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LIFETIME BRANDS, INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 7, 2014

This Quarterly Report on Form 10-Q of Lifetime Brands, Inc. (the "Company" and, unless the context otherwise requires, references to the "Company" shall include its consolidated subsidiaries) contains "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include information concerning Lifetime Company's plans, objectives, goals, strategies, future events, future revenues, performance, capital expenditures, financing needs and other information that is not historical information. Many of these statements appear, in particular, in Management's Discussion and Analysis of Financial Condition and Results of Operations. When used in this Quarterly Report on Form 10-Q, the words "estimates," "expects," "anticipates," "projects," "plans," "intends," "believes," "may," "should," "seeks," and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, the Company's examination of historical operating trends, are based upon the Company's current expectations and various assumptions. The Company believes there is a reasonable basis for its expectations and assumptions, but there can be no assurance that the Company will realize its expectations or that the Company's assumptions will prove correct. There are a number of risks and uncertainties that could cause the Company's actual results to differ materially from the forward-looking statements contained in this Quarterly Report. Important factors that could cause the Company's actual results to differ materially from those expressed as forward-looking statements are set forth in the Company's 2013 Annual Report on Form 10-K in Part I, Item 1A under the heading Risk Factors. Such risks, uncertainties and other important factors include, among others, risks related to: • Indebtedness; • Seasonality; • General economic factors and political conditions; • Acquisitions and investments; • International operations; • Liquidity; • Interest; • Competition; • Customer practices; • Supply chain; • International trade and transportation; • Intellectual property, brands and licenses; • Regulatory matters; • Product liability; • Technology; • Personnel; • Business interruptions; • Price fluctuations; and • Projections. - 23 -



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There may be other factors that may cause the Company's actual results to differ materially from the forward-looking statements. Except as may be required by law, the Company undertakes no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. - 24 -



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ABOUT THE COMPANY

The Company designs, sources and sells branded kitchenware, tableware and other products used in the home. The Company's product categories include two categories of products that people use to prepare, serve and consume foods, Kitchenware (kitchen tools and gadgets, cutlery, cutting boards, cookware, bakeware and novelty housewares) and Tableware (dinnerware, flatware and glassware); and one category, Home Solutions, which comprises other products used in the home (pantryware, spices, food storage and home dÉcor). In 2013, Kitchenware products and Tableware products accounted for approximately 89% of the Company's wholesale net sales and 86% of its consolidated net sales. The Company markets several product lines within each of its product categories and under most of the Company's brands, primarily targeting moderate to premium price points through every major level of trade. The Company believes it possesses certain competitive advantages based on its brands, its emphasis on innovation and new product development and its sourcing capabilities. The Company owns or licenses a number of the leading brands in its industry including KitchenAid®, Farberware®, Mikasa®, Pfaltzgraff®, Kamenstein®, Fred®, Towle®, Melannco®, Elements® and Wallace Silversmiths®. Historically, the Company's sales growth has come from expanding product offerings within its product categories, by developing existing brands, acquiring new brands and establishing new product categories. Key factors in the Company's growth strategy have been the selective use and management of the Company's brands and the Company's ability to provide a stream of new products and designs. A significant element of this strategy is the Company's in-house design and development teams that create new products, packaging and merchandising concepts.



BUSINESS SEGMENTS

During the second quarter of 2014, the Company realigned its reportable segments into three categories: U.S. Wholesale, International and Retail Direct. The U.S. Wholesale segment, formerly the Wholesale segment, is the Company's primary domestic business that designs, markets and distributes its products to retailers and distributors. The International segment consists of certain business operations conducted outside the U.S. which were previously included in the Wholesale segment. The Retail Direct segment is where the Company markets and sells a limited selection of its products to consumers through its Pfaltzgraff®, Mikasa® and Lifetime Sterling® Internet websites.



