GOODYS FAMILY CLOTHING INC /TN - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED FEBRUARY 2, 2002
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: 0-19526

GOODY'S FAMILY CLOTHING, INC.
(Exact name of registrant as specified in its charter)

TENNESSEE 62-0793974
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

400 GOODY'S LANE, KNOXVILLE, TENNESSEE 37922
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (865) 966-2000

Securities registered pursuant to Section 12(b) of the Act:
NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, No Par Value
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

Aggregate market value of the voting stock held by non-affiliates of the
Registrant as of April 15, 2002: approximately $167,987,000

Number of shares of Common Stock outstanding as of April 15, 2002:
32,474,463

DOCUMENTS INCORPORATED BY REFERENCE
The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in Part
III of this Form 10-K shall be incorporated from the Company's Proxy Statement
for its 2002 Annual Meeting of Shareholders currently scheduled to be held on
June 19, 2002.
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GOODY'S

[COLLAGE: PHOTOS OF PEOPLE AND LOGO]

ANNUAL REPORT 2001

Fun Family
Fashion with
a Goodfriend
Minding
the Store

(GOODY'S LOGO)

(PICTURE OF GOODY'S DEPARTMENT STORE)

TABLE OF CONTENTS

To Our Shareholders ......................................................... 1

Store Locations ............................................................. 4

Corporate, Shareholder and Investor Information ............. Inside Back Cover

FORM 10-K INDEX

Forward-Looking Statements .................................................. 2

Selected Financial Data .................................................... 16

Management's Discussion and Analysis ....................................... 17

Independent Auditors' Report .............................................. F-2

Financial Statements ...................................................... F-3

FORWARD-LOOKING STATEMENTS

Please refer to the sections entitled "Forward-Looking Statements" and "Certain
Factors That May Affect Future Results" in the Form 10-K for the fiscal year
ended February 2, 2002, that accompanies and is part of this Annual Report.

To Our Shareholders

Fiscal 2001 was a disappointing year as our financial results for the year
did not reflect the many positive strides we made in our efforts to reposition
Goody's for a profitable future.

Sales for fiscal 2001 were $1.193 billion, a decrease of 4.6% from fiscal
2000 (fiscal 2001 contained 52 weeks, while fiscal 2000 contained 53 weeks).
Comparable store sales for fiscal 2001 decreased 8.5% compared to fiscal
2000. The Company's net loss for fiscal 2001 was $20.2 million compared with net
earnings of $13.3 million for fiscal 2000.

It became clear to us as fiscal 2001 got under way that we were facing a very
tough year. The economic outlook was dismal, the retail sector as a whole was
floundering, consumer lifestyles and tastes were rapidly changing, and we had
clearly lost touch with our customer. To regain the competitive edge that we've
maintained for 48 years, we analyzed every aspect of our business from the top
line down. Having pursued this effort aggressively, we believe that, despite
negative fiscal 2001 financial results, we are well positioned for a turnaround
in fiscal 2002. There are several reasons for our optimism:

- We have a history of prudent management of our financial resources,
evidenced by our strong balance sheet at year end, which reflects a
strong cash position, favorable inventory levels, and no long-term
debt, allowing us to execute our plans for fiscal 2002;

- We have made significant changes to our marketing and advertising
strategies, including reallocating our advertising dollars to reach a
broader customer base in a way that we believe effectively brands
Goody's as a destination store for our target customer;

- We have analyzed and implemented new business strategies that will
differentiate us from our competitors, and we have a renewed optimism
for success with some of our long-term strategic branded partners, and;

- We have scrutinized every operating area of the Company and have
introduced efficiencies that we expect will reduce operating costs in
fiscal 2002 and beyond.

MARKETING AND ADVERTISING

Communicating with our target customer more effectively is central as we
continue to focus on turning our business around. The direction we're taking our
marketing and advertising efforts is based on intensive research we conducted
during the past 12 months. An important part of this research was the Goody's
Good Friend Bus Tour initiated in July 2001. During the tour, we visited 5
markets, and we spent critical one-on-one time talking with shoppers. The goal
of these visits was to find out what we can do to strengthen the Goody's
shopping experience, and to learn from our primarily female customer what
affects her shopping choices.

[CHAIRMAN AND CUSTOMER PHOTO]

[CHAIRMAN AND CUSTOMER PHOTO]

During the...Goody's Good Friend Bus Tour... we spent one-on-one time talking
with shoppers.

To Our Shareholders (continued)

At Goody's we are known for our brands.

[LOGOS OF APPAREL BRANDS]

Additionally, telephone and focus group research, not surprisingly, echoed the
responses we were getting during the tour. We incorporated what we learned into
a test advertising campaign that ran from October 24, 2001 to January 5, 2002 to
let shoppers know that we are listening and want to make their shopping
experience better.

The results of the campaign were impressive and were reflected in dramatically
improved comparable store sales results for those stores included in the bus
tour test. We have reacted to what we learned from shoppers and incorporated
consumer directed suggestions within our stores. We believe these changes will
continue to make a measurable difference in our sales and margin growth. As we
enter fiscal 2002, we feel confident our strategy of listening and responding to
our shoppers will have a positive impact on our results for the full fiscal
year.

MERCHANDISING

The most significant change shoppers will see when they visit our stores is that
Goody's has made a real commitment to provide dominant plus size fashion
assortments and extended sizes in the children's, juniors' and petite
departments. These additions to our merchandising line-up are based on
information we gleaned from our research indicating that the plus size customer
is under served by the apparel retail marketplace. Early in-store tests of these
plus size programs yielded favorable results and we expect to continue to build
our plus size inventories -- junior sizes in particular -- beginning in the
summer of 2002 and into the fall season.

At Goody's we're known for our brands. And to keep pace with our customers'
needs, we're frequently adding new brands to our merchandise line-up such as
Alexander Julian. In addition, we are revitalizing our private label programs
with the upscale Goodclothes program in the misses, plus and petite
departments, and RMG Chairman's Collection for men. Early consumer response to
these programs is encouraging and we intend to commit marketing resources to
assist them in achieving long-term success.

FINANCIAL POSITION

One thing for which Goody's is known and respected is the Company's heritage of
prudent financial management and the strength to manage through difficult
business cycles. In fact, despite a difficult fiscal 2001, we began fiscal
2002 with $53.8 million in cash and cash equivalents, and no long-term
debt. We budgeted fiscal 2001 capital expenditures at $30.0 million and, in
response to the disappointing financial results, were able to reduce capital
expenditures to only $15.3 million and still open 18 new stores and relocate or
remodel 12 stores. Capital expenditures for our fiscal 2002 budget remain modest
- -- only $11.0 million with two new stores and four remodels or relocations
planned for the year. In addition, we are planning to increase inventory
turnover while diligently managing our inventory levels.

To Our Shareholders (continued)

Following three years of difficult sales trends, we have carefully evaluated our
expense structure and are committed to reducing and managing our selling,
general and administrative expenses. Among the initiatives to minimize the
Company's expenses was a reduction in work force implemented early in fiscal
2002. Our expense reductions measures are expected to save the Company over $10
million on an annualized basis.

Executed as planned, we believe that all of our efforts, combined with
revitalized marketing, advertising and merchandising programs, should deliver
the financial results every shareholder expects from Goody's.

CONCLUSION

Despite the disappointment we all felt as fiscal 2001 came to a close, our
associates were -- and still are -- motivated by the promising work underway to
reposition Goody's as a dominant apparel retailer in the markets we serve. One
overwhelming truth came to light this past year, we can never stop listening and
responding to the needs of our customers. As our new tag line says -- It's All
About You. We are excited about this upcoming year and will strive to make
Goody's the destination for Fun Family Fashion with a Goodfriend Minding the
Store.

/s/ Robert M. Goodfriend

Robert M. Goodfriend,
Chairman of the Board and
Chief Executive Officer

/s/ Lana Cain Krauter

Lana Cain Krauter
President and Chief
Merchandising Officer

[PHOTO OF ROBERT M. GOODFRIEND]

[PHOTO OF LANA CAIN KRAUTER]

Store Locations

.....Goodys...the destination for Fun Family Fashion with a Goodfriend Minding
the Store.

[MAP of Store Locations]

As of February 2, 2002, the Company
operated 332 stores in 18 states.

Unless the context otherwise indicates, all references in this Form 10-K to
the "Company" or "Goody's" refer to Goody's Family Clothing, Inc., a Tennessee
corporation, and its subsidiaries. The Company's fiscal year ends on the
Saturday nearest the last day of January. The terms "fiscal 2007," "fiscal
2006," "fiscal 2005," "fiscal 2004," "fiscal 2003," "fiscal 2002," "fiscal
2001," "fiscal 2000," "fiscal 1999," "fiscal 1998," and "fiscal 1997," refer to
the Company's fiscal years ending or ended on February 2, 2008 (52 weeks),
February 3, 2007 (53 weeks), January 28, 2006 (52 weeks), January 29, 2005 (52
weeks), January 31, 2004 (52 weeks), February 1, 2003 (52 weeks), February 2,
2002 (52 weeks), February 3, 2001 (53 weeks), January 29, 2000 (52 weeks),
January 30, 1999 (52 weeks), and January 31, 1998 (52 weeks), respectively.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements made by or on behalf of the Company. Management
has endeavored in its communications and in this Form 10-K to highlight the
trends and factors that might have an impact on the Company and the industry in
which it competes. Any "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which generally can be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"estimate," "anticipate," "believe," "target," "plan," "project," or "continue,"
or the negatives thereof or other variations thereon or similar terminology, are
made on the basis of management's plans and current analysis of the Company, its
business and the industry as a whole. These statements appear in a number of
places in this Form 10-K and include statements regarding the intent, belief or
current expectations of the Company, its directors or its officers with respect
to, among other things: (i) the ability to reverse negative comparable store
sales trends; (ii) competition, including the impact of competitors' pricing and
store expansion; (iii) compliance with loan covenants and the availability of
sufficient eligible collateral for borrowing; (iv) growth of its store base; (v)
trends affecting the Company's financial condition or results of operations;
(vi) the continued availability of adequate credit support from vendors and
factors; (vii) customer demand and trends in the apparel and retail industry and
the acceptance of merchandise acquired for sale by the Company; (viii) the
timely availability of branded and private label merchandise in sufficient
quantities to satisfy customer demand; (ix) the effectiveness of the recently
adopted changes in merchandising, advertising, pricing and operational
strategies; (x) the outcome of pending trademark and other litigation; (xi) the
ability to control shrinkage; (xii) the success of the Company's information
technologies systems; (xiii) the ability to achieve business plan targets; (xiv)
the ability to avoid excessive markdowns; (xv) the effectiveness of advertising
and promotional events; (xvi) the ability to enter into leases for new store
locations; (xvii) the timing, magnitude and costs of opening new stores; (xviii)
individual store performance, including new stores; (xix) relations with
vendors, factors and employees; (xx) unanticipated needs for additional capital
expenditures; (xxi) the general economic conditions within the Company's markets
and an improvement in the overall retail environment; and (xxii) global
political unrest. Readers are cautioned that any such forward-looking statement
is not a guarantee of future performance and involves risks and uncertainties,
and that actual results may differ materially from those projected in the
forward-looking statement as a result of various factors. Also see "Certain
Factors That May Affect Future Results." The Company does not undertake to
publicly update or revise its forward-looking statements even if experience or
future changes make it clear that any projected results expressed or implied
therein will not be realized.
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2

PART I

ITEM 1. BUSINESS

GENERAL

Goody's is a retailer of moderately-priced family apparel operating 332
stores in 18 states as of February 2, 2002. The Company primarily locates its
stores in small to midsize markets in the Southeast, Midwest and Southwest that
have demographic characteristics consistent with its targeted customer. All of
Goody's stores are leased, average approximately 27,900 gross square feet, and
are generally located in strip shopping centers. The Company manages its core
functions, such as purchasing, pricing, marketing and advertising, distribution,
planning and allocation, real estate, finance, and information systems, from its
centrally located corporate office in Knoxville, Tennessee. The Company has two
distribution centers, one each in Knoxville, Tennessee and Russellville,
Arkansas.

The Company's objective is to be a leading retailer of apparel for the
entire family in each of the markets it serves. In keeping with this objective,
Goody's offers a broad selection of current-season, nationally-recognized brands
for its brand-conscious shoppers, as well as exclusive brands for those shoppers
who seek quality apparel at value prices.

COMPETITIVE STRATEGY

The Company's operating strategies continually evolve to keep pace with the
competitive demands of an ever-changing retail environment. However, the central
elements of the Company's core business strategy remain essentially the same and
include the following:

- Appeal to Value-Conscious Customers. Goody's appeals to value-conscious
customers by offering current-season, trend-right, nationally-recognized
and exclusive-brand merchandise at value prices.

- Offer a Broad Range of Merchandise for the Entire Family. The Company
provides a wide selection of merchandise designed to address the casual
apparel needs of the entire family. The Company believes that providing
one-stop shopping for customers in convenient and accessible locations
gives it an advantage over many of its competitors.

- Emphasize Current-Season, Nationally-Recognized Brands. The Company is
committed to maintaining a strong line-up of nationally-recognized brands
including: Adidas, Alexander Julian, Alfred Dunner, Amerex, American
Eagle, Arrow, Beach Native, Bestform, Body I.D., Bongo, Braetan, Burnes
of Boston, Byer, Carter's, Cathy Daniels, Connected, Dockers, Dorby,
Duckhead, Eastland, Felina Lingerie, FRC, Gloria Vanderbilt, Hanes,
Healthtex, K. C. Collection, Keds, Kids Headquarters, Lee, L.E.I.,
Levi's, Maidenform, Malibu Dream Girl, Manhattan Beachwear, Miss Erika,
Mootsies Tootsies, Mudd, My Michelle, New Balance, Nike, On Que, Paco,
Paris Blues, Playtex, Reebok, Requirements, Rosetti, Russell, Sag Harbor,
Scarlett, Skechers, Steve Madden, Union Bay, View by Norton McNaughton,
and Zana-di among others.

