ROYAL APPLIANCE MANUFACTURING CO - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2000

[ ] 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 0-19431

ROYAL APPLIANCE MFG. CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

OHIO 34-1350353
- ----------------------------------------------------- -----------------------------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER IDENTIFICATION)
ORGANIZATION)

7005 COCHRAN ROAD, GLENWILLOW, OHIO 44139
- ----------------------------------------------------- -----------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE

(440) 996-2000
------------------------------------------------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

Securities Registered Pursuant to Section 12(b) of the Act:

Common Shares, Without Par Value New York Stock Exchange
- ----------------------------------------------------- -----------------------------------------------------
(Title of Each Class) (Name of Each Exchange on which Registered)

Securities Registered Pursuant to Section 12(g) of the Act: None

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 (Sec. 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of 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. [ ]

The aggregate market value of the voting shares held by non-affiliates of
the Registrant, as reported on the New York Stock Exchange, based upon the
closing sale price of Registrant's Common Shares on March 15, 2001, was
$38,607,101. Common Shares held by each officer and director have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.

The number of outstanding shares of the Registrant's common shares as of
March 15, 2001, was 13,728,652.

DOCUMENTS INCORPORATED BY REFERENCE

Applicable portions of the Proxy Statement for the Annual Meeting of
Shareholders to be held on Tuesday, April 24, 2001, are incorporated by
reference in Part III of this form.

The Exhibit index appears on sequential page 30.
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PART I

ITEM 1. BUSINESS

General

Royal Appliance Mfg. Co. ("Royal" or the "Company"), an Ohio corporation
with its corporate offices in the Cleveland, Ohio metropolitan area, develops,
assembles and markets a full line of cleaning products for home and some for
commercial use, primarily in North America under the Dirt Devil(R) and Royal(R)
brand names. In 1984, the Company introduced the first in a line of Dirt
Devil(R) floorcare products, which the Company believes has become one of the
largest selling lines of vacuum cleaners in the United States. The Company has
used the Dirt Devil(R) brand name recognition to gain acceptance for other Dirt
Devil(R) floorcare products. The Company continues to market certain metal
vacuum cleaners for home and commercial use under the Royal(R) brand name.

The Company's business strategy is primarily focused on leveraging its
distribution channels and its well-known Dirt Devil(R) brand to new and
innovative products both inside and outside the floor care industry, primarily
in North America. The Company's goal is to expand the number, visibility and
volume of its products sold by retailers, as well as to increase the number of
major retailers carrying its products. The Company also seeks to increase the
sale of its products through independent dealers by offering dealer-exclusive
product lines and cooperative promotional programs.

The Company's marketing strategy is essential to its success. The Company
uses television, print, cooperative advertising and its Dirt Devil(R) website to
build and maintain brand awareness and consumer demand, as well as to gain shelf
space for its product lines from major retailers. In order to provide the
retailers with distinct product alternatives, the Company offers different Dirt
Devil(R) products in a variety of styles and colors and with various features.
Major retailers currently carrying some portion of the Dirt Devil(R) product
line include Best Buy, Canadian Tire, Kmart, Sam's Club, Sears, Lowe's, Target,
and WalMart. The Company also sells its Dirt Devil(R) products through
independent dealers, who primarily sell the metal line of Royal(R) vacuum
cleaners.

Products

The Company sells a full line of plastic and metal vacuum cleaners. The
Company's Dirt Devil(R) vacuum cleaners are intended for home use. The Company's
metal vacuum cleaners are intended for home and commercial use.

DIRT DEVIL(R) AND PLASTIC RELATED PRODUCT LINES. The Company's primary
retail product lines are sold under the Dirt Devil(R) name. The first Dirt
Devil(R) product, the Hand Vac, a corded, hand-held vacuum cleaner, was
introduced in 1984. The Dirt Devil(R) line has since been expanded to include a
full line of upright vacuum cleaners, both with bags and bagless, at various
price points, canister vacuum cleaners, a full line of hand-held vacuum
cleaners, both corded and cordless, and various other specialty cleaning
products. The Dirt Devil(R) line was further expanded in 1999 with the
introduction of the Dirt Devil(R) Easy Steamer, a carpet extractor, and again in
2000 with the introduction of the Dirt Devil(R) Spot Scrubber, a portable
hand-held extractor. During 2000, 1999, and 1998 plastic products accounted for
approximately 89%, 91%, and 88%, respectively, of the Company's net sales.

METAL PRODUCT LINES. The Company has produced durable metal vacuum cleaners
since the early 1900's. Currently, the Company markets a full line of metal
upright and canister vacuum cleaners for home and commercial use. The Company
sells its metal vacuum cleaners exclusively through its network of independent
dealers. During 2000, 1999, and 1998, metal products accounted for approximately
2%, 3%, and 4%, respectively, of the Company's net sales.

OTHER PRODUCTS. The Company sells accessories, carpet and upholstery
cleaning solutions, attachments, refurbished cleaners and replacement parts for
each of its product lines. These products are sold through retailers and
dealers, and are also available directly from the Company. During 2000, 1999,
and 1998, these products accounted for approximately 9%, 6%, and 8%,
respectively, of the Company's net sales.

NEW PRODUCTS. The Company introduces new products and enhances its existing
products on a regular basis for both the retail and dealer markets. During the
second half of 2001, the Company will introduce the Dirt

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Devil(R) Platinum Force family of products, which will include a bagless
hand-held vacuum cleaner, a bagless upright vacuum cleaner and an upright carpet
extractor. All three products will carry high-end feature sets at premium price
points. In order to support its product development efforts, the Company engages
in research and development activities, particularly with respect to new product
engineering. The Company's engineering and product development expenditures were
approximately $6.8 million, $6.3 million and $4.6 million in 2000, 1999 and
1998, respectively.

The Company will also introduce in 2001 a technology product that protects
consumers' privacy. The Company's subsidiary, Privacy Technologies, Inc.,
("Privacy Technologies") will introduce the Telezapper -- a telephone attachment
that blocks unwanted telemarketing calls by removing consumers' phone numbers
from telemarketers' computerized dialing lists. In addition, the Company has
recently formed licensing and R&D partnerships, including one with O'Cedar(R),
which licenses the Dirt Devil brand name for premium nonpowered cleaning tools
in North America.

In addition to internally developing products, the Company may purchase
product tooling, license product designs and patents, and outsource certain
product assembly for products to be marketed under the Dirt Devil(R) brand name
or through Privacy Technologies.

Marketing and Customers

The Company markets its Dirt Devil(R) products primarily through major
retailers, including mass market retailers (e.g. WalMart, Target and Kmart),
electronic chains (e.g. Best Buy), warehouse clubs (e.g. Sam's Club), home
improvement centers (e.g. Lowe's), regional chains and department stores (e.g.
Ames). During 2000, WalMart (including Sam's Club), Kmart and Target accounted
for approximately 32.6%, 13.1% and 13.5%, respectively, of the Company's net
sales, compared to approximately 36.9%, 13.6% and 12.1%, respectively, of the
Company's net sales in 1999. These were the only customers who accounted for 10%
or more of the Company's net sales during such periods. During 2000 and 1999,
the Company's net sales in the aggregate to its five largest customers were
64.7% and 67.1%, respectively, of its total net sales. The loss of any of these
customers or loss of shelf space with these customers could have a significant
impact on the Company's operations. The Company anticipates that the significant
percentage of the Company's net sales attributable to a limited number of major
retail customers will continue. The Company believes that its relations with its
customers are good. The Company sells most of its products to retailers that are
serviced directly by the Company's internal sales staff.

Since Dirt Devil(R) products are targeted to sell to the mass market, the
Company believes that brand name recognition is critical to the success of these
products. The Company provides advertising and promotional support for its Dirt
Devil(R) products through television and cooperative advertising with retailers
and believes that these promotional activities, as well as those of its major
customers, affect brand name awareness and sales. The Company's cooperative
advertising program is established based upon planning with its mass market
retail customers. Some of the Company's advertising and promotional activities
are tied to holidays and also to specific promotional activities of retailers,
and historically have been higher during the Christmas shopping season. The
Company's advertising and promotional expenditures are not proportional to
anticipated sales. In addition, the Company has generated a small portion of its
sales from consumer direct orders, primarily for accessories and new product
launches, through the Company's toll-free number, website and from direct
response television infomercials, in which consumers may order directly from the
Company.

The Company devotes considerable attention to the design and appearance of
its products and packaging in order to enhance their appeal to consumers and to
stand out among other brands on retailers' shelves. In order to increase the
presence of its Dirt Devil(R) products in major retail outlets, the Company
provides retailers with distinct product alternatives by offering its Dirt
Devil(R) product lines in a variety of styles and colors and with various
features.

The Company also strives to meet the logistic and product merchandising
needs of its retailers. The Company endeavors to have sufficient quantities of
products in stock in order to process and fill orders in a timely manner. Since
orders are typically shipped within 10 days of the receipt of a purchase order,
the Company does

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not have a significant order backlog. The Company permits cancellation of orders
up to 72 hours prior to shipment.

The Company's line of metal vacuum cleaners is sold exclusively through a
network of independent vacuum cleaner dealers. As part of its effort to support
its independent dealer network, the Company has attempted to meet independent
dealers' needs for distinctive product offerings not available to mass
merchants. The Company's metal product lines are targeted at consumers and
commercial customers who are interested in purchasing more durable and higher
quality vacuum cleaners. The Company focuses its promotional activities with its
independent dealers on cooperative advertising.

Many of the Company's independent dealers also provide warranty service for
Royal(R) and Dirt Devil(R) products. This allows the consumer to have prompt
access to local service outlets and is an important component of the Company's
efforts to be responsive to consumers. The Company's products are generally sold
with a one to six-year limited warranty.

The Company has generally accepted over-the-counter product returns from
its retail customers reflecting the retailers' customer return policies.

Each of the Company's products has a toll-free number printed on it that
consumers may use to contact a Company customer service representative. Through
its customer service computer system, the Company can provide a prompt response
to consumer inquiries concerning the availability of its products and service
dealers in the consumer's vicinity.

