of grant.



Gain on Transfer of Extended Maintenance Obligations.In connection
with our efforts to exit our product service and repair offerings, we entered into an agreement with a third party in October 2005 to transfer our product service obligations for previously sold extended service plans. We paid the third party $21.5
million to assume our product service obligation and recognized a $27.9 million gain on the sale. Going forward, the unrelated third party is the obligor on virtually all of the ESPs sold by the Company.



Restructuring and Asset Impairment Charges.In connection with our
transition to outsourcing our product service and repair services, we recorded restructuring and asset impairment charges of $1.3 million during the nine months ended December 31, 2005 in accordance with SFAS No. 146 and SFAS No. 144.
These charges represented asset impairments of certain long-lived assets and severance and benefits costs. The severance and benefits costs will result in cash outflow while the asset impairments have been recognized as non-cash charges against the
specific assets.



17



---

Other Expense (Income). On both a consolidated and a de-consolidated basis, the increase in other
expense for the nine months ended December 31, 2005 versus the comparable prior year period was primarily comprised of interest expense on the notes issued in connection with our recapitalization.



Income Tax Expense. Prior to February 3, 2005, our company was
organized as a Subchapter S corporation. Accordingly, the allocable share of taxable income or loss was includable in the tax returns of the stockholders and income taxes were not reflected in our financial statements. Following the
recapitalization, we no longer qualify as an S corporation and are subject to U.S. Federal and certain state and local income taxes applicable to C corporations. During the nine months ended December 31, 2005, we recorded deferred income tax
expense of $16.2 million, primarily the result of an increase in income before income taxes and certain state income tax rate and apportionment changes.



Liquidity and Capital Resources



The following table presents a summary on a consolidated basis of our net cash provided by (used in) operating, investing and financing activities (in
thousands):



|                                                    |  |                                |         |   |      |   |         |  
|--------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                    |  | Nine Months Ended December 31, |        
|                                                    |  | 2005                           |         |   | 2004 |  
|Net cash provided by operating activities           |  | $                              | 7,879   |   |      | $ | 35,145  |  
|Net cash used in investing activities               |  | $                              | (12,323 | ) |      | $ | (17,264 | )
|Net cash provided by (used in) financing activities |  | $                              | 1,659   |   |      | $ | (26,529 | )



The following table
presents a summary on a de-consolidated basis of our net cash provided by (used in) operating, investing and financing activities (in thousands):



|                                                    |  |                                |         |   |      |   |         |  
|--------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                    |  | Nine Months Ended December 31, |        
|                                                    |  | 2005                           |         |   | 2004 |  
|Net cash provided by operating activities           |  | $                              | 7,879   |   |      | $ | 33,771  |  
|Net cash used in investing activities               |  | $                              | (12,323 | ) |      | $ | (27,794 | )
|Net cash provided by (used in) financing activities |  | $                              | 1,659   |   |      | $ | (14,455 | )



Our liquidity
requirements arise primarily from our need to fund working capital requirements and capital expenditures.



Capital Expenditures. We make capital expenditures principally to fund our expansion strategy, which includes, among other things, investments in
new stores, remodeling and relocation of existing stores, as well as information technology and other infrastructure-related projects that support our expansion. Capital expenditures on a consolidated and a de-consolidated basis were $13.8 million
for the nine months ended December 31, 2005 and $10.5 million for the nine months ended December 31, 2004. The increase in capital expenditures for the nine months ended December 31, 2005 is primarily attributable to an increase in
expenditures to open a greater number of new stores during the period and the continued transition to a new management information system. We expect that capital expenditures in fiscal 2006 will be approximately $15 million to $16 million. During
the balance of fiscal 2006, we plan to continue the implementation of a new management information system and expend additional capital on new stores to be opened during fiscal 2007. During the nine months ended December 31, 2005, we opened
four new stores in North Carolina, four new stores in South Carolina, and one new store in Ohio. Additionally, we have developed a multi-phase plan for transitioning to a new management information system over the next three to four years. Our
estimate of the additional capital expenditures related to our new management information system is approximately $10.0 million to $15.0 million in total over the next three to four years, but we have not yet determined the amount we will expend for
this project on a year-by-year basis.



Operating
Activities. Cash provided by operating activities primarily consists of net income as adjusted for increases or decreases in working capital and non-cash depreciation and amortization. Cash provided by operating activities on a consolidated
basis was $7.9 million and $35.1 million for the nine months ended December 31, 2005 and 2004, respectively. As adjusted to remove the impact of our variable interest entities, cash provided by operating activities was $7.9 million and $33.8
million for the same periods. The decrease in cash flows, on a de-consolidated basis, for the nine months ended December 31, 2005 as compared to the nine months ended December 31, 2004 was a result of the gain on transfer of our extended
maintenance obligations and a $21.5 million cash payment related to the transfer of our extended maintenance obligations to a third party, partially offset by an increase in net income, an increase in deferred tax assets, an increase in inventories.