- Strategically Use Private-Label Programs. The Company's private-label
programs utilize exclusive brands that offer shoppers quality products at
exceptional value and generate higher gross margins. The Company's
exclusive brands include Chandler Hill, Goodclothes, Intimate Classics,
and Mountain Lake for women; Ivy Crew, OCI and RMG Chairman's Collection
for men; and Baby Crew, GoodKidz and OCI for children.

- Focus on Small to Midsize Markets. The Company generally locates its
stores in small to midsize markets that have demographic characteristics
consistent with its targeted value-conscious customer. While the Company
operates in selected larger metropolitan markets, smaller market areas
offer certain strategic advantages, including increased opportunities for
expansion, lower rent and occupancy costs and fewer competitors.

- Provide Strong Marketing and Advertising. The Company believes that
communicating frequently with customers is the key to maintaining traffic
flow in its stores and creating loyalty within its customer base. The
Company's advertising and marketing messages aim to brand Goody's as a
destination store for key categories of value-priced family apparel.
Goody's advertises in local newspapers at least once each week and
reinforces its print message with television and/or radio campaigns aired
at strategic times during the week, currently planned at 37 weeks for
fiscal 2002.

3

- Shopper-Friendly Store Environment. The Company endeavors to provide
easy-to-read in-store signage, clear and understandable pricing, wide and
easy-to-shop aisles, functional and space-efficient fixturing, efficient
check-out counters, and easy-to-locate customer service areas to enhance
the customer's shopping experience.

EXPANSION STRATEGY

During the last several years, the Company's expansion strategy has been to
grow its store base by approximately 10% each year in small to midsize markets.
However, as a result of the difficult economic environment and poor operating
results experienced during the last two fiscal years, the Company limited its
store growth during fiscal 2001, only expanding its store base approximately 5%,
and plans during fiscal 2002 to open approximately two new stores, relocate or
remodel approximately four existing stores and close at least six stores. The
Company expects that the two new stores to be opened in fiscal 2002 will be
approximately 22,300 square feet and 40,000 square feet. The Company believes
that opportunities exist to expand its presence within current markets and, in
the future, into new states.

In making its decision to open a new store, the Company typically
evaluates, among other factors, market demographics, competition, location,
consumer traffic, rent and occupancy costs, advertising, and other expenses
associated with the opening and operating of a new store. Goody's has
historically supported new store growth from internally generated funds.

Should operating performance significantly improve, the Company's expansion
strategy to grow its store base by approximately 10% each year would likely
resume.

The Company would consider a complementary acquisition opportunity should
it arise, although the Company has no understandings, arrangements or agreements
with respect to any such opportunity.

The following table provides information regarding the number of stores in
operation, new stores opened, stores closed, and stores relocated or remodeled
during the years indicated:

MERCHANDISING STRATEGY

The Company's merchandising strategy has been developed to appeal to its
value-conscious customers by offering a broad selection of current-season,
trend-right, nationally-recognized, and exclusive-brand merchandise at value
prices. The Company continually develops and refines its merchandising strategy
in an attempt to meet the tastes and lifestyles of its customers. The Company
competes with: (i) department stores by offering nationally-recognized
brand-name quality apparel at value prices, (ii) specialty stores by offering
apparel for the entire family, (iii) off-price apparel stores by offering a wide
selection of current-season merchandise at competitive prices, and (iv) discount
stores by offering better nationally-recognized brand-name merchandise generally
unavailable to discount retailers. While nationally-recognized brand-name
merchandise remains the cornerstone of its merchandising strategy, the Company
continues to invest in the development of its own exclusive brands that offer
customers quality merchandise at value prices. The Company's exclusive-brand
sales accounted for approximately 19%, 17% and 19% of total sales in fiscal
2001, 2000 and 1999, respectively.

A typical Goody's store has six divisions that include women's (junior's,
misses, petite, plus size, intimate apparel, swimwear, and outerwear), denim,
men's (sportswear, activewear, young men's, and men's furnishings), children's
(infants and toddlers, boys and girls), accessories (fashion jewelry, fine
jewelry, fragrances, handbags, belts, wallets, hair accessories, sunglasses,
picture frames, and gift items), and shoes. The Company's stores carry an
average of approximately 11,500 different styles of merchandise that are
electronically tracked (including by color and size, where appropriate) in order
to provide timely and accurate selling data to management.

4

MERCHANDISING DIVISIONS

Women's. The most comprehensive merchandise selection offered by the
Company is in the women's division, which contributed 42.8% of total sales in
fiscal 2001. The women's division emphasizes casual and career fashions and
includes junior's, misses, petite, plus size, intimate apparel, swimwear, and
outerwear. Juniors' merchandise lines include nationally-recognized brand names
such as Adidas, Byer, Lee, L.E.I., Levi's, Mudd, My Michelle, Nike, Paris Blues,
and Union Bay. Misses' merchandise lines include popular brand names such as
Alfred Dunner, Cathy Daniels, Dockers, Lee, Levi's, Miss Erika, On Que,
Requirements, Sag Harbor, and View by Norton McNaughton, as well as the
Company's exclusive brands, Goodclothes and Mountain Lake. Fashion dresses are
also an important part of Goody's overall women's product lines and feature
popular brand names such as Connected, Dorby, My Michelle, Sag Harbor, and
Scarlett. Nationally recognized brand-name undergarments offered by the women's
division include products from Bestform, Felina Lingerie, Hanes, Maidenform, and
Playtex. Swimwear features labels such as Beach Native, Body I.D., Malibu Dream
Girl, Mudd, and Manhattan Beachwear. Outerwear product lines include Amerex,
Braetan, FRC, and K. C. Collection brand-name labels and Mountain Lake, the
Company's exclusive brand.

Denim. The denim division contributed 21.2% of total sales in fiscal 2001
and is important to the Company's merchandising concept. The Company believes
that its broad selection and competitive pricing of basic denim merchandise
appeals to value-conscious families and generates customer traffic for other
higher-margin merchandise. The Company utilizes automatic replenishment programs
using electronic data interchange ("EDI") with its major denim suppliers to
optimize in-stock positions for popular styles and sizes. Nationally-recognized
brand names that are carried in the denim division include Gloria Vanderbilt,
Lee, L.E.I., Levi's, Mudd, Paco, Union Bay, and Zana-di. The Company's exclusive
brands for denim are Mountain Lake and OCI.

Men's. The men's division contributed 16.3% of total sales in fiscal 2001
and consists of sportswear, activewear, young men's, and men's furnishings
departments. The men's division features nationally-recognized brand-name
merchandise and includes Adidas, Arrow, Dockers, Duckhead, Lee, Levi's, Nike,
Reebok, and Russell. The Company's exclusive brands for men are Ivy Crew, OCI,
and RMG Chairman's Collection.

Children's. The children's division contributed 7.2% of total sales in
fiscal 2001 and offers durable apparel for children of all ages including
infants and toddlers, boys and girls. Nationally-recognized brands for children
offered by the children's division include Adidas, Byer, Carter's, Kids
Headquarters, Healthtex, Lee, L.E.I., Levi's, My Michelle, Nike, and Paco. The
Company's exclusive brands for children are Baby Crew, GoodKidz and OCI.

Accessories. The accessories division contributed 6.4% of total sales in
fiscal 2001 and includes items such as fashion jewelry, fine jewelry,
fragrances, handbags, belts, wallets, hair accessories, sunglasses, picture
frames, and gift items. Nationally-recognized brands featured in the accessories
division include Burnes of Boston, L.E.I., Mudd, and Rosetti.

Shoes. The Company operates its own shoe departments, which contributed
5.4% of total sales in fiscal 2001. At the end of fiscal 2001, 317 stores had
shoe departments; and the Company expects that all new and relocated stores in
fiscal 2002 will have shoe departments. The shoe departments offer
nationally-recognized brands such as Adidas, American Eagle, Bongo, Dockers,
Eastland, Keds, Mootsies Tootsies, Mudd, New Balance, Nike, Reebok, Skechers,
and Steve Madden.

In August 1999, the Company began operating its own shoe departments. Prior
to August 1999, the Company's shoe departments were operated by a third party
under an exclusive operating license agreement that was terminated after this
party filed for Chapter 11 bankruptcy protection in June 1999. See discussion
under "Other" below.

Other. Includes revenue from tuxedo rentals, service fees and leased
departments' net rental income that, in the aggregate, contributed 0.7% of total
sales in fiscal 2001. The Company terminated all leased department operations
during fiscal 1999. Net rental income from leased departments was $3,372,000 in
fiscal 1999.

5

The following table shows a breakdown of the Company's total sales for the
periods indicated (dollars in thousands):

STORE VISUAL PRESENTATION

Generally within each store, specific departments are well signed and have
aisles leading directly to major departments. Visual merchandising and store
presentation are enhanced by fixtures that showcase merchandise in an accessible
and customer-friendly shopping environment. Sale items featured in the Company's
advertising campaigns are highlighted in the stores with signs that allow
customers to quickly locate items of interest. The overall merchandise
presentation is organized to highlight selected fashion products as the seasons
progress. The visual merchandising department, in collaboration with the
merchandising staff, communicates with the stores frequently through its "Front
& Forward" program that coordinates visual presentation efforts with featured
items contained in advertisements or items being promoted in-store. The Company
continually endeavors to update its stores and improve their "shopability."

PURCHASING

The Company buys merchandise from approximately 725 vendors worldwide.
During fiscal 2001, the Company's receipts from Levi Strauss & Co., its largest
vendor, represented approximately 10.0% of total receipts. No more than 3.7% of
total receipts were attributable to any one of the Company's other vendors. The
Company does not have long-term or exclusive contracts with any manufacturer or
vendor. The Company believes it maintains strong relationships with its vendors.
A large portion of the Company's merchandise is prepackaged and preticketed by
the vendors for each store, thereby reducing the cost and processing time at its
distribution centers.

Merchandise associated with the Company's exclusive brands is largely
imported. The Company employs its own designers and product development teams
who work closely with the merchandising staff to track seasonal fashion trends,
analyze customer feedback and determine appropriate order quantities. The
Company controls its exclusive brands from initial concept to final sale to the
consumer and monitors product quality, freight costs and other expenses in an
effort to maximize gross margins on such merchandise.

PLANNING AND ALLOCATION

The Company's planning and allocation department works closely with
merchandising, distribution and store operations personnel to establish an
appropriate flow of merchandise for each of the Company's stores. This flow of
merchandise is intended to reflect customer preferences in each market. The
Company also utilizes automatic replenishment programs using EDI with 175
vendors. Sales from EDI vendors accounted for approximately 45.8% of total sales
in fiscal 2001. The automatic replenishment programs allow for more efficient
replenishment of specific items of merchandise in particular styles, sizes and
colors to optimize in-stock positions of basic merchandise. The Company
continues to support and encourage the use of automatic replenishment programs
using EDI for its vendors.

CENTRALIZED DISTRIBUTION

The Company has two distribution centers: a 344,000-square-foot
distribution center, located in Knoxville, Tennessee, and a 235,000-square-foot
distribution center, located in Russellville, Arkansas. The two distribution
centers have the combined capacity to serve approximately 525 stores. Both
distribution

6

centers are equipped with automated merchandise handling equipment that
facilitates efficient distribution of merchandise to the Company's stores and
provides for efficient cross docking of prepackaged and preticketed merchandise
by store. Incoming merchandise is received at the distribution centers where it
is inspected for quality control at the Company's discretion.

Merchandise for individual stores is typically processed through the
distribution centers within 48 hours of its receipt from vendors. Furthermore,
because the distribution centers are located adjacent to main interstate
highways, the Company has been able to negotiate favorable shipping terms with
common carriers.

The Company also has developed an effective computerized system for
tracking merchandise from the time it arrives at its distribution centers until
it is delivered to the stores to ensure that shipments are delivered in an
accurate and timely manner. The Company utilizes a third-party contract carrier
to deliver merchandise to its stores.

As noted above under the caption "Merchandising Divisions -- Shoes," in
August 1999, the Company began operating its own shoe departments. All
prepackaged shoe purchases are received from the vendors at Goody's own
distribution centers where they are processed for delivery to the stores.
Generally, bulk shoe purchases from vendors are received by a third-party
processor engaged by the Company to "pick and pack" shoes by color and size for
each of its stores.

MARKETING AND ADVERTISING

The Company's marketing and advertising strategies are designed to
reinforce its image as a destination store for trend-right casual apparel at
value prices for the entire family. The Company believes that its
advertisements, which emphasize nationally-recognized brand-name apparel, value
prices and wide selections for the entire family, have enabled it to communicate
a distinct identity that reinforces its brand in the marketplace.

Using a multi-media approach, Goody's utilizes an outside advertising
agency to develop its advertising for newspapers, television and radio, as well
as to research certain markets and develop profiles of shoppers to effectively
plan advertising. The Company frequently uses television and full-color
advertising to portray the depth and selection of its merchandise. In-store
merchandise presentation is coordinated with such advertising to maximize
promotional opportunities. While the exact allocation of the advertising budget
differs from market to market, the Company allocated approximately 57.3% of its
fiscal 2001 advertising expenditures to print media and plans to allocate 44.9%
of its fiscal 2002 advertising expenditures to print media. The remainder of the
advertising expenditures are allocated to television, radio, payroll costs,
professional fees, and other promotional activities. Several of the Company's
key vendors share in the costs of mutually beneficial advertising campaigns
through cooperative advertising programs.

The Company offers the GOODY'S private label credit card through an
arrangement with Alliance Data Systems and World Financial Network National
Bank. Under this arrangement, the Company pays sales transaction fees, but is
not responsible for assessing customer credit-worthiness and does not assume the
risk associated with extending credit. During fiscal 2001, net sales per
transaction on the GOODY'S private label credit card were higher than those of
other credit cards accepted. The GOODY's private label credit card includes a
loyalty program that is intended to increase the frequency and volume of
customer purchases. The Company advertises and markets directly to its credit
card customers.