Competition

The Company's most significant competitors are Hoover, Eureka and Bissell
in the upright vacuum and carpet shampooer markets and, in the hand-held market,
Black & Decker. Most of these competitors and several others are subsidiaries or
divisions of companies that are more diversified and have greater financial
resources than the Company. The Company believes that the domestic vacuum
cleaner industry is a mature industry with modest annual growth in many of its
products but with a decline in certain other products. Competition is dependent
upon price, quality, extension of product lines, and advertising and promotion
expenditures. Additionally, competition is influenced by innovation in the
design of replacement models and by marketing and approaches to distribution.
The Company has experienced heightened competition, including price pressure and
increased advertising by its competitors, in the upright and carpet shampooer
market segments as a result of the Company's recent new product successes.

Trademarks and Patents

The Company holds numerous trademarks registered in the United States and
foreign countries for various products. The Company has registered trademarks in
the United States and a number of foreign countries for the Dirt Devil(R),
Royal(R) and other names and logos, which are used in connection with the sale
of its vacuum cleaners, other products and accessory parts. The Company
considers the Dirt Devil(R) trademark to be of considerable value and critical
to its business. No challenges to its rights to this trademark have arisen and
the Company has no reason to believe that any such challenges will arise in the
future.

The Company holds or licenses the use of numerous domestic and
international patents, including design patents and processes. The Company may
also license its trademarks and patents. The Company believes that its product
lines are generally not dependent upon any single patent or group of patents.

Seasonality

The Company believes that a significant percentage of certain of its
products are given as gifts and therefore, sell in larger volumes during the
Christmas and other shopping seasons. Because of the Company's continued
dependency on its major customers, the timing of purchases by these major
customers and the timing of new product introductions cause quarterly
fluctuations in the Company's net sales. As a consequence, results in prior
quarters are not necessarily indicative of future results of operations.

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Production

The Company currently assembles certain product lines in its facilities
located in the Cleveland, Ohio metropolitan area. The products that are not
assembled in Northeast Ohio have been outsourced to global third party contract
manufacturers. Unlike many of its competitors, the Company does not manufacture
component parts for its products. Component parts for the Company's products are
manufactured by suppliers, frequently using molds and tooling owned by the
Company and built to its specifications. Since the Company's production
operations are currently limited to final assembly, it believes that its fixed
costs are lower than many of its competitors. The Company also believes that
this lack of vertical integration and the use of third party contract
manufacturers has provided increased flexibility in the introduction and
modification of products.

The Company's engineering department is primarily responsible for the
design and testing of its products. The Company has computer-aided design
systems to assist its engineers in developing new products and modifying
existing products. The Company also retains outside design firms to assist its
engineers in designing new products. In addition to internally developing
products, the Company may purchase tooling, license intellectual property, or
otherwise sell products produced by others to the Company's specifications which
may be marketed under the Dirt Devil(R) brand name or through Privacy
Technologies.

A majority of the raw materials purchased by the Company are component
parts, such as motors, bags, cords, and plastic parts, which are available from
multiple suppliers. The amount of time required by suppliers to fill orders
released by the Company varies from 1 to 3 months for sourced finished goods,
two to four months in the case of motors and cords, from five to ten weeks for
sourced components and one to four days for plastic parts. The Company does not
believe that it is dependent on any single source for any significant portion of
its raw material or component purchases. The Company believes that it has good
relationships with its suppliers and contract manufacturers and has not
experienced any significant raw material or component shortages.

Employees

As of December 31, 2000, the Company employed approximately 730 full-time
employees. In addition, the Company generally utilizes temporary personnel
during the period when the Company is responding to its peak selling season.
During 2000, the peak temporary personnel level reached approximately 470. The
Company's employees are not represented by any labor union. The Company
considers its relations with its employees to be good.

The Company also has in effect a severance compensation plan that provides
for a severance payment to full-time employees, based on years of employment, if
within thirty-six months after a change-in-control of the Company their
employment is terminated for any reason other than death, permanent disability,
voluntary retirement or for cause. Executives who receive payments pursuant to
change-in-control and other employment arrangements will not receive duplicative
severance payments under the severance compensation plan.

Governmental Regulation

The Company's facilities are subject to numerous federal, state and local
laws and regulations designed to protect the environment from waste, emissions,
and from hazardous substances. The Company is also subject to the Federal
Occupational Safety and Health Act and other laws and regulations affecting the
safety and health of employees in its facilities. The Company is not a party to
any investigation or litigation by the Environmental Protection Agency or any
state environment agency. The Company believes that it is in compliance, in all
material respects, with applicable environmental and occupational safety
regulations.

Business Segment Information

For description, see Note 13 of Notes to Consolidated Financial Statements.

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ITEM 2. PROPERTIES

On December 31, 2000, the Company and its subsidiaries owned or leased the
material properties listed on the following table:

APPROXIMATE
SQUARE FOOTAGE
------------------ LEASE EXPIRATIONS
LOCATION AND ADDRESS OWNED LEASED (EXCLUDING RENEWALS) FUNCTION
- -------------------- ------- ------- -------------------- ---------------------

7005 Cochran Road.............. -- 458,000 07/15 Distribution Center &
Glenwillow, Ohio Corporate
Headquarters

1340 East 289th Street......... 106,000 -- 11/11 Assembly and Refurb
Wickliffe, Ohio (1) Operations

8120 Tyler Blvd................ 300,000 -- N/A Assembly, Shipping
Mentor, Ohio (2) and Warehouse

1350 Rockefeller............... -- 100,000 05/02 Assembly
Wickliffe, OH

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

(1) This leased property is reflected as owned because it contains a bargain
purchase option of $1. For further description, see Note 4 of Notes to
Consolidated Financial Statements.

(2) Based upon a plan established in 2001, the Company will discontinue
operations at this location during the second quarter of 2001. The property
has been listed with a real estate broker in 2001. The Company believes that
the property will be sold during 2001 at a price which is not less than
December 31, 2000 net book value.

In addition, the Company utilizes public warehouses where appropriate. The
Company believes that these arrangements are more cost effective than leasing
its own warehouses.

ITEM 3. LEGAL PROCEEDINGS

The Hoover Company (Hoover) filed a lawsuit in federal court, in the
Northern District of Ohio (case #1:00cv 0347), against the Company on February
4, 2000, under the patent, trademark, and unfair competition laws of the United
States. The claim asserts the Company's Dirt Devil(R) Easy Steamer infringes
certain patents held by Hoover. Hoover seeks damages, injunction of future
production, and legal fees. The Company is vigorously defending the suit and
believes that it is without merit. If Hoover were to prevail on all of its
claims, it could have a material adverse effect on the consolidated financial
position, results of operations, or cash flows of the Company.

The Company is involved in various other claims and litigation arising in
the normal course of business. In the opinion of management, the ultimate
resolution of these actions will not materially affect the consolidated
financial position, results of operations, or cash flows of the Company.

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

None

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EXECUTIVE OFFICERS OF THE REGISTRANT

Set forth below is certain information with respect to the named executive
officers of the Company.

POSITION AND OFFICES
NAME AGE WITH THE COMPANY
- ---- --- --------------------

Michael J. Merriman....................... 44 President and Chief Executive Officer
Richard C. Farone......................... 37 Executive Vice President -- Sales,
Marketing & Engineering
Richard G. Vasek.......................... 36 Chief Financial Officer, Vice President --
Finance and Secretary
David M. Brickner......................... 34 Vice President -- Manufacturing
T. Keith Moone............................ 45 Vice President -- Sales

The following is a brief account of the business experience during the past
five years of each such executive officer:

Michael J. Merriman was appointed Chief Executive Officer and President in
1995 and Director in October 1993.

Richard C. Farone has been Executive Vice President -- Sales, Marketing &
Engineering since December 2000. Since 1987, he has served in several different
roles in the Company's marketing and new products areas, most recently as Vice
President -- Product Development.

Richard G. Vasek was appointed Chief Financial Officer and Vice
President -- Finance in September 1998, and Secretary in January 1996. From
February 1992 until his appointment as Chief Financial Officer and Vice
President -- Finance he served as the Company's Corporate Controller.

David M. Brickner has been Vice President -- Manufacturing since December
1998. Since 1988, he has served in several different roles in the Company's
engineering, purchasing, and sourced products areas.

T. Keith Moone has been Vice President -- Sales since 1995.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's common shares are quoted on the New York Stock Exchange
(NYSE) under the symbol "RAM". The following table sets forth, for the periods
indicated, the high and low sales price for the Company's Common Shares as
reported by the New York Stock Exchange.

YEAR ENDED DECEMBER 31,
------------------------------
2000 1999
------------ ------------
HIGH LOW HIGH LOW
---- ---- ---- ----

Quarters:
First................................... 6.00 4.37 4.50 3.00
Second.................................. 6.44 4.62 7.12 3.75
Third................................... 6.87 4.94 7.00 4.00
Fourth.................................. 5.94 3.44 6.62 4.56

The Company has not declared or paid any cash dividends and currently
intends not to pay any cash dividends in 2001. The Board of Directors intends to
retain earnings, if any, to support the operations, growth of the business and
to fund the stock repurchase program. The Company's credit agreement, which
became effective in March 2000, prohibits the payment of cash dividends. The
Company's new credit agreement permits additional stock repurchases up to $40
million, of which $20.1 million was utilized during 2000 in accordance with the
stock repurchase program. A bank credit facility limits 2001 stock repurchases
to $5 million(see Notes 3 and 11 of the Company's Consolidated Financial
Statements).

On March 9, 2001, there were approximately 1,000 shareholders of record of
the Company's Common Shares, as reported by National City Corporation, the
Company's Registrar and Transfer Agent, which maintains its corporate offices at
National City Center, Cleveland, Ohio 44101-0756.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table sets forth selected consolidated financial data of the
Company. The selected Consolidated Statements of Operations and Consolidated
Balance Sheet data for each of the five years during the period ended December
31, 2000, are derived from the audited Consolidated Financial Statements of the
Company. The data presented below should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere herein.

YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

CONSOLIDATED STATEMENTS OF
OPERATIONS:
Net sales........................... $408,223 $407,984 $282,720 $325,417 $286,123
Cost of sales....................... 315,849 304,452 208,861 229,469 204,000
-------- -------- -------- -------- --------
Gross margin...................... 92,374 103,532 73,859 95,948 82,123
Advertising and promotion........... 47,154 46,546 43,562 47,626 40,443
Other selling....................... 8,615 9,087 7,947 8,448 8,977
General and administrative.......... 17,140 15,960 12,270 12,549 11,515
Engineering and product
development....................... 6,785 6,256 4,567 4,696 3,905
Charge for tooling obsolescence..... -- 2,621 -- -- --
-------- -------- -------- -------- --------
Income from operations............ 12,680 23,062 5,513 22,629 17,283
Interest expense, net............... 3,503 1,401 1,521 1,412 2,559
Receivable securitization and other
expense (income), net............. 1,713 1,369 (140) 1,033 (622)
-------- -------- -------- -------- --------
Income before taxes............... 7,464 20,292 4,132 20,184 15,346
Income tax expense.................. 1,525 7,610 1,606 7,777 5,910
-------- -------- -------- -------- --------
Net income........................ $ 5,939 $ 12,682 $ 2,526 $ 12,407 $ 9,436
======== ======== ======== ======== ========
BASIC EARNINGS PER SHARE
Weighted average number of common
shares outstanding (in
thousands)........................ 15,083 18,155 21,368 23,553 24,010
Earnings per share.................. $ .39 $ .70 $ .12 $ .53 $ .39
DILUTED EARNINGS PER SHARE
Weighted average number of common
shares and equivalents outstanding
(in thousands).................... 15,574 18,371 21,562 23,944 24,183
Earnings per share.................. $ .38 $ .69 $ .12 $ .52 $ .39
CONSOLIDATED BALANCE SHEET DATA (AT
END OF PERIOD)
Working capital................... $ 39,885 $ 38,950 $ 30,240 $ 32,486 $ 29,818
Total assets...................... 138,552 151,892 117,480 134,947 126,141
Long-term debt.................... 48,537 34,704 18,426 13,672 15,743
Shareholders' equity.............. 31,053 44,669 46,723 60,219 56,234

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following table sets forth, for the years indicated, the percentages of
net sales of certain items in the Consolidated Statements of Operations and the
percentage change in such items as compared to the indicated prior year.

YEAR TO YEAR
YEAR ENDED DECEMBER 31, INCREASES (DECREASES)
------------------------ -----------------------------
2000 1999 1998 2000 VS. 1999 1999 VS. 1998
------ ------ ------ ------------- -------------

Net sales...................................... 100.0% 100.0% 100.0% 0.1% 44.3%
Cost of sales.................................. 77.4 74.6 73.9 3.7 45.8
----- ----- ----- ----- -----
Gross margin.............................. 22.6 25.4 26.1 (10.8) 40.2
Advertising and promotion...................... 11.5 11.4 15.4 1.3 6.9
Other selling.................................. 2.1 2.2 2.8 (5.2) 14.3
General and administrative..................... 4.2 3.9 4.3 7.4 30.1
Engineering and product development............ 1.7 1.5 1.6 8.5 37.0
Charge for tooling obsolescence................ -- 0.7 -- N/M N/M
----- ----- ----- ----- -----
Income from operations.................... 3.1 5.7 2.0 (45.0) 318.3
Interest expense, net.......................... 0.9 0.4 0.5 150.0 (7.9)
Receivable securitization and other expense
(income), net................................ 0.4 0.3 N/M 25.1 N/M
----- ----- ----- ----- -----
Income before income taxes..................... 1.8% 5.0% 1.5% (63.2)% 391.1%
===== ===== ===== ===== =====

2000 VS. 1999

Net sales for 2000 were $408,223, an increase of 0.1% from 1999. Increased
unit and dollar volume shipments of the Dirt Devil(R) Easy Steamer(TM) (which
was introduced in mid 1999) and the Dirt Devil(R) Spot Scrubber(TM) (which was
introduced in mid 2000) offset lower sales of certain other product lines
including the Company's line of upright vacuums and the Dirt Devil(R) Broom
Vac(TM). Overall sales to the top 5 customers for 2000 (all of which are major
retailers) accounted for approximately 64.7% of net sales as compared with
approximately 67.1% in 1999. The Company believes that its dependence on sales
to its largest customers will continue. Recently, several major retailers have
experienced significant financial difficulties and some have filed for
protection from creditors under applicable bankruptcy laws. The Company sells
its products to certain customers that are in bankruptcy proceedings.

Gross margin, as a percent of net sales, decreased from 25.4% for 1999 to
22.6% in 2000. The gross margin percentage was negatively affected in 2000
primarily by heightened competition resulting in lower margins on various
products, higher depreciation expense on tooling for certain product lines due
to shortened expected useful lives and inventory obsolescence charges related
primarily to the discontinued corded Mop Vac product.

Advertising and promotion expenses for 2000 were $47,154, an increase of
1.3% from 1999. The slight increase in advertising and promotion expenses was
due primarily to increases in media and cooperative advertising expenditures,
including new television commercials supporting the Dirt Devil(R)Spot
Scrubber(TM). The Company intends to continue emphasizing cooperative
advertising and television as its primary methods of advertising and promotion.
In general, the Company's advertising expenditures are not specifically
proportional to anticipated sales. For example, the amount of advertising and
promotional expenditures may be concentrated during critical retail shopping
periods during the year, particularly the fourth quarter, and during new product
and promotional campaign introductions.

Other selling expenses for 2000 were $8,615, a decrease of 5.2% from 1999.
Internal sales and marketing personnel compensation are the largest components
of other selling expenses. The decrease reflects lower bonus payouts based on
2000 operating results.

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2000 VS. 1999 (continued)

General and administrative expenses for 2000 were $17,140, an increase of
7.4% from 1999. General and administrative expenses increased as a percentage of
sales from 3.9% in 1999 to 4.2% in 2000. The principal components are
compensation (including benefits), insurance, provision for doubtful accounts
and professional services. The dollar increases were primarily due to increases
in severance expense, professional services, and provision for doubtful
accounts.

Engineering and product development expenses for 2000 were $6,785, an
increase of 8.5% from 1999. The principal components are engineering salaries,
outside professional engineering and design services and other related product
development expenditures. The amount of outside professional engineering and
design services and other related product development expenditures are dependent
upon the number and complexity of new product introductions in any given year.
The increase in 2000 was primarily due to costs associated with the new product
introductions in 2000 and new products to be introduced in 2001.

Interest expense for 2000 was $3,503, an increase of 150.0% from 1999. The
increase in interest expense resulted primarily from a higher effective
borrowing rate combined with higher levels of variable rate borrowings to
finance working capital, capital expenditures, the balloon payment made on fixed
rate debt on one of the Company's facilities and share repurchases.

Receivable securitization and other expense (income), net principally
reflects the cost of the Company's trade accounts receivable securitization
program and foreign currency transaction gains or losses related to the
Company's North American assets. The increase during 2000 was due to higher
receivable securitization expense associated with a higher effective rate and
foreign currency transaction losses on Canadian sales activity.

Due to the factors discussed above, the Company had income before income
taxes for 2000 of $7,464, as compared to income before income taxes for 1999 of
$20,292. The components of the Company's effective income tax expense rate of
20.4% are described in Note 6 of the Company's Consolidated Financial
Statements.

1999 VS. 1998

Net sales for 1999 were $407,984, an increase of 44.3% from 1998. The
overall increase in net sales was due primarily to higher shipments of the
Company's line of upright vacuum cleaners, including the Dirt Devil(R)
Vision(TM) a bagless vacuum introduced in late August 1998, and the new Dirt
Devil(R) Easy Steamer(TM), a carpet extractor. Overall sales to the top 5
customers for 1999 (all of which are major retailers) accounted for
approximately 67.1% of net sales as compared with approximately 64.2% in 1998.

Gross margin, as a percent of net sales, decreased from 26.1% for 1998 to
25.4% in 1999. The gross margin percentage was negatively affected in 1999
primarily by higher sales of lower margin products, higher provision for slow
moving and obsolete inventory and accelerated depreciation on tooling primarily
associated with the Cordless Mop Vac(R), which was discontinued during 1999. The
decline in gross margins was partially offset by lower product returns as a
percent of sales.

Advertising and promotion expenses for 1999 were $46,546, an increase of
6.9% from 1998. The increase in advertising and promotion expenses was due
primarily to increases in media and cooperative advertising expenditures,
including new television commercials supporting the Dirt Devil(R) Easy
Steamer(TM) and the Dirt Devil(R) Vision(TM) with Sensor.

Other selling expenses for 1999 were $9,087, an increase of 14.3% from
1998. The increase is primarily due to internal sales and marketing personnel
compensation, which are the largest components of other selling expenses. Other
selling expenses decreased as a percentage of sales from 2.8% in 1998 to 2.2% in
1999.

General and administrative expenses for 1999 were $15,960, an increase of
30.1% from 1998. General and administrative expenses decreased as a percentage
of sales from 4.3% in 1998 to 3.9% in 1999. The dollar increases were primarily
due to increases in employee related benefit expenses, professional services,
and provision for doubtful accounts.

10
11

1999 VS. 1998 (continued)

Engineering and product development expenses for 1999 were $6,256, an
increase of 37.0% from 1998. The increase in 1999 was primarily due to costs
associated with the new product introductions in 1999 and new products to be
introduced in 2000.

In 1999, the Company recorded a charge for tooling obsolescence of $2,621
primarily related to the write-off of tooling for the Dirt Devil(R) Mop Vac(R)
and the Dirt Devil(R) Ultra MVP(TM). For further explanation, see Note 2 of
Company's Consolidated Financial Statements.

Interest expense for 1999 was $1,401, a decrease of 7.9% from 1998. The
decrease in interest expense resulted, primarily, from the payoff of a variable
rate mortgage in the third quarter 1998 and a lower effective borrowing rate
partially offset by higher levels of variable rate borrowings to finance working
capital, capital expenditures and share repurchases.

Receivable securitization and other (income) expense, net principally
reflects the cost of the Company's trade accounts receivable securitization
program and foreign currency transaction gains or losses related to the
Company's North American assets. The 1998 amount also includes the gain from the
sale of a facility of approximately $1,300.

Due to the factors discussed above, the Company had income before income
taxes for 1999 of $20,292, as compared to income before income taxes for 1998 of
$4,132. The components of the Company's effective income tax expense rate of
37.5% are described in Note 6 of the Company's Consolidated Financial
Statements.

LIQUIDITY AND CAPITAL RESOURCES

The Company has used cash generated from operations and revolving credit
proceeds to fund its working capital needs, capital expenditures and share
repurchases. Working capital was $39,885 at December 31, 2000, an increase of
2.4% over the December 31, 1999 level. Current assets decreased by $12,590
reflecting in part a $6,429 decrease of trade accounts receivable, a $4,991
decrease of inventories, and a $339 decrease in refundable and deferred income
taxes. Current liabilities decreased by $13,525 reflecting a $4,650 decrease of
accrued salaries, benefits, and payroll taxes, a $2,829 decrease of accrued
advertising and promotion, a $3,366 decrease of accrued income taxes, and a
$5,149 decrease of current portions of capital lease obligations and notes
payable, which were partially offset by an increase in accrued other liabilities
of $2,790.