EQUITY INVESTMENTS

The Company owns approximately 30% of the outstanding capital stock of Grupo Vasconia, S.A.B. ("Vasconia"), an integrated manufacturer of aluminum products and one of Mexico's largest housewares companies. Shares of Vasconia's capital stock are traded on the Bolsa Mexicana de Valores, the Mexican Stock Exchange (www.bmv.com.mx). The Quotation Key is VASCONI. The Company accounts for its investment in Vasconia using the equity method of accounting and has recorded its proportionate share of Vasconia's net income, net of taxes, as equity in earnings in the Company's consolidated statements of operations. Pursuant to a Shares Subscription Agreement (the "Agreement"), the Company may designate four persons to be nominated as members of Vasconia's Board of Directors. As of June 30, 2014, Vasconia's Board of Directors is comprised of ten members of which the Company has designated three members. The Company owns approximately 40% of the outstanding capital stock of GS Internacional S/A ("GSI"). GSI is a leading wholesale distributor of branded housewares products in Brazil. The Company accounts for its investment in GSI using the equity method of accounting and has recorded its proportionate share of GSI's net income, net of taxes, as equity in earnings in the Company's condensed consolidated statements of operations. Pursuant to a Shareholders' Agreement, the Company has the right to designate three persons (including one independent person, as defined) to be nominated as members of GSI's Board of Directors which shall be comprised of a maximum of seven members. As of June 30, 2014, GSI's Board of Directors is comprised of six members (including two independent members) of which the Company has designated three members (including one independent member). - 25 -



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SEASONALITY

The Company's business and working capital needs are highly seasonal, with a majority of sales occurring in the third and fourth quarters. In 2013 and 2012 net sales for the third and fourth quarters accounted for 61% and 58% of total annual net sales, respectively. In anticipation of the pre-holiday shipping season, inventory levels increase primarily in the June through October time period.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to the Company's critical accounting policies and estimates discussed in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. RESULTS OF OPERATIONS



The following table sets forth statement of operations data of the Company as a percentage of net sales for the periods indicated:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 64.6 62.5 63.6 62.9 Gross margin 35.4 37.5 36.4 37.1 Distribution expenses 10.8 10.4 10.6 10.7 Selling, general and administrative expenses 27.3 26.8 28.0 26.3 Restructuring expenses 0.1 0.3 0.1 0.1 Income (loss) from operations (2.8 ) 0.0 (2.3 ) 0.0 Interest expense (1.4 ) (1.2 ) (1.3 ) (1.2 ) Loss on early retirement of debt - - (0.1 ) -



Loss before income taxes and equity in earnings (4.2 ) (1.2 ) (3.7 ) (1.2 ) Income tax benefit

1.4 0.5 1.2 0.4 Equity in earnings, net of taxes - 0.1 (0.1 ) 0.2 Net loss (2.8 )% (0.6 )% (2.6 )% (0.6 )% - 26 -



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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS THREE MONTHS ENDED JUNE 30, 2014 AS COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2013



Net Sales

Net sales for the three months ended June 30, 2014 were $115.3 million, an increase of $18.3 million, or 18.9%, as compared to net sales of $97.0 million for the corresponding period in 2013.

Net sales for the U.S. Wholesale segment for the three months ended June 30, 2014 were $85.1 million, a decrease of $0.7 million, or 0.8%, as compared to net sales of $85.8 million for the corresponding period in 2013. Net sales for the U.S. Wholesale's Kitchenware product category were $52.5 million for the three months ended June 30, 2014, a decrease of $3.0 million, or 5.4%, as compared to $55.5 million for the corresponding period in 2013. The decrease in the U.S. Wholesale Kitchenware product category was due to lower sales volumes, in part due to the timing of program launches versus the prior year period. Net sales for the U.S. Wholesale's Tableware product category were $19.6 million for the three months ended June 30, 2014, a decrease of $1.3 million, or 6.2%, as compared to $20.9 million for the corresponding period in 2013. The Tableware product category sales decrease was primarily attributable to lower sales volume attributable to category weakness for dinnerware products partially offset by higher flatware volume. Net sales for U.S. Wholesale's Home Solutions product category were $13.0 million for the three months ended June 30, 2014, an increase of $3.6 million, or 38.3%, as compared to $9.4 million for the three months ended June 30, 2013. The increase in the Home Solutions product category reflects the inclusion of Built, acquired in the first quarter of 2014, as well as successful programs for the Pantryware product line. Net sales for the International segment for the three months ended June 30, 2014 were $26.6 million, an increase of $19.1 million, as compared to net sales of $7.5 million for the corresponding period in 2013. Of the increase, $14.7 million represents sales from Kitchen Craft and La CafetiÈre, which were acquired during the first quarter of 2014. The balance of the increase for the International segment was due to higher sales volume from tableware products and the effect of the strengthening Pound Sterling. Net sales for the Retail Direct segment for the three months ended June 30, 2014 were $3.6 million, a decrease of $0.1 million, or 2.7%, as compared to $3.7 million for the corresponding period in 2013, reflecting changes in promotional discounting. Gross margin



Gross margin for the three months ended June 30, 2014 was $40.9 million, or 35.4%, as compared to $36.4 million, or 37.5%, for the corresponding period in 2013.