The Company also offers its customers a GOODY's gift card. The GOODY's gift
card is designed to simplify the gift certificate sales transaction for the
customer and enhance the "Goody's" brand image. This card is offered at the
point-of-sale, and at certain times of the year, such as the Christmas season,
is aggressively marketed to increase gift card sales. Customer response to the
GOODY's gift card has been favorable since its introduction in May 2001 and has
resulted in increased gift card sales when compared to traditional paper gift
certificates.

PRICING

The Company's pricing strategy is designed to provide value to its
customers by offering merchandise at value prices generally below the prices of
traditional department and specialty stores. In order to remain competitive and
enhance sales promotion efforts, Goody's frequently monitors its competitors'
prices. In addition, the Company's management information systems provide daily
and weekly sales and gross margin reports that, among other things, track sales
and gross margins by stock-keeping unit and provide management with the
flexibility to adjust prices, as appropriate.

7

CUSTOMER SERVICE

Goody's goal is to provide shoppers with a positive shopping experience
every time they visit its stores. The Company reviews and analyzes customer
calls, e-mails and letters, receives feedback from store management, and
conducts quantitative and qualitative studies to monitor customer expectations.
To support its efforts, the Company utilizes a customer service program called
"GREAT," an acronym that stands for "Greet every customer, Room to shop,
Exciting store presentation, Attention to detail, and Thank every customer."
Goody's store associates play the most important role in the success of the
GREAT program.

STORE OPERATIONS

Management of store operations is the responsibility of the Executive Vice
President -- Stores, who is assisted by a Vice President -- Store Operations, a
Vice President -- Loss Prevention, four Vice Presidents -- Sales, and 27
District Managers. The number of stores that each District Manager oversees
ranges from 12 to 15.

Each store is managed by a team consisting of a Manager and one to two
Assistant Managers, depending on the size of the store. Stores are typically
staffed by Sales Associates, Department Heads, Cashiers, and Stockroom
Associates. All associates are responsible for providing customer service by
interacting with customers, developing and maintaining creative visual
merchandise presentation and ensuring a positive shopping experience for each
customer. The store staff consists of a combination of full-time and part-time
associates; temporary associates are hired for peak selling seasons. The
Company's stores are generally open from 9:00 a.m. to 9:00 p.m. Monday through
Thursday; from 9:00 a.m. to 10:00 p.m. on Friday and Saturday; and from 12:00
p.m. to 7:00 p.m. on Sunday. These hours are extended during various holiday and
peak selling seasons.

STORE LOCATIONS

The Company typically locates its stores in small to midsize markets in the
Southeast, Midwest and Southwest that have populations of fewer than 100,000 and
demographic characteristics consistent with its targeted value-conscious
customer. However, since 1994, the Company has opened multiple locations within
selected larger metropolitan markets. Goody's has typically entered these larger
metropolitan markets by opening several stores simultaneously, enhancing the
Company's image and awareness throughout the market while leveraging advertising
costs that are generally higher than in small to midsize markets. Goody's leases
store space primarily in strip centers, where costs are generally lower than
mall locations. The smallest of the Company's stores has 7,600 gross square feet
and the largest store has 54,800 gross square feet; the average store size is
approximately 27,900 gross square feet. The Company's store locations can be
found by visiting its Web site at www.goodysonline.com.

All of the Company's store locations are leased. The Company believes the
flexibility of leasing its stores provides substantial benefits and avoids the
inherent risks of owning real estate. The Company believes it has established
itself as an anchor tenant due to its sales volume, the size of its stores, its
advertising contributions in local markets, its financial position, and its
history of meeting lease commitments on a timely basis.

INFORMATION SYSTEMS

The Company frequently upgrades its core business systems with current
technology, when and where possible, in an effort to enhance financial and other
business controls. The Company maintains fully integrated point-of-sale,
inventory and merchandise systems. The Company's information systems provide
management, buyers, planners, and distributors with comprehensive data that
allow them to identify emerging sales trends and, accordingly, manage
inventories. The data provided by information systems include merchandise
planning, purchase order management, open order reporting, open-to-buy,
receiving, distribution, EDI, basic stock replenishment, inventory, and price
management. Daily and weekly sales reports are used by management to enhance the
timeliness and effectiveness of purchasing and markdown decisions. Merchandise
purchases are based on planned sales and inventories, and are frequently revised
to reflect changing sales trends. The Company's point-of-sale (POS) systems are
supported by an in-store computer system. The in-store systems feature bar-coded
ticket scanning, automatic price look-up, credit and check authorization
utilizing a satellite network, and daily transmittal of detailed sales data from
stores to the corporate office.

8

TRADEMARKS

The United States Patent and Trademark Office (the "USPTO") has issued
federal registrations to the Company for the following trademarks: Authentic
GFC, Bobby G by Ivy Crew, Chandler Hill, Chandler Hill Sport, Feels Like You,
"G" (stylized G with arch design), GFC Trading Co., GoodKidz (and design),
Goody's, Goody's (credit card services), Goody's Family Clothing, Goody's Family
Clothing (and design), Goody's Low Price!! Department Store Styles Department
Store Brands, International Trading Company (and design), Intimate Classics, Low
Prices Never Looked So Good, MBJC, Mountain Lake, Mountain Lake Casuals,
Mountain Lake High Quality Apparel With A Feel Good Fit, Mountain Lake Jean
Company, OCI, OCI (shoes), OCI Quality Clothing (and design), Old College Inn,
Old College Inn Jean Company, Old College Inn Loungewear, Old College Inn Sport,
Take A Good Look, Y.E.S. Your Everyday Savings, and Your Everyday Y.E.S. Savings
Brands Value Quality. The Company has also filed applications with the USPTO
seeking federal registrations for the following trademarks: Accessory Crossing,
Goodclothes (and design), Good Boys, Good Girls, Goody's -- It's All About You,
Ivy Crew, Montana Blues Jean Company, RGM, Sterling Reflections, and West
Interstate 40.

The following trademarks and tradenames used in this Form 10-K are owned by
(and in certain cases registered to) third parties: Adidas, Alfred Dunner,
Alexander Julian, Amerex, American Eagle, Arrow, Beach Native, Bestform, Body
I.D., Bongo, Braetan, Burnes of Boston, Byer, Carter's, Cathy Daniels,
Connected, Dockers, Dorby, Duckhead, Eastland, Felina Lingerie, FRC, Gloria
Vanderbilt, Hanes, Healthtex, K.C. Collection, Keds, Kids Headquarters, Lee,
L.E.I., Levi's, Maidenform, Malibu Dream Girl, Manhattan Beachwear, Miss Erika,
Mootsies Tootsies, Mudd, My Michelle, New Balance, Nike, On Que, Paco, Paris
Blue, Playtex, Reebok, Requirements, Rosetti, Russell, Sag Harbor, Scarlett,
Skechers, Steve Madden, Union Bay, View by Norton McNaughton, and Zana-di.

ASSOCIATES

As of March 30, 2002, the Company had approximately 10,000 active full and
part-time associates. Store managers and assistant store managers are
compensated on a salaried basis. Additionally, store managers are eligible to
receive additional compensation based on the Company's profitability as well as
meeting certain other objective goals at their respective stores. All other
store associates are compensated on an hourly basis. The Company's incentive
bonus program for certain key corporate associates is based on achieving certain
profitability goals and could potentially provide a significant portion of the
associates' total annual compensation. All of the Company's associates are
non-union employees, with the exception of the associates employed at its
distribution center in Knoxville, Tennessee, who are represented by the Union of
Needletrades, Industrial and Textile Employees.

On February 1, 2002, the Company announced a "reduction-in-force"
commencing in February 2002 that is expected to reduce the work force at the
Company's corporate headquarters and distribution centers by approximately 16%.
Eligible employees have been provided severance pay and health benefits based on
compensation and tenure with the Company. In addition, all affected employees
have been offered certain outplacement services.

The Company grants stock options to certain key corporate and store
associates. These options are designed to align associates' interests with those
of the Company's shareholders and allow the Company to provide long-term
incentives to its associates.

The Company maintains the Goody's Family Clothing, Inc. 401(k) Retirement
Plan (the "401(k) Plan") with a salary deferral feature for all eligible
associates. Under the terms of the 401(k) Plan, eligible associates may
contribute between 3% and 15% of their annual compensation on a pretax basis
(with certain limitations imposed by the Internal Revenue Service) to the 401(k)
Plan. The Company provides matching contributions to the 401(k) Plan that are
discretionary, vest over an associate's service period and are based upon a
percent of an associate's elected contributions. These matching contributions
amounted to $827,000, $882,000 and $827,000 for fiscal 2001, 2000 and 1999,
respectively.

9

Until January 30, 2002, the Company also maintained the Goody's Family
Clothing, Inc. Executive Deferral Plan (the "EDP Plan") with a salary deferral
feature for all eligible associates. Under the terms of the EDP Plan, eligible
associates could have contributed between 3% and 20% of their annual
compensation on a pretax basis (with certain limitations imposed by the Internal
Revenue Service) to the EDP Plan. The Company provided matching contributions to
the EDP Plan that were discretionary, vested over an associate's service period
and were based upon a percent of an associate's elected contributions. These
matching contributions were $102,000, $79,000 and $85,000 in fiscal 2001, 2000
and 1999, respectively. On January 30, 2002, the Company's Board of Directors
elected to terminate the EDP Plan and disburse all EDP Plan assets to EDP Plan
participants. Such disbursement was made to EDP Plan participants in February
2002.

The Company also has an Employee Payroll Investment Plan that allows
eligible associates to purchase the Company's common stock (the "Common Stock")
at fair market value through regular payroll deductions.

SEASONALITY AND INFLATION

The Company's business is seasonal by nature. The Christmas season
(beginning the Sunday before Thanksgiving and ending on the first Saturday after
Christmas), the back-to-school season (beginning the first week of August and
continuing through the first week of September) and the Easter season (beginning
two weeks before Easter Sunday and ending on the Saturday preceding Easter)
collectively accounted for approximately 35.7% of the Company's annual sales
based on the Company's last three fiscal years ended February 2, 2002. In
general, sales volume varies directly with customer traffic, which is heaviest
during the fourth quarter of a fiscal year. Because of the seasonality of the
Company's business, results for any quarter are not necessarily indicative of
the results that may be achieved for the full fiscal year.

Inflation can affect the costs incurred by the Company in the purchase of
its merchandise, the leasing of its stores and certain components of its
selling, general and administrative expenses. The Company believes that during
the last three fiscal years ended February 2, 2002, inflation has not had a
material adverse effect on the Company's business, although there can be no
assurance that inflation will not have a material adverse effect on the Company
in the future.

COMPETITION

The retail apparel business is highly competitive, with price, selection,
fashion, quality, store location, store environment, and customer service being
the principal competitive factors. The Company believes that it is positioned to
compete on the basis of each of these factors. The Company competes primarily
with department stores, specialty stores, off-price apparel stores, and discount
stores. Many competitors are large national chains, with substantially greater
financial and other resources than those available to the Company; there is no
assurance that the Company will be able to compete successfully with any of them
in the future.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

The following important factors, among others, could cause the Company's
future operating results to differ materially from those indicated by
forward-looking statements made in this Form 10-K and presented elsewhere by
management from time to time.

Recent Decreases in Comparable Store Sales

The Company has had declines in comparable store sales for each of the 11
fiscal quarters ended February 2, 2002. The Company recognized increases in
comparable store sales for the last fiscal month of fiscal 2001 and the first
two fiscal months of fiscal 2002. The Company continues to address the reasons
for historical decreases and there can be no assurance that this trend is
reversing or that the Company can successfully execute its business plans and
strategies.

Despite the decreases in comparable store sales for the 11 fiscal quarters
ended February 2, 2002, the Company does not have plans to exit a significant
number of stores. However, should the negative trend continue, circumstances
could require the Company to close a significant number of stores at material
costs. Such store closures, as well as other effects from a continuation in the
negative trend, could have a material adverse effect on the Company.

10

Highly Competitive Nature of the Retail Apparel Industry

The Company faces intense competition for customers, access to quality
merchandise and suitable store locations from traditional department stores,
specialty retailers, off-price retail chains, and discount stores. Many of these
competitors are larger and have significantly greater financial, marketing, and
other resources than the Company. In addition, many department stores have
become more promotional and have reduced their selling price points, and certain
finer department stores have opened outlet stores that offer off-price
merchandise in competition with the Company. Further, in view of the Company's
strategy of offering current-season, trend-right, nationally-recognized and
exclusive-brand merchandise at value prices, aggressive department store pricing
could adversely affect the Company's margins. Accordingly, the Company faces
intense competition, which could require it to reduce prices on merchandise for
sale or increase spending on marketing and advertising, any of which could have
a material adverse effect on the Company.

Credit Facility Covenant

The Company's borrowings under its credit facility are limited by
collateral formulas, based principally upon the Company's eligible inventories.
If availability (as calculated pursuant to the credit facility) falls below
$25,000,000, the Company would be required, for a period of time, to comply with
a financial covenant requiring it to maintain minimum levels of tangible net
worth based on formulas. The credit facility also contains certain discretionary
provisions that enable the lender to reduce availability. There can be no
assurance as to the continued sufficiency of eligible collateral for borrowings
by the Company under its credit facility or as to the Company's compliance with
covenants under its credit facility.

Reduction in New Store Openings

The Company's revenue growth has historically been dependent, in part, upon
an expansion policy of growing its store base by approximately 10% each year.
During fiscal 2001, the Company decided to curtail its new store growth until
its operating performance improves significantly. As a result, the Company's
store base increased by less than 5% in fiscal 2001 and it plans to open only
approximately two new stores during fiscal 2002 and to close at least six stores
during fiscal 2002. The inability of the Company to resume its historical levels
of new store growth may have a material adverse effect on its long-term growth.
There can be no assurance that the Company's operating performance will improve
to the degree necessary to sustain its historical level of new store openings.

