The following discussion is a summary of certain factors that management considers important in reviewing the Company's results of operations, financial position, liquidity and capital resources. This discussion should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report.

Results of Operations

The following table contains results of operations for fiscal years 2012 and 2011 and the dollar and percentage changes for those periods (in thousands, except percentages).

                                              2012         2011        Change      Change
   Net sales by category
   Bedding, blankets and accessories        $ 63,832     $ 66,315     $ (2,483 )      -3.7 %
   Bibs, bath and disposable products         21,474       23,656       (2,182 )      -9.2 %
   Total net sales                            85,306       89,971       (4,665 )      -5.2 %
   Cost of products sold                      65,763       69,880       (4,117 )      -5.9 %
   Gross profit                               19,543       20,091         (548 )      -2.7 %
   % of net sales                               22.9 %       22.3 %
   Marketing and administrative expenses      11,392       12,459       (1,067 )      -8.6 %
   % of net sales                               13.4 %       13.8 %
   Interest expense                              229          460         (231 )     -50.2 %
   Other income                                   16            3           13       433.3 %
   Income tax expense                          2,886        2,772          114         4.1 %
   Income from continuing operations           5,052        4,403          649        14.7 %
   Discontinued operations - net of taxes        (13 )        (97 )         84       -86.6 %
   Net income                                  5,039        4,306          733        17.0 %
   % of net sales                                5.9 %        4.8 %

Net Sales: Sales decreased 5.2%, or $4.7 million, from fiscal year 2011 to fiscal year 2012, with such decrease consisting of a 3.7% decrease, or $2.5 million, in sales of bedding, blankets and accessories and a 9.2% decrease, or $2.2 million, in sales of bib, bath and disposable products. The overall decline in sales was primarily due to lower sell-through at retail and the transitioning away from an unprofitable private label bedding program.

Gross Profit: Gross profit decreased in amount by $548,000, but increased as a percentage of net sales from 22.3% to 22.9%, from fiscal year 2011 to fiscal year 2012. The decreases in amount followed the decline in sales, while the increase as a percentage of net sales was due to the redesign of several product lines to reduce the Company's dependency on cotton, the cost of which reached record-setting levels in fiscal year 2012. The discontinuance of an unprofitable private label bedding program mentioned above also contributed to higher margins and countered the decline in sales. The Company's gross profit for fiscal year 2012 was also positively impacted by the decline in amortization costs related to the Company's acquisition of the baby products line of Springs Global US on November 5, 2007, which were $204,000 lower than in fiscal year 2011.

Marketing and Administrative Expenses: Marketing and administrative expenses for fiscal year 2012 decreased in amount and as a percentage of net sales as compared to fiscal year 2011 primarily due to a decline of $582,000 in overall compensation costs. Also, professional fees associated with certain corporate governance and shareholder issues were $419,000 lower in fiscal year 2012 as compared to fiscal year 2011.

Interest Expense: The decrease in interest expense for fiscal year 2012 as compared to fiscal year 2011 is due to lower average balances on the Company's credit facilities.

Income Tax Expense: The Company's provision for income taxes on continuing operations decreased to 36.4% during fiscal year 2012 from 38.6% in fiscal year 2011. The decline in the effective tax rate is due to a decrease in the current year in the amount of certain expenses which are not deductible for tax purposes, as well as an increase in state Enterprise Zone wage credits.

The Company previously disclosed in its quarterly reports on Form 10-Q that the Internal Revenue Service ("IRS") had commenced an examination of the Company's consolidated federal income tax return for the fiscal year ended March 29, 2009. The IRS notified the Company on March 8, 2012 that it had closed the examination with no proposed adjustment to the positions taken by the Company on such tax return.

Inflation: The Company has endeavored to increase its prices to offset inflationary increases in its raw materials and other costs, but there can be no assurance that the Company will be successful in maintaining such price increases or in effecting such price increases in a manner that will provide a timely match to the cost increases.

Known Trends and Uncertainties

The Company's financial results are closely tied to sales to the Company's top three customers, which represented approximately 68% of the Company's gross sales in fiscal year 2012. A significant downturn experienced by any or all of these customers could lead to pressure on the Company's revenues. The Company has also faced higher raw material costs, primarily cotton, as well as increases in labor, transportation and currency costs associated with the Company's sourcing activities in China. Continued increases in these costs will adversely affect the profitability of the Company if it cannot pass the cost increases along to its customers in the form of price increases or if the timing of price increases does not closely match the cost increases, or if the Company cannot continue to reduce its dependence on cotton. For a further discussion of trends, uncertainties and other factors that could impact the Company's operating results, see "Risk Factors" in Item 1A.