Gross margin for the U.S. Wholesale segment was $29.8 million, or 35.0% for the three months ended June 30, 2014, as compared to $32.1 million or 37.4% for the corresponding period in 2013. The decrease in U.S. Wholesale gross margin reflects actions taken to create opportunities to expand the Company's market share. Gross margin for the International segment was $8.5 million or 32.2% for the three months ended June 30, 2014, as compared to $1.6 million or 21.3% for the corresponding period in 2013. The increase in gross margin in the International segment is a result of a decrease in pricing promotions for Creative Tops and the inclusion of Kitchen Craft, which is in a higher margin product category. Gross margin for the Retail Direct segment was $2.6 million or 69.7% for the three months ended June 30, 2014, as compared to $2.7 million or 71.5% for the corresponding period in 2013. Gross margin decreased for the three months ended June 30, 2014 as a result of changes in promotional discounting as compared to the 2013 period. Distribution expenses



Distribution expenses for the three months ended June 30, 2014 were $12.5 million as compared to $10.1 million for the corresponding period in 2013. Distribution expenses as a percentage of net sales were 10.8% for the three months ended June 30, 2014 as compared to 10.4% for the three months ended June 30, 2013.

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As a percentage of sales shipped from the Company's warehouses, distribution expenses for the U.S. Wholesale segment were 10.4% and 10.3% for the three months ended June 30, 2014 and 2013.

Distribution expenses as a percentage of net sales for the International segment were approximately 11.9% and 10.3% for the three months ended June 30, 2014 and 2013, respectively. The increase reflects the inclusion of Kitchen Craft which has a higher proportion of its sales to specialty customers than the segment's other businesses. Distribution expenses as a percentage of net sales for the Retail Direct segment were approximately 28.6% and 29.3% for the three months ended June 30, 2014 and 2013.



Selling, general and administrative expenses

Selling, general and administrative expenses for the three months ended June 30, 2014 were $31.4 million, an increase of $5.5 million, or 21.2%, as compared to $25.9 million for the corresponding period in 2013. Selling, general and administrative expenses for the three months ended June 30, 2014 for the U.S. Wholesale segment were $20.6 million, an increase of $1.9 million, or 10.2%, from $18.7 million for the corresponding period in 2013. The increase was primarily due to the acquisition of Built, initiation of sales in China and investments in talent to grow the Company's domestic business. As a percentage of net sales, selling, general and administrative expenses increased to 24.2% for the three months ended June 30, 2014 compared to 21.8% for the corresponding period in 2013, respectively. Selling, general and administrative expenses for the three months ended June 30, 2014 for the International segment were $6.1 million, an increase of $3.8 million, or 165.2%, from $2.3 million for the corresponding period in 2013. The increase was primarily due to the inclusion of Kitchen Craft. As a percentage of net sales, selling, general and administrative expenses decreased to 23.0% for the three months ended June 30, 2014 compared to 29.7% for the corresponding period in 2013.



Selling, general and administrative expenses for the Retail Direct segment were $1.9 million and $1.8 million for the three months ended June 30, 2014 and 2013.

Unallocated corporate expenses for the three months ended June 30, 2014 were $2.8 million as compared to $3.1 million for the corresponding period in 2013. The decrease was primarily attributable to a decrease in employee related and professional expenses. Restructuring expenses Restructuring expenses for the three months ended June 30, 2014 were $0.1 million as compared to $0.3 million for the corresponding period in 2013. The restructuring expenses in the three months ended June 30, 2014 resulted from the consolidation of our customer service and call center functions which resulted in the elimination of certain employee positions. The expenses in the three months ended June 30, 2013 resulted from the closure of the Fred® & Friends distribution center which included the elimination of certain employee positions.