In 2000, the Company utilized $13,406 of cash for capital expenditures,
including approximately $5,600 for tooling related to the new Dirt Devil(R) Easy
Steamer(TM), the new Dirt Devil(R) Vision(R) Lite(TM), the Dirt Devil(R)
Vision(R), the Dirt Devil(R) Swivel Glide(TM), the Dirt Devil(R) Spot
Scrubber(TM) and the Dirt Devil(R) Breeze(TM) Vision(R) Canister and
approximately $4,100 for computer equipment and software.

At December 31, 2000, the Company had a reducing collateralized revolving
credit facility with availability of up to $80,000 and a maturity date of March
7, 2003. Under the agreement, pricing options of the bank's base lending rate
and LIBOR rate are based on a formula, as defined. In addition, the Company pays
a commitment fee based on a formula, as defined, on the unused portion of the
facility. The revolving credit facility contains covenants which require, among
other things, the achievement of minimum net worth levels and the maintenance of
certain financial ratios. The Company was in compliance with all applicable
covenants as of December 31, 2000. The revolving credit facility is
collateralized by the assets of the Company and prohibits the payment of cash
dividends. As long as the Company remains in compliance with all covenants, the
revolving credit facility permits additional share repurchases up to $40,000, of
which $20,065 was utilized during 2000. The Company's effective interest rate
was 9.28% and 8.19% for 2000 and 1999, respectively.

The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time through December 31, 2000, was
$40,000. The maximum amount of receivables that can be sold is seasonally
adjusted. At December 31, 2000 and 1999, the Company had received approximately
$19,200 and $23,100, respectively, from the sale of trade accounts receivable
that has not yet been collected. The proceeds from the sales were used to reduce
borrowings under the Company's revolving

11
12

LIQUIDITY AND CAPITAL RESOURCES (continued)

credit facility. Costs of the program, which primarily consist of the
purchaser's financing cost of issuing commercial paper backed by the
receivables, totaled $1,559, $1,281 and $916 in 2000, 1999 and 1998,
respectively, and have been classified as Receivable securitization and other
expense (income), net in the accompanying Consolidated Statements of Operations.
The Company's effective borrowing rate under this program was 7.56%, 6.51% and
6.79% for the years 2000, 1999 and 1998, respectively. The Company, as agent for
the purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables. During the fourth quarter of
2000, the Company was notified by the provider of the receivable securitization
program that the current program would be terminated in the first quarter of
2001. The Company entered into a new revolving trade accounts receivable
securitization program with a new provider on January 23, 2001 which replaces
the existing program. Under the new program, the maximum amount allowed to be
sold at any given time is $30,000. All other terms and conditions of the program
are substantially the same as the existing program. Additionally, the new
program limits stock repurchases to $5,000 for 2001. The new program contains
covenants which the Company was in compliance with on January 23, 2001.

In October 1998, the Company's Board of Directors authorized a common share
repurchase program that provided for the Company to purchase, in the open market
and through negotiated transactions, up to 4,100 of its outstanding common
shares. The Company completed the program repurchasing 3,790 shares for an
aggregate purchase price of $19,667 in December 1999. In February 2000, the
Company's Board of Directors authorized another common share repurchase program
that enables the Company to purchase, in the open market and through negotiated
transactions, up to an additional 4,250 of its outstanding common shares. As of
March 15, 2001, the Company has repurchased approximately 3,289 for an aggregate
purchase price of $20,065 under the program that expired in February 2001.

The Company believes that its revolving credit facilities along with cash
generated by operations will be sufficient to provide for the Company's
anticipated working capital and capital expenditure requirements for the next
twelve months, as well as additional stock repurchases, if any.

QUARTERLY OPERATING RESULTS (UNAUDITED)

The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments that the
Company considers necessary for a fair presentation of such information for the
interim periods.

THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
2000 2000 2000 2000 1999(B) 1999 1999 1999
-------- --------- -------- --------- -------- --------- -------- ---------

Net sales............................ $126,549 $96,129 $82,075 $103,470 $131,766 $106,520 $80,488 $89,210
Gross margin......................... 31,690 21,778 15,451 23,455 35,536 25,156 20,824 22,016
Net income (loss).................... 3,018 3,345 (1,504) 1,080 3,660 4,407 2,863 1,752
Net income (loss) per share --
diluted (a)........................ $ 0.21 $ 0.22 $ (0.10) $ 0.06 $ 0.21 $ 0.24 $ 0.15 $ 0.09

- ---------------
(a) The sum of 2000 quarterly net income (loss) per common share does not equal
annual net income per common share due to the change in the weighted average
number of common shares outstanding due to share repurchases.

(b) Includes charge for tooling obsolescence as described in Note 2 to the
Consolidated Financial Statements.

The Company believes that a significant percentage of certain of its
products are given as gifts and therefore, sell in larger volumes during the
Christmas and other shopping seasons. Because of the Company's continued
dependency on its major customers, the timing of purchases by these major
customers and the timing of new product introductions causes quarterly
fluctuations in the Company's net sales. As a consequence, results in prior
quarters are not necessarily indicative of future results of operations.

12
13

OTHER

The Company's most significant competitors are Hoover, Eureka and Bissell
in the upright vacuum and carpet shampooer markets and, in the hand-held market,
Black & Decker. Most of these competitors and several others are subsidiaries or
divisions of companies that are more diversified and have greater financial
resources than the Company. The Company believes that the domestic vacuum
cleaner industry is a mature industry with modest annual growth in many of its
products but with a decline in certain other products. Competition is dependent
upon price, quality, extension of product lines, and advertising and promotion
expenditures. Additionally, competition is influenced by innovation in the
design of replacement models and by marketing and approaches to distribution.
The Company has experienced heightened competition, including price pressure and
increased advertising by its competitors, in the upright and carpet shampooer
market segments as a result of the Company's recent new product successes.

INFLATION

The Company does not believe that inflation by itself has had a material
effect on the Company's results of operations. However, as the Company
experiences price increases from its suppliers, which may include increases due
to inflation, retail pressures may prevent the Company from increasing its
prices. Due to recent economic conditions, the Company expects the cost of
plastic resin and transportation will continue to increase in 2001.

ACCOUNTING STANDARDS

The Company will be required to implement Statement of Financial Accounting
Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, in the first quarter of 2001. The Company expects implementation of
SFAS No. 133 will not have a material impact on its consolidated financial
position, results of operations, or cash flows.

FORWARD LOOKING STATEMENTS

Forward-looking statements in this Form 10-K are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements
which speak only as of the date hereof. Potential risks and uncertainties
include, but are not limited to: general business and economic conditions; the
financial strength of the retail industry particularly the major mass retail
channel; the competitive pricing and aggressive product development environment,
particularly in the bagless upright vacuum category within the floor care
industry; the impact of private-label programs by mass retailers; the cost and
effectiveness of planned advertising, marketing and promotional campaigns; the
success at retail and the acceptance by consumers of the Company's new products,
including the Company's bagless uprights, carpet shampooers and its first
consumer electronics product, the Telezapper; the dependence upon the Company's
ability to continue to successfully develop and introduce innovative products;
and the uncertainty of the Company's global suppliers to continuously supply
sourced finished goods and component parts.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company sells a small portion of its products in various global
markets. As a result, the Company's cash flow and earnings are exposed to
fluctuations in foreign currency exchange rates relating to receipts from
customers and payments to service providers in foreign currencies. As a general
policy, the Company hedges certain foreign currency commitments of future
payments and receipts by purchasing foreign currency-forward contracts. As of
December 31, 2000, the notional value of such derivatives was approximately
$2,670 with no significant unrealized gain or loss. The majority of the
Company's receipts and expenditures are contracted in U.S. dollars, and the
Company does not consider the market risk exposure relating to currency exchange
to be material at this time.

13
14

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors of Royal Appliance Mfg. Co.

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of Royal
Appliance Mfg. Co. and its Subsidiaries (the "Company") at December 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Cleveland, Ohio
February 8, 2001

14
15

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
(DOLLARS IN THOUSANDS)

ASSETS
Current assets:
Cash...................................................... $ 704 $ 1,427
Trade accounts receivable, less allowance for doubtful
accounts of $1,300 and $900 at December 31, 2000 and
1999, respectively...................................... 42,097 48,526
Inventories............................................... 45,470 50,461
Refundable and deferred income taxes...................... 4,735 5,074
Prepaid expenses and other................................ 1,573 1,681
-------- --------
Total current assets.................................... 94,579 107,169
-------- --------
Property, plant and equipment, at cost:
Land...................................................... 1,541 1,541
Buildings................................................. 7,777 7,777
Molds, tooling, and equipment............................. 48,650 49,515
Furniture, office and computer equipment, and software.... 12,721 7,787
Assets under capital leases............................... 3,171 4,694
Leasehold improvements and other.......................... 5,067 5,137
-------- --------
78,927 76,451
Less accumulated depreciation and amortization.......... (37,119) (37,556)
-------- --------
41,808 38,895
-------- --------
Tooling deposits............................................ 807 5,177
Other....................................................... 1,358 651
-------- --------
Total assets............................................ $138,552 $151,892
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 22,209 $ 22,280
Accrued liabilities:
Advertising and promotion............................... 13,103 15,932
Salaries, benefits, and payroll taxes................... 3,355 8,005
Warranty and customer returns........................... 9,800 10,050
Income taxes............................................ -- 3,366
Other................................................... 6,091 3,301
Current portions of capital lease obligations and notes
payable................................................. 136 5,285
-------- --------
Total current liabilities............................... 54,694 68,219
-------- --------
Revolving credit agreement................................ 46,400 32,200
Capitalized lease obligations, less current portion....... 2,137 2,504
-------- --------
Total long-term debt.................................... 48,537 34,704
-------- --------
Deferred income taxes..................................... 4,268 4,300
-------- --------
Total liabilities....................................... 107,499 107,223
-------- --------
Commitments and contingencies (Note 4 and 5).............. -- --
Shareholders' equity:
Serial preferred shares; authorized -- 1,000,000 shares;
none issued and outstanding............................. -- --
Common shares, at stated value; authorized -- 101,000,000
shares; issued 25,509,152 and 25,464,352 at December 31,
2000 and 1999, respectively............................. 212 212
Additional paid-in capital................................ 43,038 42,528
Retained earnings......................................... 61,165 55,226
-------- --------
104,415 97,966
Less treasury shares, at cost (11,780,500 and 8,491,000
shares at December 31, 2000 and 1999, respectively)..... (73,362) (53,297)
-------- --------
Total shareholders' equity.............................. 31,053 44,669
-------- --------
Total liabilities and shareholders' equity.............. $138,552 $151,892
======== ========