Financial Position, Liquidity and Capital Resources

Net cash provided by operating activities was $8.3 million for the year ended April 1, 2012, compared to $2.0 million for the year ended April 3, 2011. The increase in cash provided by operating activities was primarily due to changes in inventory, accounts payable and accounts receivable balances.

Net cash used in investing activities was $560,000 in fiscal year 2012 compared $1.8 million in the prior year. Cash used in investing activities in the prior year was primarily associated with the Company's acquisition of the Bibsters® line of disposable bibs.

Net cash used in financing activities was $7.7 million in the current year compared to $109,000 in the prior year. The increase in net cash used in investing activities was primarily due to higher net repayments in the current year on the Company's revolving line of credit.

From April 4, 2011 to April 1, 2012, the Company used the bulk of its net cash provided by operating activities to pay off $6.3 million in debt owed under the Company's credit facilities before the reduction for the original issue discount on the Company's non-interest bearing subordinated notes payable. Such payments consisted of net repayments of $4.3 million on the Company's revolving line of credit and payments made in July 2011 of $2.0 million in the aggregate for the remaining balance due on the subordinated notes payable. The Company also paid $1.3 million in cash dividends on its common stock during fiscal year 2012.

The Company's future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors beyond its control. Based upon the current level of operations, the Company believes that its cash flow from operations and availability on its revolving line of credit will be adequate to meet its liquidity needs.

At April 1, 2012 and April 3, 2011, the Company's long-term debt consisted of the following (in thousands):

                                         April 1, 2012       April 3, 2011
           Revolving line of credit     $             -     $         4,336
           Non-interest bearing notes                 -               2,000
           Original issue discount                    -                 (48 )
                                                      -               6,288
           Less current maturities                    -               1,952
                                        $             -     $         4,336

The Company's credit facility at April 1, 2012 consisted of a revolving line of credit under a financing agreement with The CIT Group/Commercial Services, Inc. ("CIT") of up to $26.0 million, which includes a $1.5 million sub-limit for letters of credit, with an interest rate of prime plus 1.00%, which was 4.25% at April 1, 2012, or LIBOR plus 3.00%, which was 3.24% at April 1, 2012, maturing on July 11, 2013 and secured by a first lien on all assets of the Company. As of April 1, 2012, the Company had elected to pay interest on the revolving line of credit under the LIBOR option. Also under the financing agreement, a monthly fee is assessed based on 0.25% of the average unused portion of the $26.0 million revolving line of credit, less any outstanding letters of credit. This unused line fee amounted to $61,000 and $47,000 during fiscal years 2012 and 2011, respectively. At April 1, 2012, there was no balance owed on the revolving line of credit, there was no letter of credit outstanding and the Company had $24.5 million available under the revolving line of credit based on its eligible accounts receivable and inventory balances.

The financing agreement was amended effective as of April 2, 2012 to provide for the payment by CIT to the Company of interest at the rate of prime minus 1.00%, which was 2.25% at April 2, 2012, on daily negative balances outstanding under the revolving line of credit, and to permit the payment by the Company of cash dividends on its common stock without limitation, provided there is no default before or as a result of the payment of such dividends.

The financing agreement contains usual and customary covenants for agreements of that type, including limitations on other indebtedness, liens, transfers of assets, investments and acquisitions, merger or consolidation transactions, transactions with affiliates, and changes in or amendments to the organizational documents for the Company and its subsidiaries.

To reduce its exposure to credit losses, the Company assigns the majority of its trade accounts receivable to CIT pursuant to factoring agreements, which expire in July 2013. The factoring agreements were amended and restated effective as of April 2, 2012, under which CIT will remit customer payments to the Company as such payments are received by CIT. Under the terms of the factoring agreements in effect prior to April 1, 2012, CIT remitted payments to the Company on the average due date of each group of invoices assigned. If a customer failed to pay CIT by the due date, the Company was charged interest at prime plus 1.0%, which was 4.25% at April 1, 2012, until payment was received. The Company incurred interest expense of $67,000 and $77,000 in the years ended April 1, 2012 and April 3, 2011, respectively, as a result of the failure of the Company's customers to pay CIT by the due date. CIT bears credit losses with respect to assigned accounts receivable from approved shipments, while the Company bears the responsibility for adjustments from customers related to returns, allowances, claims and discounts. CIT may at any time terminate or limit its approval of shipments to a particular customer. If such a termination or limitation were to occur, the Company would either assume the credit risks for shipments to the customer after the date of such termination or limitation or cease shipments to the customer. Factoring fees, which are included in marketing and administrative expenses in the accompanying consolidated statements of income, were $469,000 and $539,000 during fiscal years 2012 and 2011, respectively. There were no advances from the factor at either April 1, 2012 or April 3, 2011.