Interest expense

Interest expense for the three months ended June 30, 2014 was $1.7 million as compared to $1.1 million for the three months ended June 30, 2013. The increase in interest expense was attributable to higher average borrowings attributable to recent acquisitions which were partially offset by lower interest rates from the refinancing related to those acquisitions.



Income tax benefit

The income tax benefit for the three months ended June 30, 2014 was $1.6 million as compared to a $0.5 million for the corresponding period in 2013. The Company's effective tax rate for the three months ended June 30, 2014 was 32.8% as compared to 42.0% for the 2013 period. The lower effective tax rate for the three months ended June 30, 2014 reflects income earned in the U.K. which is taxed at a rate of 21%. Equity in earnings



Equity in earnings of Vasconia, net of taxes, was $0.3 million for the three months ended June 30, 2014 as compared to $0.4 million for the three months ended June 30, 2013. Vasconia reported income from operations

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of $2.2 million for the three months ended June 30, 2014 as compared to a loss from operations of $0.6 million for the three months ended June 30, 2013. The increase in net income is the result of an increase in sales volume from both the aluminum and kitchenware business. The three months ended June 30, 2013 includes a recovery of value-added taxes (including interest thereon) which resulted in an increase of $0.7 million in the equity in earnings of Vasconia for the three months ended June 30, 2013. Equity in losses of GSI was $0.2 million for the three months ended June 30, 2014 and 2013, respectively. - 29 -



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Table of Contents MANAGEMENT'S DISCUSSION AND ANALYSIS SIX MONTHS ENDED JUNE 30, 2014 AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2013 Net Sales



Net sales for the six months ended June 30, 2014 were $233.7 million, an increase of $38.1 million, or 19.5%, as compared to net sales of $195.6 million for the corresponding period in 2013.

Net sales for the U.S. Wholesale segment for the six months ended June 30, 2014 were $170.8 million, a decrease of $0.5 million, or 0.3%, as compared to net sales of $171.3 million for the corresponding period in 2013. Net sales for the U.S. Wholesale's Kitchenware product category were $104.4 million for the six months ended June 30, 2014, a decrease of $3.8 million, or 3.5%, as compared to $108.2 million for the corresponding period in 2013. The decrease in the U.S. Wholesale's Kitchenware product category was primarily due to lower sales volumes, in part due to the timing of program launches versus the prior period. Net sales for the U.S. Wholesale's Tableware product category were $42.9 million for the six months ended June 30, 2014, an increase of $0.3 million, or 0.7%, as compared to $42.6 million for the corresponding period in 2013. The Tableware product category sales increase reflects an increase in dinnerware sales which was partially offset by lower flatware volume. Net sales for the U.S. Wholesale's Home Solutions product category were $23.5 million for the six months ended June 30, 2014, an increase of $3.0 million, or 14.6%, as compared to $20.5 million for the corresponding period in 2013. The increase in the Home Solutions product category reflects the inclusion of Built, acquired in the first quarter of 2014, as well as successful programs for the Pantryware product line. Net sales for the International segment for the six months ended June 30, 2014 were $54.7 million, an increase of $39.6 million, as compared to net sales of $15.1 million for the corresponding period in 2013. Of the increase, $31.8 million represents sales from Kitchen Craft and La CafetiÈre, which were acquired during the first quarter of 2014. The balance of the increase for the International segment was due to higher sales volume from tableware products and the effect of the strengthening Pound Sterling. Net sales for the Retail Direct segment for the six months ended June 30, 2014 were $8.2 million, a decrease of $1.0 million, or 10.9%, as compared to $9.2 million for the corresponding period in 2013, principally as a result of reduced activity on the Company's Pfaltzgraff® and Mikasa® internet websites.



Gross margin

Gross margin for the six months ended June 30, 2014 was $85.2 million, or 36.4%, as compared to $72.7 million, or 37.1%, for the corresponding period in 2013.

Gross margin for the U.S. Wholesale segment was $60.6 million or 35.5% for the six months ended June 30, 2014, as compared to $62.3 million or 36.4% for the corresponding period in 2013. The decrease in gross margin for the U.S. Wholesale segment reflects actions taken to create opportunities to expand the Company's market share. Gross margin for the International segment was $18.9 million or 34.6% for the six months ended June 30, 2014, as compared to $3.9 million or 25.9% for the corresponding period in 2013. The increase in gross margin in the International segment is due to the inclusion of Kitchen Craft, which is in a higher margin product category.