Credit Support

The Company depends in part on credit (including acceptable credit terms)
provided by its vendors and factors, and there can be no assurance as to their
continued support. The Company believes that credit decisions made by vendors
and factors are influenced by their perception of the Company's credit rating
that is shaped by information reported in the industry and financial press and
elsewhere as to the Company's financial strength and operating performance.
Accordingly, negative perceptions as to the Company's financial strength or
operating performance could have a negative impact on the Company's liquidity.

Merchandising and Fashion Sensitivity

The Company's success is largely dependent upon its ability to gauge the
fashion tastes of its customers and to provide merchandise in sufficient
quantities to satisfy customer demand in a timely manner. The Company's failure
to anticipate, identify or react appropriately to changes in fashion trends
could have a material adverse effect on its financial results. Misjudgments or
unanticipated changes in fashion trends as well as economic conditions could
lead to excess inventories and higher markdowns, and repeated fashion
misjudgments could have a material adverse effect on the Company's image with
customers. In an effort to mitigate the negative impact of such misjudgments,
the Company utilizes automatic replenishment programs using EDI to allow for
more efficient replenishment of specific items of merchandise in particular
styles, sizes and colors to optimize in-stock positions of basic merchandise.

Dependence on Private-Label Merchandise

Sales from the Company's private-label merchandise represented
approximately 19% of the Company's total sales in fiscal 2001. The Company's
failure to anticipate, identify and react appropriately to changes in fashion
trends with its private-label merchandise could have an adverse effect on the
Company. In addition, delays in receiving such private-label merchandise, or any
deterioration in the quality thereof, could have a material adverse effect on
the Company.

11

Reliance on Key Merchandise Vendors and Private-Label Contract Manufacturers

The Company does not own or operate any manufacturing facilities and does
not have any long-term or exclusive contractual relationships with its vendors
and contract manufacturers. The success of the Company's business is largely
dependent upon its ability to purchase current-season, brand-name and
private-label apparel at competitive prices in adequate quantities and with
timely deliveries. The inability or unwillingness of key vendors to increase
their sales to the Company to keep pace with the Company's growth, or the loss
of one or more key vendors for any reason, could have a material adverse effect
on the Company. During fiscal 2001, the Company's largest vendor, Levi Strauss &
Co., accounted for approximately 10.0% of total receipts. There can be no
assurance that the Company will be able to acquire brand-name merchandise in
sufficient quantities and on favorable terms, if at all, in the future.

Foreign Merchandise Sourcing

The Company's private-label programs are largely supported by products
directly purchased from vendors located abroad. Sales from such products
represented approximately 19% of total sales for fiscal 2001. In addition, the
Company believes that a substantial portion of its merchandise purchases from
domestic vendors are manufactured abroad. These arrangements are subject to the
risks of relying on products manufactured abroad, including import duties and
quotas, loss of "most favored nation" trading status, currency fluctuations,
work stoppages, economic uncertainties including inflation, foreign government
regulations, lack of compliance by foreign manufacturers with U.S. consumer
protection laws (for which, in respect of its private-label merchandise, the
Company may be responsible as the importer of record), and intellectual property
laws, political unrest, and trade restrictions, including U.S. retaliation
against unfair foreign practices. While the Company believes it could find
alternative sources of supply for its private-label programs, an interruption or
delay in supply from these foreign sources or the imposition of additional
duties, taxes or other charges on these imports could have a material adverse
effect on the Company, unless and until alternative supply arrangements are
secured. Moreover, products from alternative sources may be of lesser quality or
more expensive than those currently purchased by the Company.

Marketing and Advertising

The Company believes that communicating frequently with its customers is
the key to maintaining traffic flow in its stores and creating loyalty within
its customer base. The Company has recently adopted new merchandising,
advertising and pricing strategies in order to reverse negative comparable store
sales trends and has implemented consumer-directed changes in merchandising,
advertising and in-store presentation. There can be no assurance that the
Company's new strategies will be effective or will reverse the negative
comparable store sales trends.

Inventory Control

The Company maintains systems, programs and controls over its merchandise
inventories to mitigate possible risks associated with shrinkage. These risks
include losses primarily from: (i) customer and employee theft, (ii) merchandise
transferred between the distribution centers and stores, (iii) store to store
transfers, (iv) customer returns, (v) unidentified breakage, (vi) concealed
shortages from vendors, and (vii) merchandise returned to vendors. The Company
conducts a complete physical inventory count near the end of each fiscal year.
For interim financial reporting purposes, the Company provides a reserve for
shrinkage based upon its historical shrinkage experience. The Company's actual
shrinkage results from physical inventory counts taken near the end of each
fiscal year could vary significantly from shrinkage reserves recorded in its
interim financial statements throughout the year and, accordingly, could have a
material adverse effect on the Company's results of operations and financial
position for that year and previously reported interim periods within such year.

Reliance on Information Systems

Since the Company's information systems are important to its success, it
frequently upgrades its core information systems with current technology, when
and where possible, in an effort to enhance financial and other operational
controls. The Company also has implemented certain disaster recovery plans to
mitigate the risk of business interruptions related to information technology
disasters. There can be no assurance that information technology systems will
not become obsolete or fail, or that the execution of the Company's disaster
recovery plans will be successful.

12

Seasonality

The Company's business is seasonal by nature. The Christmas season
(beginning the Sunday before Thanksgiving and ending on the first Saturday after
Christmas), the back-to-school season (beginning the first week of August and
continuing through the first week of September) and the Easter season (beginning
two weeks before Easter Sunday and ending on the Saturday preceding Easter)
collectively accounted for approximately 35.7% of the Company's annual sales
based on the Company's last three fiscal years ended February 2, 2002. In
general, sales volume varies directly with customer traffic, which is heaviest
during the fourth quarter of a fiscal year. Because of the seasonality of the
Company's business, results for any quarter are not necessarily indicative of
the results that may be achieved for the full fiscal year.

Fluctuation in Operating Results

The Company's results of operations have fluctuated in the past, and are
expected to fluctuate in the future, as a result of a variety of factors,
including the timing of store openings and related advertising and pre-opening
expenses, store closings and related write-offs, weather conditions, price
increases by suppliers, actions by competitors, the competitiveness of the
retail apparel environment and general economic conditions, and global political
unrest. The Company recorded its first historical annual net loss of $0.62 per
common share in fiscal 2001.

Reliance on Key Personnel

The Company believes that its future success will depend significantly on
the efforts and abilities of its senior executives, in particular Robert M.
Goodfriend, Chairman of the Board of Directors and Chief Executive Officer, and
Lana Cain Krauter, President and Chief Merchandising Officer. The loss of the
services of Mr. Goodfriend, Ms. Krauter or other members of the Company's senior
management could have a material adverse effect on the Company. The Company has
employment agreements with its senior executives, other than Mr. Goodfriend (and
is currently negotiating an employment agreement with Mr. Goodfriend). The
Company believes that its future success will also largely depend upon its
ability to attract and retain qualified employees. Competition for such
personnel is intense and there can be no assurance that the Company will
continue to be successful in attracting and retaining such personnel.

Expansion and Management of Growth

During the last several years, the Company has experienced significant
growth by opening new stores. While the Company plans to reduce such growth in
its store base as a result of the current difficult economic environment and
poor operating results, its future operating results still could be affected by
its ability to identify suitable markets and sites for new stores, negotiate
leases with acceptable terms and maintain adequate working capital. To serve its
store growth, the Company must be able to achieve and maintain efficiency
through the operation of its new distribution center in Russellville, Arkansas
that currently services 101 of the Company's stores. In addition, the Company
must be able to continue to hire, train and retain competent managers and store
personnel. There can be no assurance that the Company will be able to expand its
market presence in its existing markets or successfully enter new or contiguous
markets by opening new stores or that any such expansion will not adversely
affect the Company. Further, if the Company's management is unable to manage its
growth effectively or closes a material number of stores, the Company could be
materially and adversely affected.

Pending Litigation

In February 1999, a lawsuit was filed against the Company and Mr.
Goodfriend generally alleging that the Company discriminated against a class of
African-American employees at its retail stores through the use of
discriminatory selection and compensation procedures and by maintaining unequal
terms and conditions of employment. The plaintiffs further allege the Company
maintained a racially hostile working environment. The plaintiffs are seeking to
have this action certified as a class action, but only as to the issue of
promotions. By way of damages, the plaintiffs are seeking, among other things,
injunctive relief, as well as back pay, an award of attorneys' fees and costs,
and other monetary relief. The Company is disputing these claims and defending
this matter vigorously. The Company is unable to estimate the effect, if any,
the above lawsuit may have on the Company's financial position or results of
operations.

13

In addition, the Company is a party to various other legal proceedings
arising in the ordinary course of its business. The Company has various
insurance policies in place in the event of unfavorable outcomes from such
proceedings. The insurance companies' level of, and willingness to, support
their coverage could vary depending upon the circumstances of each particular
case. As such, there can be no assurance as to the level of support available
from insurance policies. Management does not currently believe that the ultimate
outcome of all such pending legal proceedings (other than the matter noted in
the paragraph above), individually and in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.

ITEM 2. PROPERTIES

The Company owns the following properties:

(a) its corporate headquarters consisting of approximately 140,000
square feet and located at 400 Goody's Lane, Knoxville, Tennessee;

(b) its Knoxville, Tennessee distribution center located adjacent to
its corporate headquarters consisting of a one-story, 344,000-square foot
facility with 43 loading docks and a mezzanine level that has an additional
17,500 square feet currently used as office space. The Knoxville
distribution center has the capacity to distribute merchandise to a maximum
of approximately 325 stores; and

(c) its Russellville, Arkansas distribution center consisting of a
one-story, 235,000-square foot facility with 40 loading docks. This
facility has been designed to serve more than 200 stores primarily west of
the Mississippi River.

The Company currently leases all of its stores. Lease terms generally
contain renewal options and provide for a fixed minimum rent, additional rent
based on a percent of sales in excess of stipulated amounts, real estate taxes,
insurance, and common area maintenance costs. The Company also leases two
warehouses in Athens, Tennessee, one of which is primarily used for staging and
processing inventory for new stores, and one for storing certain store fixtures.
In addition, the Company leases a warehouse in Knoxville, Tennessee for record
storage.

The following table reflects at February 2, 2002 the number of store leases
that will expire in each indicated fiscal year if the Company: (i) does not
exercise any of its renewal options and (ii) exercises all of its renewal
options. This table does not reflect 11 store leases having month-to-month lease
terms, but does include three leases executed as of February 2, 2002 for stores
to be opened or relocated in fiscal 2002.

14

ITEM 3. LEGAL PROCEEDINGS

In February 1999, a lawsuit was filed in the United States District Court
for the Middle District of Georgia and was served on the Company and Robert M.
Goodfriend, its Chairman of the Board and Chief Executive Officer, by 20 named
plaintiffs, generally alleging that the Company discriminated against a class of
African-American employees at its retail stores through the use of
discriminatory selection and compensation procedures and by maintaining unequal
terms and conditions of employment. The plaintiffs further allege that the
Company maintained a racially hostile working environment. The plaintiffs'
claims are being brought under Title VII of the Civil Rights Act of 1964, as
amended, and under the Civil Rights Act of 1866. The plaintiffs are seeking to
have this action certified as a class action, but only as to the issue of
promotions. By way of damages, the plaintiffs are seeking, among other things,
injunctive relief (including restructuring of the Company's selection and
compensation procedures) as well as back pay, an award of attorneys' fees and
costs, and other monetary relief. The Company is disputing these claims and
defending this matter vigorously. The Company is unable to estimate the effect,
if any, the above lawsuit may have on the Company's financial position or
results of operations.

In addition, the Company is a party to various other legal proceedings
arising in the ordinary course of its business. The Company has various
insurance policies in place in the event of unfavorable outcomes from such
proceedings. The insurance companies' level of, and willingness to, support
their coverage could vary depending upon the circumstances of each particular
case. As such, there can be no assurance as to the level of support available
from insurance policies. Management does not currently believe that the ultimate
outcome of all such pending legal proceedings (other than the matter noted in
the paragraph above), individually and in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Common Stock is listed and traded on The NASDAQ Stock Market (National
Market) under the symbol GDYS. The following table sets forth the range of high
and low sale prices for the Common Stock for the periods indicated.

The Company has never declared, nor has it paid, any cash dividends on the
Common Stock. The Company currently intends to retain its earnings to finance
future growth and, therefore, does not anticipate paying any cash dividends on
the Common Stock in the foreseeable future.

At April 15, 2002, there were 531 shareholders of record and approximately
6,200 persons or entities that held Common Stock in nominee name. On April 15,
2002, the closing price of the Common Stock was $8.73.

15

ITEM 6. SELECTED FINANCIAL DATA

- ---------------

(1) Consists of 53 weeks -- all other years presented consist of 52 weeks.
(2) Beginning January 30, 2000, the first day of fiscal 2000, the Company
recognized the sale and the related gross profit from layaways upon delivery
of the merchandise to the customer. The cumulative effect of this change at
January 30, 2000 was $331,000 ($207,000 after tax) and is included in
selling, general and administrative expenses in fiscal 2000. See Note 1 in
the Notes to the Consolidated Financial Statements.
(3) The unusual item in fiscal 2001 consisted primarily of severance costs
associated with a planned reduction in work force and professional fees
associated with the reduction program. See Note 9 in the Notes to the
Consolidated Financial Statements.
(4) Comparable store sales are based on stores that operated throughout the
fiscal year (including relocated, remodeled and expanded stores) and that
were in operation for the entire previous fiscal year (computed on
comparable 52-week periods).
(5) Sales per gross square foot is calculated by dividing (i) sales from stores
that operated throughout the fiscal year (including relocated, remodeled and
expanded stores) and that were in operation for the entire previous fiscal
year (computed on comparable 52-week periods) by (ii) the gross square
footage related to those stores.
(6) Average sales per store is calculated by dividing (i) total sales during
such fiscal year less sales attributable to new stores opened and stores
closed during the fiscal year by (ii) the number of stores open at the end
of the fiscal year less new stores opened during the fiscal year.