The accompanying notes are an integral part of these financial statements.
15
16

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net sales.............................................. $408,223 $407,984 $282,720
Cost of sales.......................................... 315,849 304,452 208,861
-------- -------- --------
Gross margin......................................... 92,374 103,532 73,859
Advertising and promotion.............................. 47,154 46,546 43,562
Other selling.......................................... 8,615 9,087 7,947
General and administrative............................. 17,140 15,960 12,270
Engineering and product development.................... 6,785 6,256 4,567
Charge for tooling obsolescence........................ -- 2,621 --
-------- -------- --------
Income from operations............................... 12,680 23,062 5,513
Interest expense, net.................................. 3,503 1,401 1,521
Receivable securitization and other expense (income),
net.................................................. 1,713 1,369 (140)
-------- -------- --------
Income before income taxes............................. 7,464 20,292 4,132
Income tax expense..................................... 1,525 7,610 1,606
-------- -------- --------
Net income........................................... $ 5,939 $ 12,682 $ 2,526
======== ======== ========
BASIC
Weighted average number of common shares outstanding
(in thousands).................................... 15,083 18,155 21,368
Earnings per share................................... $ .39 $ .70 $ .12
DILUTED
Weighted average number of common shares and
equivalents outstanding (in thousands)............ 15,574 18,371 21,562
Earnings per share................................... $ .38 $ .69 $ .12

The accompanying notes are an integral part of these financial statements

16
17

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR YEARS ENDED DECEMBER 31,

COMMON SHARES ADDITIONAL TREASURY SHARES TOTAL
------------------- PAID-IN RETAINED --------------------- SHAREHOLDERS'
NUMBER AMOUNT CAPITAL EARNINGS NUMBER AMOUNT EQUITY
---------- ------ ---------- -------- ---------- -------- -------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Balance at December 31, 1997... 25,311,724 $211 $41,897 $40,018 2,401,000 $(21,907) $60,219
Compensatory effect of stock
options.................... 68 68
Shares issued from stock
option plan................ 36,200 150 150
Purchase of treasury
shares..................... 3,325,400 (16,240) (16,240)
Net income................... 2,526 2,526
---------- ---- ------- ------- ---------- -------- -------

Balance at December 31, 1998... 25,347,924 211 42,115 42,544 5,726,400 (38,147) 46,723
Shares issued from stock
option plan................ 116,428 1 413 414
Purchase of treasury
shares..................... 2,764,600 (15,150) (15,150)
Net income................... 12,682 12,682
---------- ---- ------- ------- ---------- -------- -------

Balance at December 31, 1999... 25,464,352 212 42,528 55,226 8,491,000 (53,297) 44,669
Compensatory effect of stock
options.................... 361 361
Shares issued from stock
option plan................ 44,800 149 149
Purchase of treasury
shares..................... 3,289,500 (20,065) (20,065)
Net income................... 5,939 5,939
---------- ---- ------- ------- ---------- -------- -------
Balance at December 31, 2000... 25,509,152 $212 $43,038 $61,165 11,780,500 $(73,362) $31,053
========== ==== ======= ======= ========== ======== =======

The accompanying notes are an integral part of these financial statements.

17
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

2000 1999 1998
-------- ------- --------
(DOLLARS IN THOUSANDS)

Cash flows from operating activities:
Net income................................................ $ 5,939 $12,682 $ 2,526
-------- ------- --------
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 15,836 11,896 9,390
Charge for tooling obsolescence........................ -- 2,621 --
Compensatory effect of stock options................... 361 -- 68
(Gain) loss on sale of property, plant and equipment,
net.................................................. (32) 85 (1,125)
Deferred income taxes.................................. 618 (1,853) 443
(Increase) decrease in assets:
Trade accounts receivable, net......................... 6,429 (10,990) 9,509
Inventories, net....................................... 4,991 (19,373) 5,107
Refundable and accrued income taxes.................... (3,677) 1,436 955
Prepaid expenses and other............................. 108 2,891 (1,361)
Other.................................................. (1,147) (308) (325)
Increase (decrease) in liabilities:
Trade accounts payable................................. (1,700) 2,745 (8,001)
Accrued advertising and promotion...................... (2,829) 7,164 (808)
Accrued salaries, benefits, and payroll taxes.......... (4,650) 5,706 (3,451)
Accrued warranty and customer returns.................. (250) 1,950 (600)
Accrued other.......................................... 2,257 (3,508) 1,279
-------- ------- --------
Total adjustments.................................... 16,315 462 11,080
-------- ------- --------
Net cash from operating activities..................... 22,254 13,144 13,606
-------- ------- --------

Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment,
net.................................................... (17,776) (16,474) (8,667)
Proceeds from sale of property, plant and equipment....... 32 -- 6,806
Decrease (increase) in tooling deposits................... 4,370 (2,407) (1,624)
-------- ------- --------
Net cash from investing activities..................... (13,374) (18,881) (3,485)
-------- ------- --------

Cash flows from financing activities:
Proceeds (payments) on bank debt, net..................... 15,829 22,488 9,127
Payments on notes payable................................. (5,186) (302) (4,280)
Proceeds from exercise of stock options................... 149 414 150
Payments on capital lease obligations..................... (330) (286) (233)
Purchase of treasury shares............................... (20,065) (15,150) (16,240)
-------- ------- --------
Net cash from financing activities..................... (9,603) 7,164 (11,476)
-------- ------- --------

Net (decrease) increase in cash............................. (723) 1,427 (1,355)
-------- ------- --------

Cash at beginning of year................................... 1,427 -- 1,355
-------- ------- --------

Cash at end of year......................................... $ 704 $ 1,427 $ --
======== ======= ========

Supplemental disclosure of cash flow information:
Cash payments for:
Interest.................................................. $ 3,818 $ 1,594 $ 1,687
======== ======= ========
Income taxes, net of refunds.............................. $ 4,574 $ 8,021 $ 208
======== ======= ========

The accompanying notes are an integral part of these financial statements.

18
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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. ACCOUNTING POLICIES:

DESCRIPTION OF BUSINESS -- Royal Appliance Mfg. Co. ("Royal" or the
"Company"), an Ohio corporation with its corporate offices in the Cleveland,
Ohio metropolitan area, develops, assembles and markets a full line of cleaning
products for home and commercial use under the Dirt Devil(R) and Royal(R) brand
names. In 1984, the Company introduced the first in a line of Dirt Devil(R)
floorcare products, which the Company believes has become one of the largest
selling line of vacuum cleaners in the United States. The Company has used the
Dirt Devil(R) brand name recognition to gain acceptance for other Dirt Devil(R)
products.

The following is a summary of significant policies followed in the
preparation of the accompanying Consolidated Financial Statements.

BASIS OF PRESENTATION -- The Consolidated Financial Statements include the
accounts of the Company and its wholly owned subsidiaries after elimination of
all intercompany accounts and transactions. The companies are hereinafter
referred to as "Royal" or the "Company".

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 reported amounts and
related disclosures. Actual results could differ from those estimates.
Significant estimates include allowance for doubtful accounts, reserve for
returns and allowances, and depreciation and amortization, among others.

Net income per common share is computed based on the weighted average
number of common shares outstanding for basic earnings per share and on the
weighted average number of common shares and common share equivalents
outstanding for diluted earnings per share.

The Company's revenue recognition policy is to recognize revenues when
products are shipped. The Company's return policy is to replace, repair or issue
credit for product under warranty. Returns received during the current period
are expensed as received and a provision is provided for future returns based on
current shipments. All sales are final upon shipment of goods to the customers.
The Company's revenue recognition policy is in accordance with Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements."

International operations, primarily Canadian, are conducted in their local
currency. Assets and liabilities denominated in foreign currencies are
translated at current exchange rates, and income and expenses are translated
using weighted average exchange rates. The net effect of currency gains and
losses realized on these business transactions is included in the determination
of net income.

The Company uses forward exchange contracts to reduce fluctuations in
foreign currency cash flows related to receivables denominated in foreign
currencies. The terms of the currency instruments are consistent with the timing
of the transactions being hedged. The purpose of the Company's foreign currency
management activity is to protect the Company from the risk that the eventual
cash flows from the foreign currency denominated transactions may be adversely
affected by changes in exchange rates. Gains and losses on forward exchange
contracts are deferred and recognized in income when the related transactions
being hedged are recognized. Such gains and losses are generally reported on the
same financial line as the hedged transaction. The Company does not use
derivative financial instruments for trading or speculative purposes.
Outstanding as of December 31, 2000 and 1999 were $2,670 and $0, respectively,
in contracts to purchase foreign currency forward. There is no significant
unrealized gain or loss on these contracts. All contracts have terms of four
months or less.

ADVERTISING AND PROMOTION -- Cost incurred for producing and communicating
advertising are expensed during the period aired, including cost incurred under
the Company's cooperative advertising program.

INVENTORIES -- Inventories are stated at the lower of cost or market using
first-in, first-out (FIFO) method.

19
20
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. ACCOUNTING POLICIES: (CONTINUED)

Inventories at December 31, consisted of the following:

DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------

Finished goods............................................. $37,832 $37,280
Work in process and component parts........................ 7,638 13,181
------- -------
$45,470 $50,461
======= =======

PROPERTY, PLANT AND EQUIPMENT -- the Company capitalizes, as additions to
property, plant and equipment, expenditures at cost for molds, tooling, land,
buildings, equipment, furniture, computer software, and leasehold improvements.
Expenditures for maintenance and repairs are charged to operating expense as
incurred. The asset and related accumulated depreciation or amortization
accounts are adjusted to reflect retirements and disposals and the resulting
gain or loss is included in the determination of net income.

Internal and external costs incurred to develop internal use computer
software during the application development stage are capitalized and amortized
on the straight line method over the estimated useful life of software.
Capitalized costs include payroll costs and related benefits, costs of related
hardware and consulting fees. During 2000 and 1999, $94 and $163, respectively
of such internal costs were capitalized.