Gross margin for the Retail Direct segment was $5.7 million or 69.5% for the six months ended June 30, 2014, as compared to $6.5 million or 69.7% for the corresponding period in 2013.

Distribution expenses

Distribution expenses for the six months ended June 30, 2014 were $24.8 million as compared to $20.9 million for the corresponding period in 2013. Distribution expenses as a percentage of net sales were 10.6% and 10.7% for the six months ended June 30, 2014 and 2013, respectively. - 30 -



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Distribution expenses as a percentage of sales shipped from the Company's warehouses for the U.S. Wholesale segment were 10.4% for the six months ended June 30, 2014 and 10.1% for the six months ended June 30, 2013. The increase reflects lower volume of shipments and higher expenses. Distribution expenses as a percentage of net sales for the International segment were approximately 10.0% for the six months ended June 30, 2014 as compared to 10.5% for the corresponding period in 2013. The decrease reflects higher sales volume.



Distribution expenses as a percentage of net sales for the Retail Direct segment were approximately 30.0% for the six months ended June 30, 2014 and 2013.

Selling, general and administrative expenses

Selling, general and administrative expenses for the six months ended June 30, 2014 were $65.6 million, an increase of $14.0 million, or 27.1% as compared to $51.6 million for the corresponding period in 2013. Selling, general and administrative expenses for the six months ended June 30, 2014 for the U.S. Wholesale segment were $40.4 million, an increase of $3.3 million, or 8.9%, as compared to $37.1 million for the corresponding period in 2013. The increase was primarily due to the acquisition of Built, initiation of sales in China and investments to grow the Company's domestic business. As a percentage of net sales, selling, general and administrative expenses increased to 23.7% for the six months ended June 30, 2014 compared to 21.6% for the corresponding period in 2013. Selling, general and administrative expenses for the six months ended June 30, 2014 for the International segment were $14.3 million, an increase of $9.6 million, or 204.3%, as compared to $4.7 million for the corresponding period in 2013. The increase was primarily due to the inclusion of Kitchen Craft. As a percentage of net sales, selling, general and administrative expenses decreased to 26.2% for the six months ended June 30, 2014 compared to 31.3% for the corresponding period in 2013. Selling, general and administrative expenses for the six months ended June 30, 2014 and 2013 for the Retail Direct segment were $4.0 million and $3.9 million, respectively.



Unallocated corporate expenses for the six months ended June 30, 2014 and 2013 were $6.9 million and $5.9 million, respectively.

Restructuring expenses

Restructuring expenses for the six months ended June 30, 2014 were $0.1 million as compared to $0.3 million for the corresponding period in 2013. The restructuring expenses in the six months ended June 30, 2014 resulted from the consolidation of our customer service and call center functions which resulted in the elimination of certain employee positions. The expenses resulted from the closure of the Fred® & Friends distribution center which included the elimination of certain employee positions.



Interest expense

Interest expense for the six months ended June 30, 2014 was $3.1 million as compared to $2.3 million for the corresponding period in 2013. The increase in interest expense was attributable to higher average borrowings attributable to recent acquisitions which were partially offset by lower rates resulting from the refinancing related to those acquisitions.



Loss on early retirement of debt

In January 2014, the Company repaid the Senior Secured Term Loan. In connection therewith, the Company wrote-off debt issuance costs of $0.3 million.

Income tax benefit

The income tax benefit for the six months ended June 30, 2014 was $2.8 million as compared to $0.9 million for the corresponding period in 2013. The Company's effective tax rate for the six months ended June 30, 2014 was 31.7% as compared to 36.3% for the 2013 period. The Company's effective tax rate for the six months ended June 30, 2014 reflects expense recorded for uncertain tax positions as well as income earned in the U.K. which is taxed at a rate of 21%. - 31 -