18



---

Investing Activities. Cash used in investing activities on a consolidated basis was $12.3 million
and $17.3 million for the nine months ended December 31, 2005 and 2004, respectively. As adjusted to remove the impact of our variable interest entities, cash used in investing activities was $12.3 million and $27.8 million for the same
periods. The increase for the nine months ended December 31, 2005 as compared to the nine months ended December 31, 2004 was principally due to an increase in our capital expenditures for the nine months ended December 31, 2005
partially offset by a $16.6 million loan we made to a related party during the nine months ended December 31, 2004.



Financing Activities. On a consolidated basis, financing activities provided $1.7 million in cash for the nine months ended December 31, 2005
while financing activities used $26.5 million of cash for the comparable prior year period. On a de-consolidated basis, financing activities provided $1.7 million in cash for the nine months ended December 31, 2005 while financing activities
used $14.5 million of cash for the comparable prior year period.



Revolving Credit Facility.In connection with our recapitalization, we entered into a five-year, $75.0 million asset-based revolving credit facility with Congress Financial Corporation (Central), as administrative agent, Wachovia
Capital Markets, LLC, as sole lead arranger and book runner, Wachovia Bank, National Association, as syndication agent, and certain other lenders. The facility provides for aggregate borrowings of up to $75.0 million, including a sublimit for
letters of credit of up to $25.0 million, subject to a borrowing base computation. As of December 31, 2005, under the revolving credit facility, we had no cash borrowings outstanding and $5.8 million of letters of credit outstanding which
expire through June 30, 2006. As of December 31, 2005, the total borrowing availability under the revolving credit facility was $53.8 million.



Until June 30, 2005, borrowings under our revolving credit facility bore interest, at our option, at either a floating rate equal to the prevailing
eurodollar rate plus a spread of 1.75% per year, or the prime rate as set by Wachovia Bank plus a spread of 0.25% per year. Borrowings under our revolving credit facility bear interest, at our option, at either such eurodollar rate plus a
margin of between 1.25% and 2.00% per year, or such prime rate plus a margin of between 0.25% and 0.75% per year, in each case, depending on our financial performance. In addition to interest, the lenders under our revolving credit
facility are paid certain additional fees on the unused commitments under the facility.



Our revolving credit facility contains customary restrictive covenants which, among other things, limit indebtedness, liens, mergers and consolidations, asset sales, dividends and other distributions and transactions
with affiliates. Our revolving credit facility also contains customary affirmative covenants as to, among other things, financial statements, corporate existence, insurance, properties, collateral maintenance and employee benefit and environmental
legal compliance. We are required to maintain a fixed charge coverage ratio (as defined therein) if excess availability under the facility is less than $8.5 million. Our revolving credit facility also contains customary events of default, including
non-payment of principal, interest or fees, covenant violations, cross defaults, bankruptcy or insolvency, change of control and material adverse changes to our business.



Senior Notes.In connection with our recapitalization on February 3, 2005, we issued $165 million in unsecured
9% senior notes. Interest on the notes is payable in arrears twice a year on February 1 and August 1. The notes will mature on February 3, 2013. On September 1, 2005, the interest on the senior notes increased to 9.25% per
annum pursuant to section 4 of the Registration Rights Agreement dated February 3, 2005 between us and the initial purchasers of the notes. The interest rate increase remained in effect until the Registration Statement covering the exchange
offer with respect to the notes was declared effective by the SEC and the exchange offer was consummated. On November 4, 2005, the exchange offer was consummated and the interest rate consequently decreased to 9.0% per annum.



Junior Subordinated Notes. As part of the consideration paid in the
recapitalization to certain stockholders, we issued $25 million in unsecured 6% junior subordinated notes, with a fair value of $17.2 million at the time of issue based on an effective interest rate of 11%. These notes are subordinated to the
unsecured senior notes and any payment of principal thereof directly or indirectly is deferred until the



19



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payment in full of all of the senior debt. Unless there is a default or an event of default under any senior debt, interest on the junior subordinated debt
is payable in arrears on February 1 and August 1. The junior notes will mature on February 1, 2015. The original discount on the note will be accreted to interest expense through the maturity date. As of December 31, 2005, the
unamortized discount on the note totaled approximately $7.4 million. Accretion of the discount was approximately $0.3 million during the first nine months of fiscal 2006 and is included in interest expense in the accompanying statements of income.