Plant and equipment are depreciated over the estimated useful lives of the
respective classes of assets. Leasehold improvements and assets held under
capital leases are amortized over the shorter of useful lives or their
respective lease terms. Accumulated amortization on assets under capital leases
totaled $1,407 and $2,525 at December 31, 2000 and 1999, respectively.

Depreciation for financial reporting purposes is computed on the
straight-line method using the following depreciable lives:

Buildings................................................... 40 years
Building under capital lease................................ 20 years
Molds, tooling, and equipment............................... 3-5 years
Furniture, office and computer equipment, and software...... 2-5 years
Vehicles.................................................... 3 years
Internal use software....................................... 2-5 years

Accelerated methods as permitted by the applicable tax law are used for tax
reporting purpose.

The Company reviews for impairment whenever events or changes in
circumstances indicates that the carrying amount of property, plant and
equipment may not be recoverable under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long Lived Assets to be Disposed Of. If it is
determined that an impairment loss has occurred based on expected future cash
flows, the loss is recognized on the Consolidated Statement of Operations.

Based upon a plan established in January 2001, the Company will discontinue
operations at its former distribution center during the second quarter of 2001.
The property has been listed with a real estate broker and the Company believes
that the property will be sold for a price that exceeds the net book value as of
December 31, 2000.

FAIR VALUE OF FINANCIAL INSTRUMENTS -- Financial instruments consist of a
revolving credit agreement that is carried at an amount which approximates fair
value.

20
21
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. ACCOUNTING POLICIES: (CONTINUED)

NEW ACCOUNTING PRONOUNCEMENTS -- The Company will be required to implement
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities, in the first quarter of 2001. The
Company expects the implementation of SFAS No. 133 will not have a material
impact on its consolidated financial position, results of operations, or cash
flows.

2. CHANGES IN DEPRECIABLE LIVES AND CHARGES FOR TOOLING OBSOLESCENCE:

During 2000 and 1999, the Company shortened the useful lives of tooling for
certain product families due to declining sales volumes, reduced product life
cycles and the launch of replacement products. As a result of the reduced useful
lives for certain product families, including the Dirt Devil(R) Corded Mop Vac,
Dirt Devil(R) Stick Vac and Dirt Devil(R) Broom Vac during 2000 and the Dirt
Devil(R) Cordless Mop Vac and Dirt Devil(R) Ultra MVP during 1999, the Company
recorded accelerated depreciation expense of $1,788 and $1,574 during 2000 and
1999, respectively.

Also during 2000, the Company relocated its corporate headquarters. As a
result of the move, the remaining net book value of leasehold improvements
associated with the former corporate headquarters was amortized on an
accelerated basis from the date the decision was made to move through the actual
date of the move. Due to this event, accelerated depreciation expense of
approximately $1,200 was recorded in 2000.

During the fourth quarter of 1999, the wholesale price for the cordless
Dirt Devil(R) Mop Vac(R) (Mop Vac) decreased significantly. This reduction in
wholesale price triggered an impairment review for cordless Mop Vac tooling.
Previous to the fourth quarter reduction in wholesale prices, the cordless Mop
Vac had net future cash flows in excess of the remaining net book value of the
tooling. However, earlier that year, the Company shortened the depreciable lives
of such tooling due to the decision to discontinue the product line at the end
of 1999. Subsequent to the price reduction, the product was no longer profitable
and therefore discontinued. As a result of the impairment review, the Company
determined that net future cash flows for the product were negative, therefore,
an impairment charge of $992 was recorded during the fourth quarter.

During 1999, the Dirt Devil(R) Ultra MVP(R) lost its shelf placement in
retail stores, however, the unit was slotted for special promotions at several
retailers. When the unit lost its shelf placement at retail, an impairment
review was performed resulting in no impairment charge as the estimated net
future cash flows exceeded the net book value of the tooling. During the 1999
Holiday season, the Dirt Devil(R) Ultra MVP had some limited special promotion
distribution. However, retail subsequently lowered the retail price point below
the wholesale price. With the reduction of price, the Company would no longer be
able to produce the unit at a profit, thus triggering an impairment review. As a
result of the review, an impairment charge of $1,629 was recorded at the end of
the fourth quarter and accelerated depreciation of $436 was also taken during
the fourth quarter.

Prior to the fourth quarter of 1999, due to sales commitments and component
part usage requirements, the assets were considered as "held for use" in
accordance SFAS No. 121. However, due to specific trigger events which occurred
during the fourth quarter, the remaining value of the assets were determined to
be impaired and the assets were written down to zero and removed from service.

3. DEBT:

At December 31, 2000, the Company had a reducing collateralized revolving
credit facility with availability of up to $80,000 and a maturity date of March
7, 2003. Under the agreement, pricing options of the bank's base lending rate
and LIBOR rate are based on a formula, as defined. In addition, the Company pays
a commitment fee based on a formula, as defined, on the unused portion of the
facility. The revolving credit facility contains covenants which require, among
other things, the achievement of minimum net worth levels and the maintenance of
certain financial ratios. The Company was in compliance with all applicable
covenants as of December 31, 2000. The revolving credit facility is
collateralized by the assets of the Company and prohibits the payment of
21
22
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. DEBT: (CONTINUED)

cash dividends. As long as the Company remains in compliance with all covenants,
the revolving credit facility permits additional share repurchases up to $40,000
million, of which $20,065 million was utilized during 2000. The Company's
effective interest rate was 9.28% and 8.19% for 2000 and 1999, respectively.

The Company also utilizes a revolving trade accounts receivable
securitization program to sell without recourse, through a wholly-owned
subsidiary, certain trade accounts receivable. Under the program, the maximum
amount allowed to be sold at any given time through December 31, 2000, was
$40,000. The maximum amount of receivables that can be sold is seasonally
adjusted. At December 31, 2000 and 1999, the Company had received approximately
$19,200 and $23,100, respectively, from the sale of trade accounts receivable
that has not yet been collected. The proceeds from the sales were used to reduce
borrowings under the Company's revolving credit facility. Costs of the program,
which primarily consist of the purchaser's financing cost of issuing commercial
paper backed by the receivables, totaled $1,559, $1,281 and $916 in 2000, 1999
and 1998, respectively, and have been classified as Receivable securitization
and other (income) expense, net in the accompanying Consolidated Statements of
Operations. The Company's effective borrowing rate under this program was 7.56%,
6.51% and 6.79% for the years 2000, 1999 and 1998, respectively. The Company, as
agent for the purchaser of the receivables, retains collection and
administrative responsibilities for the purchased receivables. During the fourth
quarter of 2000, the Company was notified by the provider of the receivable
securitization program that the current program would be terminated in the first
quarter of 2001. The Company entered into a new revolving trade accounts
receivable securitization program with a new provider on January 23, 2001 which
replaces the existing program. Under the new program, the maximum amount allowed
to be sold at any given time is $30,000. All other terms and conditions of the
program are substantially the same as the existing program. Additionally, the
new program limits stock repurchases to $5,000 for 2001. The new program
contains covenants which the Company was in compliance with on January 23, 2001.

4. LEASES:

Royal leases various facilities, equipment and vehicles under capital and
operating lease agreements. Operating lease payments totaled $1,912, $796 and
$602 for the years ended December 31, 2000, 1999, and 1998, respectively.

Minimum commitments under all capital and operating leases at December 31,
2000 are as follows:

YEAR CAPITAL OPERATING
- ---- ------- ---------

2001............................................ $ 312 $ 2,362
2002............................................ 312 2,037
2003............................................ 315 1,829
2004............................................ 317 1,722
2005............................................ 314 1,713
Thereafter...................................... 1,366 18,427
------ -------
Total minimum lease payments.................... 2,936 $28,090
=======
Less amount representing interest............... 663
------
Total present value of capital obligation....... 2,273
Less current portion............................ 136
------
Long-term obligation under capital leases....... $2,137
======

22
23
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES:

At December 31, 2000, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $8,600,
including commitments for television advertising through December 31, 2001.
Other contractual commitments for items in the normal course of business total
approximately $3,100.

The Company is self-insured with respect to workers' compensation benefits
in Ohio and carries excess workers' compensation insurance covering aggregate
claims exceeding $350 per occurrence.

The Hoover Company (Hoover) filed a lawsuit in federal court, in the
Northern District of Ohio (case #1:00cv 0347), against the Company on February
4, 2000, under the patent, trademark, and unfair competition laws of the United
States. The claim asserts the Company's Dirt Devil(R) Easy Steamer infringes
certain patents held by Hoover. Hoover seeks damages, injunction of future
production, and legal fees. The Company is vigorously defending the suit and
believes that it is without merit. If Hoover were to prevail on all of its
claims, it could have a material adverse effect on the consolidated financial
position, results of operations, or cash flows of the Company.

The Company is involved in various claims and litigation arising in the
normal course of business. In the opinion of management, the ultimate resolution
of these actions will not materially affect the consolidated financial position,
results of operations, or cash flows of the Company.

6. INCOME TAXES:

The income tax expense consisted of the following:

2000 1999 1998
------ ------ ------

Current:
Federal................................................ $ 782 $8,683 $ 873
State and local........................................ 125 780 290
Deferred................................................. 618 (1,853) 443
------ ------ ------
Total.................................................... $1,525 $7,610 $1,606
====== ====== ======

23
24
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES: (CONTINUED)

Deferred income taxes reflect the impact, for financial statement reporting
purposes, of temporary differences between the financial statement carrying
amounts and the tax basis of assets and liabilities. At December 31, 2000 and
1999, the components of the net deferred tax asset were as follows:

2000 1999
------ ------

Deferred tax assets:
Warranty and customer returns............................. $4,017 $4,261
Bad debt reserve.......................................... 507 351
Inventory basis difference................................ 833 846
Accrued vacation, compensation and benefits............... 422 419
State and local taxes..................................... 166 359
Accrued advertising....................................... 164 192
Self insurance reserves................................... 59 183
Deferred compensation plan................................ 154 43
Other..................................................... 7 13

Deferred tax liabilities:
Accounts receivable mark to market........................ (658) (1,315)
Basis difference in fixed and intangible assets........... (4,409) (3,679)
State and local taxes..................................... (969) (768)
Other..................................................... (137) (131)
------ ------
Net deferred tax asset...................................... $ 156 $ 774
====== ======

The differences between income taxes at the statutory federal income tax
rate of 34% and those reported in the Consolidated Statements of Operations are
as follows:

YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
% OF % OF % OF
PRE-TAX PRE-TAX PRE-TAX
2000 INCOME 1999 INCOME 1998 INCOME
------ ------- ------ ------- ------ -------

Tax expense at statutory rate......... $2,538 34.0% $6,900 34.0% $1,404 34.0%
Research & experimentation credit..... (1,130) (15.1) -- -- -- --
State and local income taxes, net of
federal benefit..................... 125 1.6 507 2.5 186 4.5
Federal surtax on income over $10
million............................. -- -- 196 1.0 -- --
Other, net............................ (8) (0.1) 7 -- 16 0.4
------ ----- ------ ---- ------ ----
$1,525 20.4% $7,610 37.5% $1,606 38.9%
====== ===== ====== ==== ====== ====

During 2000, the Company performed a detailed study of Research and
Experimentation ("R&E") expenses over the preceding three-year period. As a
result of this study, it was determined that additional expenditures qualify
under the current guidance. Based on revised calculations, the Company was
entitled to R & E credits of $462, $166 and $302 for the years ended 1999, 1998
and 1997, respectively. Subsequent to December 31, 2000, these Federal Income
Tax refunds have been received. For the year ended December 31, 2000, the R & E
credit amounted to $200.