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Equity in earnings

Equity in earnings of Vasconia, net of taxes, was $0.3 million for the six months ended June 30, 2014 as compared to $0.6 million for the corresponding period in 2013. Vasconia reported income from operations of $4.0 million and $1.6 million for the six months ended June 30, 2014 and 2013, respectively, and net income of $1.5 million and $2.6 million for the six months ended June 30, 2014 and 2013, respectively. Net income for six months ended June 30, 2013 includes the recovery of value-added taxes (including interest thereon) which resulted in an increase of $0.7 million in the equity in earnings of Vasconia for the six months ended June 30, 2013. Excluding this recovery, net income for the six months ended June 30, 2014 increased $1.2 million, as compared to the six months ended June 30, 2013, as a result of an increase in sales volume in both the aluminum and kitchenware business. Equity in losses of GSI was $0.4 million and $0.3 million for the three months ended June 30, 2014 and 2013, respectively. - 32 -



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LIQUIDITY AND CAPITAL RESOURCES

The Company's principal sources of cash to fund liquidity needs are: (i) cash provided by operating activities and (ii) borrowings available under its revolving credit facility. The Company's primary uses of funds consist of working capital requirements, capital expenditures and payments of principal and interest on its debt. In January 2014, the Company entered into a Second Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A, as Administrative Agent and Co-Collateral Agent and HSBC Bank USA, National Association, as Syndication Agent and Co-Collateral Agent ("Second Amended and Restated Credit Agreement") amending and restating the Company's then existing Amended and Restated Credit Agreement. The Second Amended and Restated Credit Agreement provides for, among other things, (i) an extension of the maturity of the $175.0 million Revolving Credit Facility to January 11, 2019 and (ii) a new Term Loan facility of $50.0 million. Each borrowing under the Revolving Credit Facility bears interest, at the Company's option, at one of the following rates: (i) the Alternate Base Rate, defined as the greater of the Prime Rate, Federal Funds Rate plus 0.5% or the Adjusted LIBO Rate plus 1.0%, plus a margin of 0.75% to 1.25%, or (ii) the Eurodollar Rate, defined as the Adjusted LIBO Rate plus a margin of 1.75% to 2.25%. The respective margins are based upon availability which is a function of usage and the borrowing base. Interest rates on outstanding borrowings at June 30, 2014 ranged from 2.125% to 4.25%. In addition, the Company pays a commitment fee of 0.375% on the unused portion of the Revolving Credit Facility. At June 30, 2014, borrowings outstanding under the Revolving Credit Facility were $97.5 million and open letters of credit were $4.2 million. Availability under the Revolving Credit Facility was approximately $52.6 million, or 30% of the total loan commitment at June 30, 2014. The Company classifies a portion of the Revolving Credit Facility as a current liability if the Company's intent and ability is to repay the loan from cash flows from operations which are expected to occur within the year. Repayments and borrowings under the facility can vary significantly from planned levels based on cash flow needs and general economic conditions. ABR Term Loans or Eurocurrency Term Loans, provided for under the Second Amended and Restated Credit Agreement, bear interest based on the applicable Senior Leverage Ratio. The ABR Spread for Term Loans is 3.0% to 3.5% and the Eurocurrency Spread for Term Loans is 4.0% to 4.5%. As of June 30, 2014, $50.0 million was outstanding under the Term Loan. The Second Amended and Restated Credit Agreement provides for customary restrictions and events of default. Restrictions include limitations on additional indebtedness, acquisitions, investments and payment of dividends, among other things. Further, the Second Amended and Restated Credit Agreement provides that at any time any Term Loan is outstanding or at any time no Term Loan is outstanding and availability under the Revolving Credit Facility is less than $17.5 million and continuing until availability of at least $20.0 million is maintained for three consecutive months, the Company is required to maintain a minimum fixed charge coverage ratio of 1.10 to 1.00 for each four consecutive fiscal quarter period. The Second Amended and Restated Credit Agreement also provides that when the Term Loan is outstanding, the Company is required to maintain a Senior Leverage Ratio within defined parameters not to exceed 3.75 to 1.00 at each fiscal quarter end during 2014; 3.00 to 1.00 at each fiscal quarter end in 2015; and 2.50 to 1.00 at each fiscal quarter end thereafter; provided that for any fiscal quarter ending on September 30 of any year, the maximum Senior Leverage Ratio specified above shall be increased by an additional 0.25:1.00. In January 2014, the Company repaid the previously outstanding Senior Secured Term Loan in connection with the execution and delivery of the Second Amended and Restated Credit Agreement. The Company expects that it will continue to borrow and repay funds, subject to availability, under the facility based on working capital and other corporate needs. Other Credit Agreements A subsidiary of the Company has a credit facility ("HSBC Facility") with HSBC Bank (China) Company Limited, Shanghai Branch ("HSBC") for up to RMB 18.0 million (approximately $2.9 million). The HSBC Facility is subject to annual renewal and may be used to fund general working capital needs of the subsidiary which is a trading company in the People's Republic of China. Borrowings under the HSBC Facility are guaranteed by the Company and are granted at the sole discretion of HSBC. At June 30, 2014, RMB 5.4 million ($868,000) was outstanding and the interest rate was 6.44% under the HSBC Facility. - 33 -