16

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

REPORT OF MANAGEMENT

Management is responsible for the integrity and objectivity of all
financial information presented in this Form 10-K. The consolidated financial
statements included herein have been prepared in accordance with accounting
principles generally accepted in the United States of America and include, where
necessary, certain amounts based on the best estimates and judgments of
management.

In fulfilling its responsibility for the reliability of financial
information, management has developed and maintains accounting systems and
procedures appropriately supported by internal accounting controls. Such
controls include the selection and training of qualified personnel, an
organizational structure providing for appropriate division of responsibility,
communication of approved accounting, control and business practices, and a
program of internal audit. Although no system of internal accounting controls
can ensure that all errors or irregularities have been eliminated, management
believes that the controls in place provide reasonable assurance, at reasonable
cost, that assets are safeguarded against loss from unauthorized use or
disposition, that transactions are executed in accordance with management's
authorization, and that the financial records are reliable for preparing
financial statements. The consolidated financial statements of the Company have
been audited by Deloitte & Touche LLP, the Company's independent auditors. Their
report is based on their audits conducted in accordance with auditing standards
generally accepted in the United States of America.

The Audit Committee of the Board of Directors, consisting solely of outside
directors, serves in an oversight role to assure the integrity and objectivity
of the Company's financial reporting process. The Audit Committee is responsible
for recommending to the Board of Directors the selection of independent
auditors. It also meets periodically with management, and the independent and
internal auditors, to assure they are carrying out their responsibilities. The
independent and internal auditors have full and free access to the Audit
Committee and meet with it periodically with and without management's presence.

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America that
require the Company to make estimates and assumptions. The Securities and
Exchange Commission ("SEC") recently issued disclosure guidance for "critical
accounting policies." The SEC defines critical accounting policies as those that
require application of management's most difficult, subjective or complex
judgments that are inherently uncertain and may change in subsequent periods.

The Company believes that of its significant accounting policies (see Note
1 in the Notes to the Consolidated Financial Statements), the following may
involve a higher degree of judgment and complexity. Actual results may
ultimately differ from these estimates.

Inventory valuation. The Company's inventories are stated at the lower of
weighted average cost or market. The Company computes the weighted average cost
utilizing specific identification at the stock-keeping unit level multiplied by
the weighted average cost for such stock-keeping unit.

In most cases, the expected sales value (i.e., market value) of the
Company's inventory is higher than its cost. However, as the Company progresses
through a selling season, certain merchandise may be currently, or in the
future, marked to sell or ultimately sold below the cost for that item. As a
result, there is a high degree of judgement and complexity in determining the
market value of such inventories. For inventories on hand at any given fiscal
quarter end, the Company estimates the future selling price of its merchandise,
given its current selling price and its planned promotional activities, and
provides a reserve for the difference between cost and the expected selling
price for all items expected to be sold below cost.

The Company conducts a chainwide physical inventory count near the end of
each fiscal year and adjusts the Company's records to reflect the actual
inventory counts. For interim financial reporting quarters, the Company provides
a reserve for shrinkage based principally on historical shrinkage experience.

Impairment of long-lived assets. The Company periodically evaluates its
investment in long-lived assets used in operations at the individual store level
that is the lowest level at which individual cash flows can be identified. When
evaluating assets for potential impairment, the Company first compares the
carrying value of the asset to the asset's estimated future cash flows
(undiscounted and without interest charges). The individual store's estimated
future cash flows are based on the Company's estimated future results given
perceived local market conditions, the local economy and historical results. If
the individual store's estimated future cash flows used in this analysis are
less than the carrying amount of the asset, impairment is indicated.

17

Decisions to close a store can also result in accelerated depreciation over the
revised useful life. The impairment loss would then be recorded and is generally
measured as the excess of the carrying amount of the asset over the asset's
estimated fair value (generally based upon future discounted cash flows.) In
addition, decisions to close a store, prior to the expiration of its underlying
lease, generally results in increased depreciation over the remaining revised
useful life of property and equipment.

Insurance. The Company is self-insured for workers' compensation, employee
health benefits and general liability up to a predetermined stop-loss amount.
Third party insurance coverage is maintained for claims that exceed the
predetermined stop-loss amount. The Company's self-insurance accruals are based
upon standard insurance industry actuarial assumptions or the Company's
historical claims experience.

Income taxes. The Company records reserves for estimates of probable
settlements of tax audits. At any one time, many tax years are subject to audit
by various taxing jurisdictions. The results of these audits and negotiations
with taxing authorities may affect the ultimate settlement of these issues. The
Company's effective tax rate in a given financial statement may be materially
impacted by changes in the mix and level of financial results.

RESULTS OF OPERATIONS -- FOURTH QUARTER FISCAL 2001 COMPARED WITH FOURTH QUARTER
FISCAL 2000

The following table sets forth the Company's unaudited results of
operations for the quarters indicated (in thousands, except per share amounts):

Overview. In the fourth quarter of fiscal 2001, the Company did not open,
relocate or close any stores, leaving the total number of stores in operation at
February 2, 2002 at 332, compared with 317 at February 3, 2001. In the fourth
quarter of fiscal 2000, seven new stores were opened and six stores were
relocated. The net loss was $7,674,000, or 2.1% of sales, in the fourth quarter
of fiscal 2001 compared with net earnings of $11,135,000, or 2.8% of sales, in
the fourth quarter of fiscal 2000.

Sales. Sales for the fourth quarter of fiscal 2001 (which contained 13
weeks) were $363,102,000, a 9.3% decrease from the $400,275,000 for the fourth
quarter of fiscal 2000 (which contained 14 weeks). This decrease of $37,173,000
consisted of: (i) $15,950,000 in sales from the additional week included in the
fourth quarter of fiscal 2000, (ii) a $30,012,000 decrease in comparable store
sales, offset by (iii) an $8,789,000 increase in sales from new, transition and
closed stores that are not included in comparable store sales. Comparable store
sales for the fourth quarter of fiscal 2001 (on a 13-week basis) decreased 8.7%
compared with the corresponding period of the previous fiscal year. The Company
believes the decline in comparable store sales in the fourth quarter of fiscal
2001 was due, in part, to the unseasonably warm weather throughout the fall
season, the events of September 11 and the subsequent war, the weak economy, and
a very promotional and competitive retail apparel environment.

18

Gross profit. Gross profit for the fourth quarter of fiscal 2001 was
$78,833,000, or 21.7% of sales, a $32,061,000 decrease compared with the
$110,894,000, or 27.7% of sales, in gross profit generated for the fourth
quarter of the previous fiscal year. The 6.0% decrease in gross profit rate, as
a percent of sales, in the fourth quarter of fiscal 2001 compared with the
fourth quarter of fiscal 2000 consisted primarily of a 5.1% increase in cost of
sales caused by the sales shortfall and the resulting excessive markdowns needed
to reduce inventories, and a 0.9% increase in occupancy costs which were not
leveraged, as a percent of sales, due to the shortfall in comparable store sales
and higher occupancy costs for new and relocated stores.

Selling, general and administrative expenses. Selling, general and
administrative expenses for the fourth quarter of fiscal 2001 were $90,048,000,
or 24.8% of sales, a decrease in dollar amount of $3,669,000 from $93,717,000,
or 23.4% of sales, for the fourth quarter of fiscal 2000. The 1.4% increase in
selling, general and administrative expenses, as a percent of sales, in the
fourth quarter of fiscal 2001 compared with the fourth quarter of fiscal 2000
resulted primarily from increases of: (i) 0.3% in payroll costs, (ii) 0.4% in
advertising and promotional expense, (iii) 0.2% in depreciation expense, and
(iv) 0.5% in all other selling, general and administrative expenses.

Unusual Item. In the fourth quarter of fiscal 2001 the Company recorded a
restructuring charge of $1,335,000 primarily consisting of severance costs
associated with a planned reduction in work force and professional fees
associated with the reduction program.

Interest expense. Even though average borrowings for the fourth quarter of
fiscal 2001 were higher compared to the fourth quarter of fiscal 2000, interest
expense for the fourth quarter of fiscal 2001 decreased by $68,000 compared with
the fourth quarter of fiscal 2000 due to lower borrowing rates.

Investment income. Investment income for the fourth quarter of fiscal 2001
decreased by $436,000 compared with the fourth quarter of fiscal 2000 due to
lower levels of invested funds and lower interest rates.

Income taxes. The benefit for income taxes for the fourth quarter of
fiscal 2001 was $4,605,000, for an effective tax rate of 37.5% of loss before
income taxes, compared with a provision for income taxes of $6,681,000, for an
effective tax rate of 37.5% of earnings before income taxes, for the fourth
quarter of fiscal 2000.

RESULTS OF OPERATIONS -- FISCAL 2001, 2000 AND 1999

The following table sets forth the Company's results of operations as a
percent of sales for the fiscal years indicated:

Fiscal 2001 Compared with Fiscal 2000

Overview. In fiscal 2001, the Company opened 18 new stores, relocated 9
stores, remodeled 3 stores, and closed 3 stores, bringing the total number of
stores in operation at February 2, 2002 to 332 compared with 317 at February 3,
2001. In fiscal 2000, 32 new stores were opened, 12 stores were relocated, 1
store was remodeled, and 2 stores were closed. The Company sustained a net loss
of $20,191,000, or 1.7% of sales, in fiscal 2001, compared with net earnings of
$13,342,000, or 1.1% of sales, in fiscal 2000.

19

Sales. Sales for fiscal 2001 (which contained 52 weeks) were
$1,192,546,000, a 4.6% decrease from the $1,250,604,000 for fiscal 2000 (which
contained 53 weeks). This decrease of $58,058,000 consisted of: (i) $15,950,000
in sales from the additional week included in fiscal 2000, (ii) a $98,211,000
decrease in comparable store sales, offset by (iii) a $56,103,000 increase in
new, transition and closed stores that are not included in comparable store
sales. Comparable store sales for fiscal 2001 (on a 52-week basis) decreased
8.5% compared with fiscal 2000. The Company believes the decline in comparable
store sales for fiscal 2001 was due, in part, to the unseasonable weather, the
loss of market share related to ineffective marketing efforts, the events of
September 11 and the subsequent war, the generally weak economy, and a very
promotional and competitive retail apparel environment.

Gross profit. Gross profit for fiscal 2001 was $297,469,000, or 24.9% of
sales, a $40,547,000 decrease from the $338,016,000, or 27.0% of sales, in gross
profit generated for fiscal 2000. The 2.1% decrease in gross profit rate, as a
percent of sales, in fiscal 2001 compared with fiscal 2000 resulted primarily
from a 1.2% increase in cost of sales, and a 0.9% increase in occupancy costs
which were not leveraged, as a percent of sales, due to the shortfall in
comparable store sales and higher occupancy costs for new and relocated stores.

Selling, general and administrative expenses. Selling, general and
administrative expenses for fiscal 2001 were $328,997,000, or 27.6% of sales, an
increase of $9,972,000 from $319,025,000 for fiscal 2000, or 25.5% of sales. The
2.1% increase in selling, general and administrative expenses, as a percent of
sales, in fiscal 2001 compared with fiscal 2000 resulted primarily from an
increase of: (i) 0.5% in payroll costs, (ii) 0.5% in advertising and promotional
expenses and (iii) 1.1% in all other selling, general and administrative
expenses.

Unusual item. In fiscal 2001, the Company recorded a restructuring charge
of $1,335,000 primarily consisting of severance costs associated with a planned
reduction in work force and professional fees associated with the reduction
program.

Interest expense. Even though borrowing rates were lower in fiscal 2001 as
compared with fiscal 2000, interest expense for fiscal 2001 increased by
$123,000 compared with fiscal 2000 due to higher levels of borrowing in the
third and fourth fiscal quarters of fiscal 2001.

Investment income. Investment income for fiscal 2001 decreased by
$1,676,000 compared with fiscal 2000 primarily due to lower levels of invested
funds and lower interest rates.

Income taxes. The benefit for income taxes for fiscal 2001 was
$12,115,000, for an effective tax rate of 37.5% of loss before income taxes,
compared with a provision for income taxes of $8,005,000, for an effective tax
rate of 37.5% of earnings before income taxes for fiscal 2000.

Fiscal 2000 Compared with Fiscal 1999

Overview. In fiscal 2000, the Company opened 32 new stores, relocated 12
stores, remodeled 1 store, and closed 2 stores, bringing the total number of
stores in operation at February 3, 2001 to 317 compared with 287 at January 29,
2000. In fiscal 1999, 32 new stores were opened, 15 stores were relocated, 5
stores were remodeled, and 2 stores were closed. Net earnings were $13,342,000,
or 1.1% of sales, in fiscal 2000, compared with net earnings of $19,725,000, or
1.7% of sales, in fiscal 1999.

Sales. Sales for fiscal 2000 were $1,250,604,000, a 5.9% increase over the
$1,180,930,000 for fiscal 1999. This increase of $69,674,000 consisted of: (i)
$15,950,000 in sales from the additional last week of sales included in fiscal
2000, (ii) a $106,800,000 increase in new, transition and closed stores that are
not included in comparable store sales, offset by (iii) a $53,076,000 decrease
in comparable store sales. Comparable store sales for fiscal 2000 (on a 52-week
basis) decreased 4.8% compared with fiscal 1999. The Company believes that: (i)
unseasonable weather at certain times during the year, (ii) unbalanced
inventories that led to significant promotional activities at lower price
points, (iii) a more competitive retail environment, and (iv) a general economic
slowdown were the primary causes for the decrease in comparable store sales
during fiscal 2000. The largest sales decreases during fiscal 2000 were in the
men's and junior's divisions and the basic denim departments.