Critical Accounting Policies and Estimates

The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") as promulgated by the Financial Accounting Standards Board ("FASB"), as well as the Securities Act, the Exchange Act and the rules and regulations thereunder as administered by the SEC. References herein to GAAP are to topics within the FASB Accounting Standards Codification (the "FASB ASC"), which the FASB periodically revises through the issuance of an Accounting Standards Update ("ASU") and which has been established by the FASB as the authoritative source for GAAP recognized by the FASB to be applied by nongovernmental entities.

Use of Estimates: The preparation of financial statements in conformity with GAAP 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 consolidated balance sheets and the reported amounts of revenues and expenses during the reporting period. The listing below, while not inclusive of all of the Company's accounting policies, sets forth those accounting policies which the Company's management believes embody the most significant judgments due to the uncertainties affecting their application and the likelihood that materially different amounts would be reported under different conditions or using different assumptions.

Inventory Valuation: The preparation of the Company's financial statements requires careful determination of the appropriate dollar amount of the Company's inventory balances. Such amount is presented as a current asset in the Company's consolidated balance sheets and is a direct determinant of cost of goods sold in the consolidated statements of income and, therefore, has a significant impact on the amount of net income reported in the accounting periods. The basis of accounting for inventories is cost, which is the sum of expenditures and charges, both direct and indirect, incurred to acquire inventory, bring it to a condition suitable for sale, and store it until it is sold. Once cost has been determined, the Company's inventory is then stated at the lower of cost or market, with cost determined using the first-in, first-out ("FIFO") method, which assumes that inventory quantities are sold in the order in which they are acquired. The determination of the indirect charges and their allocation to the Company's finished goods inventories is complex and requires significant management judgment and estimates. If management made different judgments or utilized different estimates, then differences would result in the valuation of the Company's inventories and in the amount and timing of the Company's cost of goods sold and resulting net income for the reporting period.

On a periodic basis, management reviews its inventory quantities on hand for obsolescence, physical deterioration, changes in price levels and the existence of quantities on hand which may not reasonably be expected to be sold within the Company's normal operating cycle. To the extent that any of these conditions is believed to exist or the market value of the inventory expected to be realized in the ordinary course of business is otherwise no longer as great as its carrying value, an allowance against the inventory value is established. To the extent that this allowance is established or increased during an accounting period, an expense is recorded in cost of goods sold in the Company's consolidated statements of income. Only when inventory for which an allowance has been established is later sold or is otherwise disposed is the allowance reduced accordingly. Significant management judgment is required in determining the amount and adequacy of this allowance. In the event that actual results differ from management's estimates or these estimates and judgments are revised in future periods, the Company may not fully realize the carrying value of its inventory or may need to establish additional allowances, either of which could materially impact the Company's financial position and results of operations.

Cash and Cash Equivalents: The Company considers all highly-liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company classifies a negative balance outstanding under its revolving line of credit as cash, as these amounts are legally owed to the Company and are immediately available to be drawn upon by the Company.

Revenue Recognition: Sales are recorded when goods are shipped to customers and are reported net of allowances for estimated returns and allowances in the consolidated statements of income. Allowances for returns are estimated based on historical rates. Allowances for returns, advertising allowances, warehouse allowances and volume rebates are recorded commensurate with sales activity and the cost of such allowances is netted against sales in reporting the results of operations. Shipping and handling costs, net of amounts reimbursed by customers, are not material and are included in net sales.

Allowances Against Accounts Receivable: The Company's allowances against accounts receivable are primarily contractually agreed-upon deductions for items such as advertising and warehouse allowances and volume rebates. These deductions are recorded throughout the year commensurate with sales activity. Funding of the majority of the Company's allowances occurs on a per-invoice basis. The allowances for customer deductions, which are netted against accounts receivable in the consolidated balance sheets, consist of agreed-upon advertising support, markdowns and warehouse and other allowances. All such allowances are recorded as direct offsets to sales, and such costs are accrued commensurate with sales activities. When a customer requests deductions, the allowances are reduced to reflect such payments or credits issued against the customer's account balance. The Company analyzes the components of the allowances for customer deductions monthly and adjusts the allowances to the appropriate levels. The timing of the customer initiated funding requests for advertising support can cause the net balance in the allowance account to fluctuate from period to period. The timing of such funding requests should have a minimal impact on the consolidated statements of income since such costs are accrued commensurate with sales activity.