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Covenant Calculations

Consolidated EBITDA, as provided below, is used in the calculation of covenants provided for in the Company's Second Amended and Restatement Credit Agreement. The following is the Company's Consolidated EBITDA for the last four fiscal quarters, excluding the effect of an acquisition pro forma adjustment: Consolidated EBITDA for the Four Quarters Ended June 30, 2014 (in thousands) Three months ended June 30, 2014 $ 1,494 Three months ended March 31, 2014 3,660 Three months ended December 31, 2013 21,011 Three months ended September 30, 2013 15,067 Total for the four quarters $ 41,232



Capital expenditures for the six months ended June 30, 2014 were $2.8 million.

Non-GAAP financial measure

Consolidated EBITDA is a non-GAAP financial measure within the meaning of Regulation G promulgated by the Securities and Exchange Commission. The following is a reconciliation of the net income, as reported to Consolidated EBITDA, for the three and six months ended June 30, 2014 and 2013:

Three Months Ended Six Months Ended June 30, June 30, 2014 2013 2014 2013 (in thousands) Net income as reported $ (3,202 )$ (568 )$ (6,131 )$ (1,200 ) Subtract out: Undistributed equity in (earnings) losses, net (41 ) 480 167 234 Add back: Income tax benefit (1,586 ) (477 ) (2,771 ) (876 ) Interest expense 1,672 1,149 3,062 2,311 Loss on early retirement of debt - - 319 - Depreciation and amortization 3,716 2,667 7,329 5,190 Stock compensation expense 713 722 1,439 1,393 Permitted acquisition related expenses 97 60 1,615 60 Restructuring expenses 125 288 125 288 Consolidated EBITDA $ 1,494$ 4,321

$ 5,154$ 7,400 Derivatives The Company is a party to interest rate swap agreements with an aggregate notional amount of $28.0 million to manage interest rate exposure in connection with its variable interest rate borrowings. The hedge periods in these agreements commenced in March 2013 and expire in June 2018, and the notional amounts amortize over this period. The hedge provides for a fixed payment of interest at an annual rate of 1.05% in exchange for the Adjusted LIBO Rate. The Company has also entered into certain foreign exchange contracts, to primarily offset the earnings impact related to fluctuations in foreign currency exchange rates associated with inventory purchases denominated in foreign currencies. Although these foreign exchange contracts have not been designated as hedges as required in order to apply hedge accounting, the contracts are effective from an economic perspective. - 34 -



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Operating activities

Cash used in operating activities was $7.4 million for the six months ended June 30, 2014 as compared to cash provided by operating activities of $27.3 million for the 2013 period. The decrease was primarily attributable to a larger increase in inventory in 2014 as compared to 2013 and increased payments of accounts payable and accrued expenses in the 2014 period as compared to the 2013 period. Investing activities Cash used in investing activities was $69.7 million and $2.0 million for the six months ended June 30, 2014 and 2013, respectively. The increase in investing activities primarily related to the cash consideration paid in the 2014 acquisition of Kitchen Craft.



Financing activities

Cash provided by financing activities was $77.3 million for the six months ended June 30, 2014 as compared to cash used in financing activities of $25.8 million for the 2013 period. The proceeds from the 2014 borrowings were principally used to finance the 2014 acquisition of Kitchen Craft.



Stock repurchase program

On April 30, 2013, Lifetime's Board of Directors authorized the repurchase of up to $10.0 million of the Company's common stock. The repurchase authorization permits the Company to effect the repurchases from time to time through open market purchases and privately negotiated transactions. During the three months ended June 30, 2013, the Company repurchased 245,575 shares under the April 2013 authorization at a total cost of $3.2 million and thereafter retired the shares. - 35 -



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