Gross profit. Gross profit for fiscal 2000 was $338,016,000, or 27.0% of
sales, a $25,231,000 increase over the $312,785,000, or 26.5% of sales, in gross
profit generated for fiscal 1999. The 0.5% increase in gross profit rate, as a
percent of sales, in fiscal 2000 compared with fiscal 1999 resulted primarily
from a 0.9% decrease in cost of sales related to better inventory management,
which reduced promotionally priced clearance merchandise sales, and a 0.4%
increase in occupancy costs which were not leveraged due to the shortfall in
comparable store sales and higher occupancy costs for new and relocated stores.

20

Selling, general and administrative expenses. Selling, general and
administrative expenses for fiscal 2000 were $319,025,000, or 25.5% of sales, an
increase of $34,891,000 from $284,134,000 for fiscal 1999, or 24.0% of sales.
The 1.5% increase in selling, general and administrative expenses, as a percent
of sales, in fiscal 2000 compared with fiscal 1999 resulted primarily from an
increase of: (i) 0.6% in payroll costs, (ii) 0.5% in advertising and promotional
expenses and (iii) 0.4% in all other selling, general and administrative
expenses.

Interest expense. Interest expense for fiscal 2000 increased by $65,000
compared with fiscal 1999 due to increased borrowings under the credit agreement
during fiscal 2000 compared with fiscal 1999.

Investment income. Investment income for fiscal 2000 decreased by $488,000
compared with fiscal 1999 consisting of a $383,000 reduction from a decrease in
invested funds during fiscal 2000 and a $105,000 reduction from a decrease in
the investment of EDP Plan assets.

Income taxes. The provision for income taxes for fiscal 2000 was
$8,005,000, for an effective tax rate of 37.5% of earnings before income taxes,
compared with $11,835,000, for an effective tax rate of 37.5% of earnings before
income taxes for fiscal 1999.

LIQUIDITY AND CAPITAL RESOURCES

Financial position

The Company's primary sources of liquidity are cash flows from operations,
including credit terms from vendors and factors, and borrowings under its credit
facility. The Company's working capital was $85,340,000 at February 2, 2002
compared with $93,538,000 at February 3, 2001 and $104,213,000 at January 29,
2000.

In May 2001, the Company entered into a five-year $130,000,000 syndicated
revolving loan and security agreement (the "credit facility") that provides for
cash borrowings for general corporate purposes, including a $95,000,000
sub-facility for the issuance of letters of credit. Borrowings under this credit
facility are limited by collateral formulas, based principally upon the
Company's eligible inventories. The credit facility is secured primarily by the
Company's inventories, receivables, and cash and cash equivalents, which at
February 2, 2002 aggregated $233,777,000. Of this amount, approximately
$139,004,000 represented the borrowing base, which excludes cash and most of
cash equivalents and only gives credit for specified percentages of inventory
and receivables. The amount available to draw under the credit facility at
February 2, 2002 was approximately $94,075,000. If availability (as calculated
pursuant to the credit facility) falls below $25,000,000, the Company would be
required, for a period of time, to comply with a financial covenant requiring it
to maintain minimum levels of tangible net worth based on formulas. If this
financial covenant had been applicable at February 2, 2002, the minimum tangible
net worth required would have been $176,157,000. At February 2, 2002, the
Company's tangible net worth was $202,716,000. The credit facility also contains
certain discretionary provisions that enable the lender to reduce availability.
The credit facility bears interest at LIBOR plus an applicable margin or the
prime rate.

At February 2, 2002 and February 3, 2001, the Company had no cash
borrowings under the current or prior credit facility, and had letters of credit
outstanding not yet reflected in accounts payables of $22,758,000 and
$18,298,000, respectively. Cash borrowings averaged $5,650,000 during fiscal
2001 compared with $902,000 during fiscal 2000, with the highest balance of
$38,000,000 in November 2001 compared with $22,000,000 in November 2000. Letters
of credit outstanding averaged $36,241,000 during fiscal 2001 compared with
$55,075,000 during fiscal 2000, with the highest balance of $49,169,000 in May
and June 2001 compared with $79,789,000 in June 2000. The weighted average
interest rates on cash borrowings in fiscal 2001, 2000 and 1999 were 4.4%, 7.9%
and 5.2%, respectively.

Future Commitments

The table below sets forth the Company's commercial commitments related to
real estate leases for its stores and service fees associated with the Company's
outsourced shoe distribution function:

Outstanding documentary and standby letters of credit totaled $33,310,000
and $2,562,000, respectively, at February 2, 2002 with expiration dates of less
than one year.

21

In fiscal 1999, the Company entered into a split-dollar life insurance
agreement, whereby the Company agreed to pay the premiums for certain
second-to-die policies insuring the lives of Mr. and Mrs. Robert M. Goodfriend.
These policies are owned by a trust for the benefit of the Goodfriends'
children. During fiscal 2001, the Company did not pay premiums on the policies.
However, a certain policy's premium in fiscal 2001 was funded from a $1,332,000
loan taken against the cash surrender value of such policy. The Company paid
premiums for all policies of $4,195,000 in each of fiscal 2000 and 1999. The
Company currently expects to pay premiums of $2,425,000 in fiscal 2002 and repay
the loan of $1,332,000 in fiscal 2003. The Company does not expect to make
payments related to the policies beyond fiscal 2003. The Company has certain
rights under this agreement, including the right to terminate these policies at
any time prior to the occurrence of certain "restricting events." See Note 8 in
the Notes to Consolidated Financial Statements.

In June 1999, the Board of Directors authorized the Company to spend up to
$20 million to repurchase Common Stock. Through February 2, 2002, the Company
repurchased an aggregate of $7.4 million. The Company made no purchases during
fiscal 2001 and has no current plans to repurchase any shares of Common Stock
during fiscal 2002, although such intentions could change.

Cash flows

Operating activities provided cash of $7,191,000, $11,298,000 and
$43,705,000 in fiscal 2001, fiscal 2000 and 1999, respectively, and included the
following effects:

- Cash provided by inventories in fiscal 2001 of $27,749,000 was primarily
the result of achieving the Company's plan for lower inventories on a per
square foot basis. Cash used for increased inventories in fiscal 2000 and
1999 of $24,826,000 and $17,207,000, respectively, was reflective of an
increased number of stores, with a modest increase in inventory levels on
a per square foot basis.

- Cash used for accounts payable in fiscal 2001 and fiscal 2000 of
$14,794,000 and $13,828,000, respectively, was a result of lower
inventory levels for fiscal 2001 and a lower accounts payable to
inventory ratio for fiscal 2000. Accounts payable provided cash of
$20,909,000 in fiscal 1999 primarily due to a higher accounts payable to
inventory ratio for fiscal 1999.

- Depreciation and amortization expenses were $23,779,000, $20,068,000 and
$16,624,000 in fiscal 2001, 2000 and 1999, respectively. The increases in
depreciation and amortization were due primarily to increased capital
expenditures for new, relocated and remodeled stores, the new
distribution center in Russellville, Arkansas (in fiscal 2000), as well
as for upgrading information technology, and for general corporate
purposes.

Cash flows from investing activities reflected a $15,215,000, $43,277,000
and $31,139,000 net use of cash for fiscal 2001, 2000 and 1999, respectively.
Cash was used primarily to fund capital expenditures for new, relocated and
remodeled stores, the new distribution center in Russellville, Arkansas (in
fiscal 2000), as well as for upgrading information technology, and for general
corporate purposes.

Financing activities used cash of $920,000, $2,570,000 and $4,559,000 in
fiscal 2001, 2000, and 1999, respectively. The Company used cash in fiscal 2000
of $2,931,000 to repurchase 533,000 shares of Common Stock and used cash in
fiscal 1999 of $4,507,000 to repurchase 585,300 shares of Common Stock.

Outlook

The Company's business plan for fiscal 2002 currently calls for: (i) the
opening of two new stores, the relocation or remodeling of approximately four of
its existing stores and the closing of at least six stores; (ii) comparable
store sales to increase approximately 5.0% for the full fiscal year with a
greater part of the increase coming in the second half of the year; (iii) an
increase in the gross profit rate of approximately 300 basis points; (iv) a
decrease in the selling, general and administrative expense rate of
approximately 150 basis points, with total advertising expenditures similar to
fiscal 2001; (v) net interest expense of approximately $160,000; (vi) an
effective income tax rate of 37.5%; (vii) 33.1 million average diluted shares
outstanding; (viii) capital expenditures of $11.0 million (of which
approximately $5.4 million is allocated for new and existing stores); and (ix)
depreciation of approximately $24.7 million. A profit is planned for each
quarter during fiscal 2002. Actual results may vary from the business plan.

22

On February 1, 2002, the Company announced a reduction in its work force,
anticipated to be completed during 2002, that is expected to result in the
elimination of approximately 150 jobs or 16% of the employees located at its
corporate office and distribution center in Knoxville, Tennessee, and its
distribution center in Russellville, Arkansas. The reduction in work force is
expected to decrease overhead by approximately $4.3 million during fiscal 2002
and $5.2 million on an annualized basis. The Company also intends to modify
certain activities in its stores in an effort to increase efficiency and reduce
its store costs by approximately $3.7 million during fiscal 2002 and $5.0
million on an annualized basis. The combined annualized savings are expected to
total approximately $10.2 million.

The Company's primary needs for capital resources are for the purchase of
store inventories, capital expenditures and for normal operating purposes.
Management believes that its existing working capital, together with anticipated
cash flows from operations, including credit terms from vendors and factors, and
the borrowings available under its credit facility will be sufficient to meet
the Company's operating and capital expenditure requirements. However, an
adverse outcome from the risks and uncertainties described in the section above
captioned "Certain Factors That May Affect Future Results" could have a material
adverse effect on working capital or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company has no material investments or risks in market risk sensitive
instruments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the financial statements listed under the heading
"(a)(1) Consolidated Financial Statements" of Item 14 hereof, which financial
statements are incorporated herein by reference in response to this Item 8.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference to
information under the captions "Item 1. Election of Directors -- Biographies of
Director Nominees, Directors, and Executive Officers" and "Item 1. Election of
Directors -- Section 16(a) Beneficial Ownership Reporting Compliance" in the
Registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders
currently scheduled to be held on June 19, 2002.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference to
information under the caption "Item 1. Election of Directors -- Executive
Compensation and Other Information" in the Registrant's Proxy Statement for the
2002 Annual Meeting of Shareholders currently scheduled to be held on June 19,
2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference to
information under the caption "Item 1. Election of Directors -- Share Ownership"
in the Registrant's Proxy Statement for the 2002 Annual Meeting of Shareholders
currently scheduled to be held on June 19, 2002.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference to
information under the caption "Item 1. Election of Directors -- Certain
Transactions with Directors and Officers" in the Registrant's Proxy Statement
for the 2002 Annual Meeting of Shareholders currently scheduled to be held on
June 19, 2002.

23

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

(a)(1) Consolidated Financial Statements

The following consolidated financial statements of Goody's and the
Independent Auditors' Report thereon are included in Item 8 above:

- Independent Auditors' Report.

- Consolidated Statements of Operations for each of the three fiscal years
in the period ended February 2, 2002.

- Consolidated Balance Sheets as of February 2, 2002 and February 3, 2001.

- Consolidated Statements of Cash Flows for each of the three fiscal years
in the period ended February 2, 2002.

- Consolidated Statements of Shareholders' Equity for each of the three
fiscal years in the period ended February 2, 2002.

- Notes to Consolidated Financial Statements for each of the three fiscal
years in the period ended February 2, 2002.

(a)(2) Financial Statement Schedules

All financial statement schedules are omitted as the required information
is inapplicable.

(a)(3) Exhibits

The following Exhibits are incorporated herein by reference or are filed
with this report as indicated below.

EXHIBIT LIST

- ---------------

* The indicated exhibit is a management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Annual Report on Form
10-K:
a Incorporated herein by reference to exhibit of the same number in Registrant's
Registration Statement on Form S-3 (Registration No. 333-32409) filed on
August 18, 1997 and amended on August 25, 1997 and September 3, 1997.
b Incorporated herein by reference to exhibit of the same number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 29, 1995 (File No.
019526).
c Incorporated herein by reference exhibit of the same number in Registrant's
Annual Report on Form 10-K for the year ended January 28, 1995 (File No.
019526).
d Incorporated herein by reference to exhibit 4 in Registrant's Registration
Statement on Form S-8 (Registration No. 333-00052) originally filed on January
4, 1996.
e Incorporated herein by reference to exhibit of the same number in Registrant's
Annual Report on Form 10-K for the year ended February 3, 1996 (File No.
019526).
f Incorporated herein by reference to exhibit of the same number in Registrant's
Annual Report on Form 10-K for the year ended February 1, 1997 (File No.
019526).
g Incorporated herein by reference to exhibit of the same number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended November 1, 1997 (File No.
019526).
h Incorporated herein by reference to exhibit of the same number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended August 1, 1998 (File No.
019526).
i Incorporated herein by reference to exhibit of the same number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 31, 1998 (File No.
019526).
j Incorporated herein by reference to exhibit of the same number in Registrant's
Annual Report on Form 10-K for the year ended January 30, 1999 (File No.
019526).
k Incorporated herein by reference to exhibit of the same number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 31, 1999 (File No.
019526).
l Incorporated herein by reference to exhibit of the same number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 30, 1999 (File No.
019526).
m Incorporated herein by reference to exhibit of the same number in Registrant's
Annual Report on Form 10-K for the year ended January 29, 2000 (File No.
019526).
n Incorporated herein by reference to exhibit of the same number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 29, 2000 (File No.
019526).
o Incorporated herein by reference to exhibit of the same number in Registrant's
Quarterly Report on Form 10-Q for the quarter ended October 28, 2000 (File No.
019526).
p Incorporated herein by reference to exhibit of the same number in Registrant's
Annual Report on Form 10-K for the year ended February 3, 2001 (File No.
019526).
q Incorporated herein by reference to exhibit of the same number in Registrant's
Annual Report on Form 8-K/A dated July 3, 2001 (File No. 019526).