24
25
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. MAJOR CUSTOMERS:

Royal's three largest customers represented approximately 32.6%, 13.5%, and
13.1% of total net sales in 2000. The Company's three largest customers
represented approximately 36.9%, 13.6% and 12.1% in 1999 and 31.6%, 14.1% and
13.4% of total net sales in 1998. Additionally, a significant concentration of
Royal's business activity is with major domestic mass market retailers whose
ability to meet their financial obligations with Royal is dependent on economic
conditions germane to the retail industry. During recent years, several major
retailers have experienced significant financial difficulties and some have
filed for protection from creditors under applicable bankruptcy laws. The
Company sells its products to certain customers that are in bankruptcy
proceedings.

The Company provides credit, in the normal course of business, to the
retail industry which includes mass market retailers, warehouse clubs, and
independent dealers. The Company performs ongoing credit evaluations of its
customers and establishes appropriate allowances for doubtful accounts based
upon factors surrounding the credit risk of specific customers, historical
trends and other information.

8. STOCK BASED PLANS:

Under the terms of the Company's stock option plans for employees, outside
directors and consultants, all outstanding options have been granted at prices
at least equal to the then current market value on the date of grant. Certain
stock options granted become exercisable in cumulative 20% installments,
commencing one year from date of grant with full vesting occurring on the fifth
anniversary date, and expire in ten years, subject to earlier termination in
certain events related to termination of employment. Other stock options granted
vest at the end of five years ("5 year cliff vesting") and expire in six to ten
years, subject to earlier termination in certain events related to termination
of employment. Vesting may be accelerated in certain events relating to change
of the Company's ownership.

The following summarizes the changes in the number of Common Shares under
option:

2000 1999 1998
--------------- --------------- ---------------

Options outstanding at beginning of the
year..................................... 2,764 2,244 2,301
Options granted during the year............ 90 673 100
Options exercised during the year.......... (45) (116) (36)
Options canceled during the year........... (136) (37) (121)
--------------- --------------- ---------------
Options outstanding at end of the year..... 2,673 2,764 2,244
=============== =============== ===============
Options exercisable at end of the year..... 865 669 662
Option price range per share............... $2.50 to $10.25 $2.50 to $10.25 $2.50 to $10.25

The 865 exercisable options at December 31, 2000 are exercisable at an
average exercise price of $4.86. The Company's current option plans, which
provide for a total of 3,060 options, have 78 options remaining for future
grants at December 31, 2000.

25
26
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. STOCK BASED PLANS: (CONTINUED)
The Company adopted the disclosure only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" in fiscal 1996. As permitted by SFAS
No. 123, the Company continues to measure compensation cost in accordance with
Accounting Principles Board ("APB") Opinion No. 25 and related interpretations
in accounting for its plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under these plans consistent with the method of SFAS 123, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:

YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------ ------- ------

Net income (in thousands) As reported.......................... $5,939 $12,682 $2,526
Pro forma............................ $5,623 $12,314 $2,289
Basic earnings per share As reported.......................... $ .39 $ .70 $ .12
Pro forma............................ $ .37 $ .68 $ .11
Diluted earnings per share As reported.......................... $ .38 $ .69 $ .12
Pro forma............................ $ .36 $ .67 $ .11

The effect on net income and earnings per share is not expected to be
indicative of the effects on net income and earnings per share in future years.
Since the SFAS No. 123 method of accounting has not been applied to options
granted prior to 1995, the resulting pro forma compensation costs may not be
representative of those to be expected in future years. The fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions:

YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------

Expected volatility............................. 36.6% 39.0% 38.9%
Risk-free interest rate......................... 5.12% 6.70% 5.26%
Expected life of options in years............... 7 years 7 years 7 years
Expected dividend yield......................... 0% 0% 0%

During fiscal years 2000, 1999 and 1998 the weighted average grant-date
fair value of options granted was $2.39, $1.44 and $2.22 per share,
respectively.

The Company has also established compensation plans under which stock
rights have been granted to certain key employees to receive Company stock upon
exercise. These rights become 60% vested on the third anniversary from date of
grant and an additional 20% vested for each subsequent year, subject to earlier
termination in certain events related to termination of employment. Vesting may
be accelerated in certain events relating to change of the Company's ownership.
During 2000, the Company awarded 330 stock rights under the plans, with a
weighted average fair value at the date of grant of $4.89 per share. The Company
amortizes unearned compensation to expense over the five-year vesting period.
Compensation expense related to these awards was $361 for 2000. At December 31,
2000, 70 total stock rights were reserved for future issuance.

26
27
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. SHAREHOLDER RIGHTS PLAN:

The Company has a Shareholder Rights Plan which provides that under certain
circumstances each Right will entitle the shareholder to purchase one
one-hundredth of a share of Series A Participating Preferred Stock at an
exercise price of $40. Upon the occurrence of certain other events, including if
a "Person" becomes the beneficial owner of more than 20% of the outstanding
Common Shares or an "Adverse Person" becomes the beneficial owner of 10% of the
outstanding Common Shares, the holder of a Right will have the right to receive,
upon exercise, Common Shares of the Company, or Common Stock of the acquirer,
having a value equal to two times the exercise price of the Right. The
Shareholder Rights Plan is designed to deter abusive market manipulation or
unfair takeover tactics and to prevent an acquirer from gaining control of the
Company without offering a fair price to all shareholders. The Rights expire on
November 2, 2003, unless redeemed prior to that date. The Rights can be redeemed
at a price of $.01 per Right.

10. BENEFIT PLANS:

The Company sponsors a 401(k) defined contribution plan which covers
substantially all of its employees who have satisfied the plan's eligibility
requirements. Participants may contribute to the plan by voluntarily reducing
their salary up to a maximum of 15% of qualified compensation subject to annual
I.R.S. limits. All contributions vest immediately. For 2000 and 1999, the
matching contribution was 100%, up to the first 3% of qualified compensation,
and 50% of the next 2% of such compensation. The Company has also made
discretionary contributions to the plan. The Company's provisions for matching
and discretionary contributions totaled approximately $1,017, $906 and $788 for
the years ended December 31, 2000, 1999 and 1998, respectively. Voluntary
after-tax contributions and certain rollover contributions are also permitted.

The Company also sponsors a non-qualified deferred compensation plan which
permits key employees to annually elect (via individual contracts) to defer a
portion of their compensation on a pre-tax basis until retirement. The
retirement benefit to be provided is based on the amount of compensation
deferred, Company match and investment earnings. All contributions vest
immediately. Although the Plan is designed to be unfunded, the Company has
funded the deferred compensation liability with investments in marketable
securities, primarily stock mutual funds, which are classified as current
assets. During the third quarter of 1999 the original non-qualified deferred
compensation plan was terminated and all proceeds were paid out to the
participants. Effective October 1, 1999, a new non-qualified deferred
compensation plan was established. The new plan offers the same benefits as the
old plan. The Company's provisions for matching and discretionary contributions
totaled approximately $77, $25 and $154 for the years ended December 31, 2000,
1999 and 1998, respectively. The deferred compensation liability which equals
the related assets recorded by the Company was $395 and $111 as of December 31,
2000 and 1999, respectively.

The Company does not offer any other post-retirement benefits, accordingly,
it is not subject to the provisions of SFAS No. 106, "Employers' Accounting for
Post Retirement Benefits Other Than Pensions."

11. SHARE REPURCHASE PROGRAM:

In October 1998, the Company's Board of Directors authorized a common share
repurchase program that provided for the Company to purchase, in the open market
and through negotiated transactions, up to 4,100 of its outstanding common
shares. The Company completed the program repurchasing 3,790 shares for an
aggregate purchase price of $19,667 in December 1999. In February 2000, the
Company's Board of Directors authorized another common share repurchase program
that enables the Company to purchase, in the open market and through negotiated
transactions, up to an additional 4,250 of its outstanding common shares. As of
March 15, 2001, the Company has repurchased approximately 3,289 shares for an
aggregate purchase price of $20,065 under the program that expired in February
2001. A bank credit facility limits 2001 stock repurchases to $5 million.

27
28
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. EARNINGS PER SHARE:

Basic earnings per share excludes dilution and is computed by dividing
income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share includes the dilution of common stock
equivalents.

2000 1999 1998
------- ------- -------

Net income.................................................. $ 5,939 $12,682 $ 2,526
======= ======= =======
BASIC:
Common shares outstanding, net of treasury shares,
beginning of year...................................... 16,973 19,622 22,911
Weighted average common shares issued during year......... 23 68 17
Weighted average treasury shares repurchased during
year................................................... (1,913) (1,535) (1,560)
------- ------- -------
Weighted average common shares outstanding, net of treasury
shares, end of year....................................... 15,083 18,155 21,368
======= ======= =======
Net income per common share................................. $ .39 $ .70 $ .12
======= ======= =======
DILUTED:
Common shares outstanding, net of treasury shares,
beginning of year...................................... 16,973 19,622 22,911
Weighted average common shares issued during year......... 23 68 17
Weighted average common share equivalents................. 491 216 194
Weighted average treasury shares repurchased during
year................................................... (1,913) (1,535) (1,560)
------- ------- -------
Weighted average common shares outstanding, net of treasury
shares, end of year....................................... 15,574 18,371 21,562
======= ======= =======
Net income per common share................................. $ .38 $ .69 $ .12
======= ======= =======

13. BUSINESS SEGMENT INFORMATION:

Management has determined that the Company consists of a single operating
segment, therefore, the disclosure requirements of SFAS 131 consist only of
revenues and long lived assets by geographic location.