To reduce its exposure to credit losses, the Company assigns the majority of its receivables under factoring agreements with CIT. In the event a factored receivable becomes uncollectible due to creditworthiness, CIT bears the risk of loss. The Company's management must make estimates of the uncollectiblity of its non-factored accounts receivable when evaluating the adequacy of its allowance for doubtful accounts, which it accomplishes by specifically analyzing accounts receivable, historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in its customers' payment terms. The Company's accounts receivable at April 1, 2012 amounted to $20.3 million, net of allowances of $1.1 million. Of this amount, $19.4 million was due from CIT under the factoring agreements, and $18,000 was due from CIT as a negative balance outstanding under the Company's revolving line of credit, which combined amounts represent the maximum loss that the Company could incur if CIT failed completely to perform its obligations under the factoring agreements and the revolving line of credit.

Royalty Payments: The Company has entered into agreements that provide for royalty payments based on a percentage of sales with certain minimum guaranteed amounts. These royalty amounts are accrued based upon historical sales rates adjusted for current sales trends by customers. Royalty expense is included in cost of sales and amounted to $6.9 million and $7.3 million for fiscal years 2012 and 2011, respectively.

Provision for Income Taxes: The Company's provision for income taxes includes all currently payable federal, state, local and foreign taxes that are based on the Company's taxable income and the change during the fiscal year in net deferred income tax assets and liabilities. The Company provides for deferred income taxes based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates that will be in effect when the differences are expected to reverse. The Company's policy is to recognize the effect that a change in enacted tax rates would have on net deferred income tax assets and liabilities in the period that the tax rates are changed.

The Company's provision for income taxes on continuing operations is based on effective tax rates of 36.4% and 38.6% in fiscal years 2012 and 2011, respectively. These effective tax rates are the sum of the top U.S. statutory federal income tax rate and a composite rate for state income taxes, net of federal tax benefit, in the various states in which the Company operates.

Management evaluates items of income, deductions and credits reported on the Company's various federal and state income tax returns filed and recognizes the effect of positions taken on those income tax returns only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that has a greater than 50% likelihood of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Based on its recent evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in the Company's consolidated financial statements. Tax years still open to federal or state general examination or other adjustment as of April 1, 2012 were the tax years ended March 29, 2009, March 28, 2010, April 3, 2011 and April 1, 2012, as well as the tax year ended March 30, 2008 for several states. The Company's policy is to accrue interest expense and penalties as appropriate on any estimated unrecognized tax benefits as a charge to interest expense in the Company's consolidated statements of income.

Depreciation and Amortization: The Company's consolidated balance sheets reflect property, plant and equipment, and certain intangible assets at cost less accumulated depreciation or amortization. The Company capitalizes additions and improvements and expenses maintenance and repairs as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, which are three to eight years for property, plant and equipment, and one to sixteen years for intangible assets other than goodwill. The Company amortizes improvements to its leased facilities over the term of the lease or the estimated useful life of the asset, whichever is shorter.

Valuation of Long-Lived Assets, Identifiable Intangible Assets and Goodwill: In addition to the depreciation and amortization procedures set forth above, the Company reviews for impairment long-lived assets and certain identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. In the event of impairment, the asset is written down to its fair market value. Assets to be disposed of, if any, are recorded at the lower of net book value or fair market value, less estimated costs to sell at the date management commits to a plan of disposal, and are classified as assets held for sale on the consolidated balance sheets.

The Company tests the carrying value of its goodwill annually on the first day of the Company's fiscal year. An additional impairment test is performed during the year whenever an event or change in circumstances suggest that the fair value of the goodwill of either of the reporting units of the Company has more likely than not fallen below its carrying value.

Recently Issued Accounting Standards

On May 12, 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This ASU is intended to improve consistency across jurisdictions to ensure that U.S. GAAP and International Financial Reporting Standards ("IFRSs") fair value measurement and disclosure requirements are described in the same way. For public entities, the amendments in this ASU are to be applied prospectively effective for annual periods beginning after December 15, 2011, and early application is not permitted. The Company does not anticipate that its adoption of ASU No. 2011-04 on April 2, 2012 will impact its consolidated financial statements.

On September 15, 2011, the FASB issued FASB ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU will give an entity the option to first assess qualitative factors to determine whether it is more likely than not (defined as having a likelihood of greater than 50%) that the fair value of the goodwill of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step impairment test. The ASU is intended to reduce the cost and complexity associated with the test for goodwill impairment. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early application is permitted. Because the annual impairment test of the fair value of the goodwill of the Company's reporting units was performed as of April 4, 2011, the Company adopted ASU No. 2011-08 on April 2, 2012. The Company does not anticipate that such adoption will impact its consolidated financial statements.