(b) Forms 8-K: None

25

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

GOODY'S FAMILY CLOTHING, INC.

By: /s/ ROBERT M. GOODFRIEND
------------------------------------
Robert M. Goodfriend
Chairman of the Board and
Chief Executive Officer

Dated: April 26, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

26

GOODY'S FAMILY CLOTHING, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
Goody's Family Clothing, Inc.

We have audited the accompanying consolidated balance sheets of Goody's
Family Clothing, Inc. and subsidiaries as of February 2, 2002 and February 3,
2001 and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three fiscal years in the period ended
February 2, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Goody's Family Clothing, Inc.
and subsidiaries as of February 2, 2002 and February 3, 2001 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended February 2, 2002 in conformity with accounting principles generally
accepted in the United States of America.

DELOITTE & TOUCHE LLP

Atlanta, Georgia
March 18, 2002

F-2

GOODY'S FAMILY CLOTHING, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements

F-3

GOODY'S FAMILY CLOTHING, INC.

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements

F-4

GOODY'S FAMILY CLOTHING, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements

F-5

GOODY'S FAMILY CLOTHING, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

See accompanying notes to consolidated financial statements

F-6

GOODY'S FAMILY CLOTHING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED FEBRUARY 2, 2002, FEBRUARY 3, 2001 AND JANUARY 29, 2000

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of business. Headquartered in Knoxville, Tennessee, Goody's
Family Clothing, Inc. and subsidiaries (the "Company") is a retailer of
moderately-priced family apparel operating 332 stores in 18 states (all under
one business segment) as of February 2, 2002.

Fiscal year end. The Company's fiscal year ends on the Saturday nearest
the last day of January. Fiscal 2001, 2000 and 1999 refer to the Company's
fiscal years ended February 2, 2002 (52 weeks), February 3, 2001 (53 weeks) and
January 29, 2000 (52 weeks), respectively.

Principles of consolidation. The consolidated financial statements include
the accounts of Goody's Family Clothing, Inc. and its subsidiaries, all of which
are wholly owned. All material intercompany balances and transactions have been
eliminated.

Use of estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Cash and cash equivalents. Cash equivalents consist of highly liquid
investments, such as money market accounts, deposit accounts, government-backed
securities, and overnight repurchase agreements, each with a maturity of less
than three months. The costs of these investments approximate their fair market
value.

Inventories. Inventories are stated at the lower of weighted average cost
or market. Weighted average cost is computed utilizing specific identification
at the stock-keeping unit level multiplied by the weighted-average cost for such
stock-keeping unit.

Property and equipment. Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is computed by using the
straight-line method over the estimated useful lives of the assets, which are 40
years for buildings and up to 10 years for other assets. Leasehold improvements
are amortized by the straight-line method over the lesser of the useful lives of
the improvements or the related lease terms. Maintenance and repair costs are
charged directly to expense as incurred. Major renewals or replacements that
substantially extend the useful life of an asset are capitalized and
depreciated.

Impairment of long-lived assets. The Company periodically evaluates its
investment in long-lived assets used in operations at the individual store level
that is the lowest level at which individual cash flows can be identified. When
evaluating assets for potential impairment, the Company first compares the
carrying value of the asset to the asset's estimated future cash flows
(undiscounted and without interest charges). If the estimated future cash flows
used in this analysis are less than the carrying amount of the asset, an
impairment loss is recorded. The impairment loss is generally the excess of the
carrying amount of the asset over the asset's estimated fair value (generally
based upon future discounted cash flows.) In addition, decisions to close a
store, prior to the expiration of its underlying lease, generally results in
increased depreciation over the remaining revised useful life of property and
equipment.

Revenue recognition. The Company recognizes revenue from the sale of
merchandise at the time merchandise is sold and the customer takes delivery. At
each period end, an estimate of sales returns is recorded. The Company
terminated all leased department operations during fiscal 1999. Net rental
income from leased departments during fiscal 1999 aggregated $3,372,000 and is
included in sales for fiscal 1999.

The Company changed its method of recording layaway sales in fiscal 2000.
Prior to fiscal 2000, the Company recorded the sale and related gross profit
from a layaway on receipt of the initial layaway deposit from its customers.
Beginning January 30, 2000, the first day of fiscal 2000, the Company recognized
the sale and the related gross profit from layaways upon delivery of the
merchandise to the customer. The pre-tax cumulative effect of this change at
January 30, 2000 was $331,000 and is included in selling, general and
administrative expenses in fiscal 2000. Pro forma operating results for
full-year fiscal 1999 would not be significantly different than historically
reported results had this new accounting methodology for layaways been
retroactively applied. However, this change in methodology would have slightly
modified the reported unaudited operating results between certain quarters
within those years.
F-7

GOODY'S FAMILY CLOTHING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Advertising. For annual financial reporting purposes, the Company expenses
all advertising expenditures as incurred. For interim financial reporting
purposes, the Company expenses advertising expenditures in the period when the
advertisement first runs. Advertising expenses, net of vendor reimbursements,
were $65,355,000, $62,795,000 and $54,101,000 for fiscal 2001, 2000 and 1999,
respectively.

Store opening and closing costs. New and relocated store opening costs are
charged directly to expense when incurred. When the Company decides to close or
relocate a store, the estimated unrecoverable costs to be incurred upon or after
the store closing, principally consisting of the remaining lease obligations,
are charged to expense.

Insurance. The Company is self-insured for workers' compensation, employee
health benefits and general liability up to a predetermined stop-loss amount.
Third party insurance coverage is maintained for claims that exceed the
predetermined stop-loss amount. The Company's self-insurance accruals are
calculated using either standard insurance industry actuarial assumptions or the
Company's historical claims experience.

Unusual Item. The Company incurred a significant loss from operations
during fiscal 2001. As a result, the Company implemented a cost reduction
program during the fourth quarter of fiscal 2001 and recorded an unusual charge
of $1,335,000 in that quarter for approximately $480,000 for severance and
health benefits payments associated with employee terminations, and
approximately $855,000 for professional fees and outplacement services related
to the reduction program.

Income taxes. Deferred income taxes are recognized for the tax
consequences of temporary differences between the tax and financial reporting
basis of the Company's assets and liabilities based on enacted tax laws and
statutory tax rates applicable to the future years that the differences are
expected to affect taxable income.

(Loss) earnings per common share. Basic (loss) earnings per common share
are computed by dividing net (loss) earnings by the weighted-average number of
common shares outstanding during the period. Diluted earnings per common share
are computed by dividing net earnings by the weighted-average number of common
shares outstanding and potentially dilutive common shares. Weighted-average
diluted shares outstanding differs from weighted-average basic shares
outstanding solely from the effect of dilutive stock options under the treasury
stock method and amounted to 59,000, 112,000 and 435,000 shares for fiscal 2001,
2000 and 1999, respectively. Stock options to purchase 2,440,000, 2,556,000 and
2,517,000 shares of the Company's common stock in fiscal 2001, 2000 and 1999,
respectively, were excluded from the computation of weighted-average diluted
shares outstanding because they would have been antidilutive.

Comprehensive income. The Company is required to disclose within the basic
financial statements items of comprehensive (loss) income, such as foreign
currency transactions and unrealized gains and losses on available-for-sale
securities. Since the Company has no items that qualify as comprehensive (loss)
income, there is no difference between comprehensive (loss) income and net
(loss) earnings for any fiscal year presented.

Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
which requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. The statement, as amended, is effective for the Company's 2001
fiscal year. The Company adopted SFAS 133 and related amendments on February 4,
2001. The Company does not hold any derivative financial instruments and,
accordingly, the adoption of SFAS 133 did not have any effect on its
consolidated financial statements.

In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). This statement
supersedes APB Opinion No. 17, "Accounting for Intangible Assets." It revises
the standards for accounting for goodwill and other intangible assets by not
allowing amortization of goodwill and establishing accounting for impairment of
goodwill and other intangible assets. In addition, the standard includes
provisions for reclassification of certain existing recognized intangibles as
goodwill, reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill, and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. The Company is required to apply SFAS 142 in fiscal
2002. To date, the Company has not entered into any business combinations and
has no goodwill or intangible assets that would be subject to this statement.
Accordingly, the adoption of SFAS 142 should not have any impact on the
Company's financial statements and related disclosures.

F-8

GOODY'S FAMILY CLOTHING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long-Lived
Assets," which is effective for the Company's fiscal year 2002. SFAS 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and
reporting provisions relating to the disposal of a segment of a business of
Accounting Principles Board Opinion No. 30. The adoption of SFAS 144 in fiscal
2002 should not have a significant impact on the Company's financial statements.

Reclassifications. Certain reclassifications have been made to the
financial statements of prior periods to conform to the current period
presentation.

2. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following (in thousands):

Impairment charges for property and equipment were $1,892,000, $1,196,000 and
$779,000 in fiscal 2001, 2000 and 1999, respectively.

3. CREDIT FACILITY

In May 2001, the Company entered into a five-year $130,000,000 syndicated
revolving loan and security agreement (the "credit facility") that provides for
cash borrowings for general corporate purposes, including a $95,000,000
sub-facility for the issuance of letters of credit. Borrowings under this credit
facility are limited by collateral formulas, based principally upon the
Company's eligible inventories. The credit facility is secured primarily by the
Company's inventories, receivables and cash and cash equivalents, which at
February 2, 2002 aggregated $233,777,000. Of this amount, approximately
$139,004,000 represented the borrowing base, which excludes cash and most of
cash equivalents and only gives credit for specified percentages of inventory
and receivables. The amount available to draw under the credit facility at
February 2, 2002 was approximately $94,075,000. If availability (as calculated
pursuant to the credit facility) falls below $25,000,000, the Company would be
required, for a period of time, to comply with a financial covenant requiring it
to maintain minimum levels of tangible net worth based on formulas. The credit
facility also contains certain discretionary provisions that enable the lender
to reduce availability. The credit facility bears interest at LIBOR plus an
applicable margin or the prime rate.

At February 2, 2002 and February 3, 2001, the Company had no cash
borrowings under the current or prior credit facility, and had letters of credit
outstanding not yet reflected in accounts payables of $22,758,000 and
$18,298,000, respectively. Cash borrowings averaged $5,650,000 during fiscal
2001 compared with $902,000 during fiscal 2000, with the highest balance of
$38,000,000 in November 2001 compared with $22,000,000 in November 2000. Letters
of credit outstanding averaged $36,241,000 during fiscal 2001 compared with
$55,075,000 during fiscal 2000, with the highest balance of $49,169,000 in May
and June 2001 compared with $79,789,000 in June 2000. The weighted average
interest rates on cash borrowings in fiscal 2001, 2000 and 1999 were 4.4%, 7.9%
and 5.2%, respectively.

F-9

GOODY'S FAMILY CLOTHING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. INCOME TAXES

The (benefit) provision for income taxes for the years indicated consisted
of the following (in thousands):

The (benefit) provision for income taxes differed from the amounts computed
by applying the federal statutory rate to (loss) earnings before income taxes as
follows (in thousands):

The tax effects of temporary differences were as follows (in thousands):

The Company has net operating loss carryforwards for state income tax
purposes aggregating $40,934,000 at February 2, 2002, with expirations ranging
from fiscal 2003 through fiscal 2021. The Company has a net operating loss
carryback for federal tax purposes of approximately $38,080,000. Current
deferred tax assets are included in accounts receivable and other current assets
in the accompanying consolidated balance sheets.

F-10

GOODY'S FAMILY CLOTHING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. STOCK OPTIONS

The Company has options outstanding under four stock option plans: the
Goody's Family Clothing, Inc. 1991 Stock Incentive Plan ( the "1991 Plan"), the
Goody's Family Clothing, Inc. 1993 Stock Option Plan (the "1993 Plan"), the
Goody's Family Clothing, Inc. 1997 Stock Option Plan (the "1997 Plan") and the
Discounted Stock Option Plan for Directors (the "Directors' Plan").

The 1991 Plan, 1993 Plan and 1997 Plan provide for the grant of
nonqualified and incentive stock options to key associates and directors and
formula options to non-associate directors. The Compensation Committee of the
Board of Directors determines the exercise price (not to be less than the fair
market value of the Company's common stock for incentive options or formula
options on the date of grant) and the vesting and exercise periods. The options
typically vest in equal installments over five years from the date of grant and
are generally exercisable up to 10 years from the date of grant. The Company is
authorized to issue an aggregate of 4,000,000 shares of common stock under the
1993 Plan and 1997 Plan. The 1991 Plan terminated in September 2001 and the
Company is no longer entitled to issue options thereunder. However, at February
2, 2002, an aggregate of 533,650 options remain outstanding under the 1991 Plan.

Under the Directors' Plan, non-associate directors may elect to receive
options to purchase common stock at an exercise price equal to 50% of the fair
market value of the common stock on the date of grant in lieu of cash for their
director fees. These options vest one year from the date of grant and are
exercisable up to 20 years from the date of grant. The expense recorded in
connection with stock options issued under this plan has been immaterial. The
Company is authorized to issue an aggregate of 300,000 shares of common stock
under the Directors' Plan.