2000 1999 1998
-------- -------- --------

Revenues, net:
United States............................ $389,867 $390,121 $268,227
All other countries...................... 18,356 17,863 14,493
-------- -------- --------
$408,223 $407,984 $282,720
======== ======== ========
Long lived assets, net:
United States............................ $ 38,109 $ 34,676 $ 31,325
All other countries...................... 3,699 4,219 5,475
-------- -------- --------
$ 41,808 $ 38,895 $ 36,800
======== ======== ========

28
29

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

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this Item with respect to Executive Officers of the
Company is set forth in Part I of this Annual Report on Form 10-K. Information
required by this Item with respect to members of the Board of Directors of the
Company contained under the headings "Nominees for Terms Expiring in 2003" and
"Directors whose Terms Expire in 2002" in the Company's Proxy Statement, dated
March 26, 2001, is incorporated herein by reference.

Information required by this Item with respect to compliance with Section
16 of the Exchange Act contained under the heading "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement, dated March
26, 2001, is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item relating to executive compensation
contained under the headings "Compensation of Directors", "Executive Officers'
Compensation", "Options/SAR Grants in 2000", "Aggregated Option/SAR Exercises in
2000 and Year-End Option/SAR Values", and "Change-in-Control and Other
Employment Arrangements" in the Company's Proxy Statement, dated March 26, 2001,
is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item contained under the headings
"Security Ownership of Certain Beneficial Owners" and "Security Ownership of
Management", in the Company's Proxy Statement, dated March 26, 2001, is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None

29
30

PART IV

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

PAGE
-----

(a)(1) FINANCIAL STATEMENTS
Report of Independent Accountants........................... 14
Consolidated Balance Sheets at December 31, 2000 and 1999... 15
Consolidated Statements of Operations -- Years Ended
December 31, 2000, 1999 and 1998............................ 16
Consolidated Statement of Shareholders' Equity -- Years
Ended December 31, 2000, 1999 and 1998.................... 17
Consolidated Statements of Cash Flows -- Years Ended
December 31, 2000, 1999 and 1998.......................... 18
Notes to Consolidated Financial Statements.................. 19-28
(2) FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statement schedule of
Royal Appliance Mfg. Co. and Subsidiaries is included in
Item 14(d):
Report of Independent Accountants on Financial Statement
Schedule.................................................... 32
Schedule II -- Valuation and Qualifying Accounts........... 33
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions, are inapplicable, or the information has been
included in the Notes to Consolidated Financial Statements
(3) EXHIBITS
The exhibits filed herewith are set forth on the Index to
Exhibits filed as part of this report....................... 34-35
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 2000...........................................

30
31

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, on this 16th day of
March, 2001.
ROYAL APPLIANCE MFG. CO.
Registrant

By /s/ MICHAEL J. MERRIMAN
------------------------------------
Michael J. Merriman
Chief Executive Officer and
President

Date March 16, 2001

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 indicated, as of the 16th day of March 2001.

SIGNATURE TITLE
--------- -----

/s/ MICHAEL J. MERRIMAN Chief Executive Officer, President and Director
- ------------------------------------------------ (Principal Executive Officer)
Michael J. Merriman

/s/ RICHARD G. VASEK Chief Financial Officer and Secretary
- ------------------------------------------------ (Principal Financial and Accounting Officer)
Richard G. Vasek

/s/ R. LOUIS SCHNEEBERGER* Chairman of the Board
- ------------------------------------------------
R. Louis Schneeberger

/s/ JACK KAHL JR.* Director
- ------------------------------------------------
Jack Kahl Jr.

/s/ E. PATRICK NALLEY* Director
- ------------------------------------------------
E. Patrick Nalley

/s/ J.B. RICHEY* Director
- ------------------------------------------------
J.B. Richey

/s/ JOHN P. ROCHON* Director
- ------------------------------------------------
John P. Rochon

* The undersigned, by signing his name hereto, does hereby sign this Form 10-K
on behalf of Royal Appliance Mfg. Co., and the above named directors and
officers of Royal Appliance Mfg. Co., pursuant to a Power of Attorney executed
on behalf of Royal Appliance Mfg. Co. and each of such directors and officers
and which has been filed with the Securities and Exchange Commission.

/s/ MICHAEL J. MERRIMAN
--------------------------------------
Michael J. Merriman, Chief Executive
Officer, President and Director, and
Attorney-in-Fact

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REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Shareholders and Board of Directors of Royal Appliance Mfg. Co.

Our audits of the consolidated financial statements referred to in our
report dated February 8, 2001, appearing on page 14 of the Form 10-K also
included an audit of the financial statement schedule listed as Schedule II of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP

Cleveland, Ohio
February 8, 2001

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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000

BALANCE AT ADDITIONS CHARGED TO BALANCE AT
BEGINNING OF YEAR EXPENSES AND COSTS DEDUCTIONS END OF YEAR
----------------- -------------------- ---------- -----------
(DOLLARS IN THOUSANDS)

ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended
December 31, 1998............... $1,400 $ 134 $ 34(A) $1,500
Year Ended
December 31, 1999............... $1,500 $ 595 $1,195(A) $ 900
Year Ended
December 31, 2000............... $ 900 $ 321 $ (79)(A) $1,300

INVENTORY RESERVE:
Year Ended
December 31, 1998............... $ 994 $1,339(B) $ 858(C) $1,475
Year Ended
December 31, 1999............... $1,475 $2,444(B) $1,591(C) $2,328
Year Ended
December 31, 2000............... $2,328 $2,707(B) $3,190(C) $1,845

- ---------------
Note:

(A) Uncollectible accounts charged off, less recoveries.

(B) Reserve for product model changes.

(C) Disposal of obsolete inventory.

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ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

INDEX TO EXHIBITS
FOR FORM 10-K

EXHIBIT DESCRIPTION
- ------- -----------

3(a) Articles of Incorporation, amended and restated May 4, 1992,
filed as Exhibit 3.1 of Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1992, filed with
the Commission on August 13, 1992, and incorporated herein
by reference.

3(b) Code of Regulations, amended and restated May 4, 1992, filed
as Exhibit 3.2 of Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1992, filed with the
Commission on August 13, 1992, incorporated herein by
reference.

3(c) Amendment to Amended and Restated Articles of Incorporation
October 21, 1993, filed as an Exhibit to Registrant's Form
8-K filed with the Commission on November 1, 1993, and
incorporated herein by reference.

4(a) Credit Agreement dated as of March 7, 2000, by and among the
Registrant and various banks including National City Bank as
administrative agent, filed as Exhibit 4(a) to the Annual
Report on Form 10-K for the year ended December 31, 1999,
incorporated herein by reference.

4(b) Receivables Purchase Agreement dated as of January 23, 2001,
among Royal Appliance Receivables, Inc., as Seller, the
Registrant, Market Street Funding Corporation and PNC Bank,
National Association.

The Registrant agrees to furnish copies of certain of its
other long-term debt to the Commission upon request.

4(c) Shareholder Rights Agreement dated as of October 21, 1993,
filed as an Exhibit to Registrant's Form 8-K filed with the
Commission on November 1, 1993, and incorporated herein by
reference.

10(a) Royal Appliance Mfg. Co. 1991 Stock Option Plan for Outside
Directors, filed as Exhibit 10.12 to the Registrant's
Registration Statement on Forms S-1, filed with the
Commission on August 6, 1991, file number 33-41211 (the
"Initial Registration Statement"), incorporated herein by
reference.

10(b) Royal Appliance Mfg. Co. Employees and Consultants Stock
Option Plan, filed as Exhibit 10.13 to the Initial
Registration Statement, incorporated herein by reference.

10(c) Form of Indemnity Agreement for Directors and Officers of
the Registrant, filed as Exhibit 10.38 to the Initial
Registration Statement, incorporated herein by reference.

10(e) Annual Management Incentive Plan Description. Filed as
Exhibit 10(f) to the Annual Report on Form 10-K for the year
ended December 31, 1993, incorporated herein by reference.

10(f) Royal Appliance Mfg. Co. Key Executive Long-Term Incentive
Plan filed as Exhibit 10(f) to the Annual Report on Form
10-K for the year ended December 31, 1995, incorporated
herein by reference.

10(g) Form of Severance and Employment Agreement between the
registrant and Messrs. Brickner and Moone.

10(h) Form of Amendment to Severance and Employment Agreement
between the registrant and Messrs. Merriman, Farone and
Vasek.

10(i) Employment Agreement dated September 15, 1995, between the
Registrant and Mr. Merriman filed as Exhibit 10(I) to the
Annual Report on Form 10-K for the year ended December 31,
1995, incorporated herein by reference.

10(j) Royal Appliance 401(k) Plus Plan, effective October 1, 1999
filed as Exhibit 10(i) to the Annual Report on Form 10-K for
the year ended December 31, 1999, incorporated herein by
reference.

10(k) Royal Appliance Phantom Stock Plan, effective March 31, 2000
Filed as Exhibit 10(k) of Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by reference.

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EXHIBIT DESCRIPTION
- ------- -----------

10(l) Royal Appliance Phantom Stock Plan, effective December 15,
2000.

10(m) Lease dated October 15, 1996, as amended, with respect to
Glenwillow, Ohio property between Health-O-Meter Products,
Inc. n.k.a. Sunbeam Products, Inc. and Duke Realty Limited
Partnership, as lessor, together with the lease assignment
effective July 1, 2000, between Sunbeam Products, Inc.,
Royal Appliance Mfg. Co. and Dugan Realty L.L.C. f.k.a. Duke
Realty Limited Partnership, filed as Exhibit 10(l) of
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by reference.

21 Subsidiaries of Registrant.

23 Consent of PricewaterhouseCoopers LLP regarding S-8
Registration.

24 Powers of Attorney of the Registrant, Directors and
Principal Financial Officer of the Registrant.

99.1 Form 11-K Annual Report for Royal Appliance 401(k)
Retirement Savings Plan.

99.2 Consent of independent accountants.

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