Long Term Liquidity. Anticipated cash flows from
operations and funds available from our revolving credit facility, together with cash on hand, should provide sufficient funds to finance our operations for at least the next 12 months. As a normal part of our business, we consider opportunities to
refinance our existing indebtedness, based on market conditions. Although we may refinance all or part of our existing indebtedness in the future, there can be no assurances that we will do so. Changes in our operating plans, lower than anticipated
sales, increased expenses, acquisitions or other events may require us to seek additional debt or equity financing. There can be no guarantee that financing will be available on acceptable terms or at all. Additional debt financing, if available,
could impose additional cash payment obligations and additional covenants and operating restrictions.



Seasonality



Our
business is seasonal, with a higher portion of net sales and operating profit realized during the quarter that ends December 31. Our consumer electronics net sales is influenced by overall demand for digital electronics and is generally the
highest in the third quarter of each fiscal year due to the holiday shopping season. Appliance revenue is impacted by seasonal weather patterns but is less seasonal than our electronics business and helps to offset the seasonality of our overall
business. For example, we experience stronger sales of compressor appliances (air conditioners, refrigerators and freezers) during hotter summers because higher temperatures tend to wear out the compressors in these products and cause consumers to
replace them.



Outlook



Our video business is undergoing a transition as a result of declining
consumer demand for big screen projection televisions in favor of plasma and LCD flat panel technology. As a result, we anticipate comparable store sales to decline between 3% to 5% for the fourth quarter ending March 31, 2006 versus the comparable
prior year period. We expect, however, that earnings before net interest expense, income taxes, depreciation and amortization will increase during the fourth fiscal quarter compared to the prior year period. During this transition, we expect that
larger screen plasma and LCD flat panel supply adjusts in the second half of calendar 2006 to compensate for the declining demand for big screen projection televisions. No new store openings, relocations or closings are anticipated during the fourth
quarter of 2006.



Our outlook for the fourth quarter of fiscal
2006 is based on information presently available and contains certain assumptions regarding macroeconomic conditions. We can not be certain what effects rising energy prices, reduced consumer confidence and increasing interest rates may have on
consumer spending. Differences in actual economic conditions compared with our assumptions could have a material impact on our fourth quarter of fiscal 2006 results.



ITEM 3. Quantitative and Qualitative Disclosures about Market Risk



We are exposed to market risk from changes in floating rate interest on outstanding debt under our revolving credit facility. As of December 31,
2005, we had no cash borrowings under our revolver. We are not currently exposed to market risk from currency fluctuations as all our purchases are dollar-denominated. We do not hedge interest rate exposure. We will consider entering into interest
rate swap agreements at such times as we deem appropriate.



20



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ITEM 4. Controls and Procedures



Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and regulations, and that the information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures based solely on the definition of Disclosure Controls and Procedures in Rules 13a-15(e) and 15d-15(e) of the Exchange
Act.



As of December 31, 2005, we carried out an
evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based
on this evaluation, we concluded that our disclosure controls and procedures were effective.



Changes in Internal Control. During the three months ended December 31, 2005, there were no significant changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only
reasonable assurance that our controls will succeed in achieving the stated goals under all potential future conditions.



21



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Part II - Other Information



ITEM 1. Legal Proceedings



We
are party to various legal actions in the ordinary course of business. We believe these actions are routine and incidental to the business. While the outcome of these actions cannot be predicted with certainty, we believe that the ultimate
resolution of these matters will not have a material adverse effect on our business, financial condition or operations.



ITEM 5. Other Information



On February 13, 2006, the Company entered into an amendment to the Loan and Security Agreement dated February 3, 2005. The Amendment No. 1 to the Loan and Security Agreement is attached hereto as Exhibit 10.21.



ITEM 6. Exhibits



|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.21 |  | Amendment No. 1 to Loan and Security Agreement dated February 3, 2005 by and among Gregg Appliances, Inc., as Borrower, and HHG Distributing LLC, as Guarantor, and Congress Financial
Corporation (Central), as Administrative Agent and Collateral Agent, Wachovia Capital Markets LLC, as Sole Lead Arranger and Bookrunner, Wachovia Bank, National Association, as Syndication Agent, and the Lenders from Time to Time Party Hereto, as
Lenders.
|      | 
|31.1  |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                                                                                                                                                                                                                
|      | 
|31.2  |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                                                                                                                                                                                                                
|      | 
|32.1  |  | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                
|      | 
|32.2  |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                



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 thereunto duly authorized.



GREGG APPLIANCES, INC.By:

/s/ Donald J.B. Van der WielDonald J.B. Van der WielChief Financial Officer




Dated: February 14,
2006



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