A summary of the stock option activity and the related weighted-average
exercise prices for all the option plans is as follows:

The following table summarizes information about stock options outstanding
at February 2, 2002:

F-11

GOODY'S FAMILY CLOTHING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), encourages, but does not require,
companies to record compensation expense for stock-based employee compensation
plans at fair value. The Company has chosen to adopt the disclosure-only
provisions of SFAS 123 and to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
interpretations. Accordingly, no compensation expense has been recognized for
the stock options granted under the various stock option plans to associates. If
compensation expense for the Company's stock option plans had been determined
based on the fair value on the date of grant for awards in fiscal 2001, 2000 and
1999 consistent with the provisions of SFAS 123, the Company's net (loss)
earnings and (loss) earnings per common share would have been reduced to the pro
forma amounts indicated below:

The fair value of the options granted under the Company's various stock
option plans during fiscal 2001, 2000 and 1999 was estimated on their date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions: no dividend yield; expected volatility of 68%, 58% and 55%,
respectively; risk free interest rates of 4.5%, 6.3% and 6.0%, respectively; and
expected lives of five, four and four years, respectively. The weighted average
fair value of options granted was $2.58, $2.75 and $3.47 for fiscal 2001, 2000
and 1999, respectively.

6. BENEFIT PLANS

The Company maintains the Goody's Family Clothing, Inc. 401(k) Retirement
Plan (the "401(k) Plan") with a salary deferral feature for all eligible
associates. Under the terms of the 401(k) Plan, eligible associates may
contribute between 3% and 15% of their annual compensation on a pretax basis
(with certain limitations imposed by the Internal Revenue Service) to the 401(k)
Plan. The Company provides matching contributions to the 401(k) Plan, which are
discretionary, vest over an associate's service period and are based on a
percent of the associates' elected contributions. These matching contributions
amounted to $827,000, $882,000 and $827,000 for fiscal 2001, 2000 and 1999,
respectively.

Until January 30, 2002, the Company also maintained the Goody's Family
Clothing, Inc. Executive Deferral Plan (the "EDP Plan") with a salary deferral
feature for all eligible associates. Under the terms of the EDP Plan, eligible
associates could have contributed between 3% and 20% of their annual
compensation on a pretax basis (with certain limitations imposed by the Internal
Revenue Service) to the EDP Plan. The Company provided matching contributions to
the EDP Plan, which were discretionary, vested over an associate's service
period and were based upon a percent of an associate's elected contributions.
These matching contributions were $102,000, $79,000 and $85,000 in fiscal 2001,
2000 and 1999, respectively. On January 30, 2002, the Company's Board of
Directors elected to terminate the EDP Plan and disburse all EDP Plan assets to
EDP Plan participants. Such disbursement was made to EDP Plan participants in
February 2002.

The Company also has an Employee Payroll Investment Plan that allows
eligible associates to purchase its common stock at fair market value through
regular payroll deductions.

F-12

GOODY'S FAMILY CLOTHING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. LEASE OBLIGATIONS

The Company leases its stores under operating leases, the majority of which
expire at various times during the next 10 years. The Company can, at its
option, renew most of these leases at rents that are fixed based at their then
current fair rental value. Payments under store leases consist of a fixed
minimum rent, additional rent based on a percent of sales in excess of
stipulated amounts ("percentage rent") and real estate taxes, insurance, and
common area maintenance costs. The Company also leases certain data processing
and store systems equipment.

The future minimum rental payments under operating leases having initial or
remaining non-cancelable lease terms in excess of one year at February 2, 2002
are as follows (in thousands):

Total rental expense for operating leases for fiscal 2001, 2000 and 1999
were $80,920,000, $72,541,000 and $63,281,000, respectively, including
percentage rent of $88,000, $242,000 and $350,000, respectively.

8. RELATED PARTY TRANSACTIONS

The Company has entered into the following related party transactions with
respect to Robert M. Goodfriend (the Company's Chairman of the Board and Chief
Executive Officer and beneficial owner of approximately 42% of the Company's
common stock):

Since 1987, the Company has, by agreement (the "Initial Agreement"), paid
premiums on certain split-dollar life insurance policies covering the life of
Mr. Goodfriend. During fiscal 1999, the Company paid premiums of $54,000 in
accordance with the Initial Agreement. The Company terminated the policies under
this Initial Agreement in January 2000, and received the cash surrender value of
these policies aggregating $2,144,000 in February 2000.

During fiscal 1999, the Company entered into a new split-dollar life
insurance agreement (the "New Agreement") and therein agreed to pay the premiums
for certain second-to-die policies insuring the lives of Mr. and Mrs.
Goodfriend. These policies are owned by a trust for the benefit of the
Goodfriends' children (the "Trust"). The Company, however, has certain rights
including the right to terminate these policies at any time prior to the
occurrence of the following "restricting events": (i) a change of control (as
defined in the New Agreement), (ii) the termination of Mr. Goodfriend's
employment by the Company, or (iii) unless certain conditions are met, the death
of Mr. Goodfriend. The Company will be reimbursed for all premiums paid by it on
the policies' termination (subject to deficiencies in the cash surrender value
from the early termination of the policies prior to a restricting event). The
New Agreement generally provides that one-half of the new coverage would
terminate should Mr. Goodfriend decrease his Company ownership below 20%. The
Trust has the right, but not the obligation, to purchase the policies from the
Company at any time for a purchase price equal to the cumulative premiums paid
by the Company on the policies; should the policies be purchased, all of the
Company's future obligations would cease.

During fiscal 2001, the Company did not pay premiums on the policies.
However, a certain policy's premium in fiscal 2001 was funded from a loan taken
against the cash surrender value of such policy. The Company paid premium for
all policies of $4,195,000 in each of fiscal 2000 and 1999. The cash surrender
value of all policies covered by the New Agreement at February 2, 2002 and
February 3, 2001 aggregated $7,510,000 and $7,659,000, respectively; such
amounts are included in other assets. In addition, the Company paid a premium of
$47,510 on a term policy on the life of Mr. Goodfriend in connection with the
New Agreement during each of fiscal 2001 and 2000.

F-13

GOODY'S FAMILY CLOTHING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company paid rent and taxes amounting to $312,000, $311,000 and
$310,000 for fiscal 2001, 2000 and 1999, respectively, for a store leased from
another trust benefiting Mr. Goodfriend's children. Future commitments at
February 2, 2002 under this related party lease are $2,026,000.

The Company had a promissory note payable to its founder and former
chairman, Mike D. Goodfriend, and his wife, who are the parents of Robert M.
Goodfriend. The debt was repaid in January 2001. Interest paid on this debt was
$32,000 and $61,000 during fiscal 2000 and 1999, respectively.

Mr. Robert F. Koppel, a director of the Company, is the President of the
East Tennessee Children's Hospital (the "Hospital") of which Mr. Goodfriend is a
director. The Company facilitates contributions by its employees to the Hospital
through a payroll deduction plan and matches employee contributions to the
Hospital on a 100% basis. The Company also makes additional contributions (in
cash or in kind) to the Hospital. The total amount of contributions paid by the
Company (including employee contributions) to the Hospital in fiscal 2001 was
$494,800.

9. UNUSUAL ITEMS

The Company recorded a restructuring charge during the fourth quarter of
fiscal 2001 of approximately $1,335,000 for an announced reduction in the
Company's work force, expected to be completed during 2002, that will result in
the planned elimination of approximately 150 jobs located at its corporate
office and distribution center in Knoxville, Tennessee, and its distribution
center in Russellville, Arkansas. The charge includes the costs associated with
severance, health benefits, outplacement services and professional fees related
to developing and implementing the restructuring plan. The following is a
rollforward schedule of the activity related to the restructuring accrual for
fiscal 2001:

10. CONTINGENCIES

In February 1999, a lawsuit was filed in the United States District Court
for the Middle District of Georgia and was served on the Company and Robert M.
Goodfriend, its Chairman of the Board and Chief Executive Officer, by 20 named
plaintiffs, generally alleging that the Company discriminated against a class of
African-American employees at its retail stores through the use of
discriminatory selection and compensation procedures and by maintaining unequal
terms and conditions of employment. The plaintiffs further allege that the
Company maintained a racially hostile working environment. The plaintiffs'
claims are being brought under Title VII of the Civil Rights Act of 1964, as
amended, and under the Civil Rights Act of 1866. The plaintiffs are seeking to
have this action certified as a class action, but only as to the issue of
promotions. By way of damages, the plaintiffs are seeking, among other things,
injunctive relief (including restructuring of the Company's selection and
compensation procedures) as well as back pay, an award of attorneys' fees and
costs, and other monetary relief. The Company is disputing these claims and is
defending this matter vigorously. The Company is unable to estimate the effect,
if any, the above lawsuit may have on the Company's financial position or
results of operations.

In addition, the Company is a party to various other legal proceedings
arising in the ordinary course of its business. The Company has various
insurance policies in place in the event of unfavorable outcomes from such
proceedings. The insurance companies' level of, and willingness to, support
their coverage could vary depending upon the circumstances of each particular
case. As such, there can be no assurance as to the level of support available
from insurance policies. Management does not currently believe that the ultimate
outcome of all such pending legal proceedings (other than the matter noted in
the paragraph above), individually and in the aggregate, would have a material
adverse effect on the Company's financial position or results of operations.

F-14

GOODY'S FAMILY CLOTHING, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. SELECTED QUARTERLY DATA (UNAUDITED)

Following is a summary of unaudited results of operations for the
respective fiscal quarters (in thousands, except per share amounts):

(1) On January 30, 2000, the first day of the first quarter of fiscal
2000, the Company changed its accounting methodology to recognize
the sale and related gross profit from layaways upon delivery of
the merchandise to the customer. Net earnings for the first
quarter of fiscal 2000 includes a charge for the after-tax
cumulative effect of this accounting change at its adoption date
of $207,000 ($0.01 per dilutive share). See Note 1.

F-15

CORPORATE INFORMATION

BOARD OF DIRECTORS

Robert M. Goodfriend(3)
Chairman of the Board and
Chief Executive Officer
Goody's Family Clothing, Inc.

Samuel J. Furrow(2)(3*)
Chairman
Furrow Auction Company
Innovo Group, Inc.
Owner
Mercedes Benz of Knoxville
Land Rover of Knoxville
Land Rover of Chattanooga
Advisory Board
AmSouth Bank

Robert F. Koppel(1)(2*)
President
East Tennessee Children's Hospital

Irwin L. Lowenstein(1)(3)
Retired Chairman and CEO
Rhodes Furniture
Director
Schnadig Corp.
Chairman
The Powell Company

Cheryl L. Turnbull(1*)(2)
Managing Director
Banc One Mezzanine Corp.

Committees of the Board of Directors

1 Compensation Committee
2 Audit Committee
3 Nominating Committee
* Chairperson

EXECUTIVE AND OTHER OFFICERS

Robert M. Goodfriend Mary Ann Barr Greg S. Lurry
Chairman of the Board and Vice President Vice President
Chief Executive Officer Divisional Merchandise Manager Planning and Allocation
Center Core
Lana Cain Krauter Allen P. Markway
President and Chief Michael R. Bryant Vice President
Merchandising Officer Vice President Divisional Merchandise Manager
Distribution -- Russellville, AR Children's

Edward R. Carlin Chris A. Bullard Barbara J. Mesecke
Executive Vice President Vice President Vice President
Chief Financial Officer Sales Divisional Merchandise Manager
and Secretary Junior's
Michael D. Burgard
Max W. Jones Vice President Hazel A. Moxim
Executive Vice President Loss Prevention Vice President
Merchandising Human Resources
Richard E. Gatian
David R. Mullins Vice President Rosalind C. Parneix
Executive Vice President Treasurer Vice President
Stores Divisional Merchandise Manager
Robert S. Gobrecht Misses Sportswear
Bruce E. Halverson Vice President
Senior Vice President Assistant to the Mike H. Teeple
Planning and Allocation Chairman Vice President
Sales
John J. Okvath, III Donald E. Goett
Senior Vice President Vice President Barbara J. Thoreson
Product Development Divisional Merchandise Manager Vice President
Shoes Divisional Merchandise Manager
John A. Payne Dresses and Special Sizes
Senior Vice President Jeffrey D. Hayes
General Merchandise Manager Vice President Donald R. Whitted
Men's Sales Vice President
Sales
David G. Peek Regis J. Hebbeler
Senior Vice President Vice President John G. Wise
Chief Accounting Officer General Counsel and Vice President
Assistant Secretary Visual Merchandising
Jay D. Scussel
Senior Vice President Steven M. Keil Lynn R. Youngs
Management Information Systems Vice President Vice President
Planning and Allocation Store Operations
Bobby Whaley
Senior Vice President
Distribution, Transportation
and Logistics

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SHAREHOLDER AND INVESTOR INFORMATION

DIVIDEND POLICY

The Company has not paid cash dividends during the last three fiscal years. The
Company currently intends to retain all net earnings for the development of its
business and does not anticipate paying dividends in the foreseeable future. The
payment of future dividends, if any, will depend upon profitability, financial
condition, cash requirements, future prospects and other factors deemed relevant
by the Board of Directors.

ANNUAL MEETING

The Annual Meeting of Shareholders will be held at 10:00 a.m. on Wednesday,
June 19, 2002, at the Company's headquarters in Knoxville, Tennessee. Detailed
information about the meeting is contained in the Notice of Annual Meeting and
Proxy Statement sent with a copy of this Annual Report to each shareholder of
record as of April 29, 2002.

CORPORATE HEADQUARTERS TRANSFER AGENT AND REGISTRAR
Goody's Family Clothing, Inc. Communications concerning
400 Goody's Lane shareholder records, the transfer of
Knoxville, Tennessee 37922 shares, lost certificates or change of
Tel: (865) 966-2000 address should be directed to:
Fax: (865) 777-4555
EquiServe Trust Co., N.A.
INDEPENDENT AUDITORS c/o EquiServe Limited Partnership
Deloitte & Touche LLP P.O. Box 43012
Atlanta, Georgia Providence, RI 02940-3012
Tel: (800) 633-4236
GENERAL COUNSEL
Swidler Berlin Shereff Friedman, LLP GOODY'S WEBSITE
New York, New York www.goodysonline.com

GOODY'S
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