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, 2001
[ ] 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 (I.R.S. Employer
incorporation or organization) Identification)

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 11, 2002, was
$44,639,303. 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 11, 2002, was 13,017,352.

DOCUMENTS INCORPORATED BY REFERENCE

Applicable portions of the Proxy Statement for the Annual Meeting of
Shareholders to be held on Thursday, April 25, 2002, are incorporated by
reference in Part III of this form.

The Exhibit index appears on sequential page 37.
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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 or sources 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 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 brand name recognition to gain acceptance for other Dirt
Devil floorcare products. The Company continues to market certain metal vacuum
cleaners for home and commercial use under the Royal brand name.

During 2001, the Company's subsidiary, Privacy Technologies, Inc. ("Privacy
Technologies(TM)") introduced the TeleZapper(TM) -- a telephone attachment that
helps block unwanted telemarketing calls and removes consumers' phone numbers
from the telemarketers' computerized dialing lists.

The Company has also created Product Launch Partners, Inc. Product Launch
Partners, Inc. was established as a vehicle for inventors and start-up consumer
product companies to joint venture with the Company on new product launch
opportunities.

The Company's business strategy is primarily focused on leveraging its
distribution channels and its well-known Dirt Devil brand, where applicable, to
new and innovative products both inside and outside the floorcare industry,
primarily in North America. The Company's product offering consists of name
brand consumer products in two business segments: Consumer Products -- Floorcare
and Consumer Products -- Other. 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 floorcare 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 and Privacy
Technologies websites to build and maintain brand awareness and consumer demand,
as well as to gain shelf space for its product lines from major retailers.

BUSINESS SEGMENTS

CONSUMER PRODUCTS -- FLOORCARE:

The Company's Consumer Products -- Floorcare business segment designs,
assembles or sources, markets and distributes a full line of plastic and metal
vacuum cleaners. The Company's Dirt Devil vacuum cleaners are intended for home
use. The Company's metal vacuum cleaners are intended for home and commercial
use.

This business segment's primary retail product lines are sold under the
Dirt Devil name. The first Dirt Devil product, the Hand Vac, was introduced in
1984. The Dirt Devil line has since been expanded to include a full line of
upright vacuum cleaners at various price points, both with bags and bagless,
upright and hand held carpet and upholstery extractors, canister vacuum
cleaners, and a full line of corded and cordless hand held vacuum cleaners.
During 2001, the Dirt Devil line of products was further expanded with the
introduction of Dirt Devil(R) Platinum Force(TM), a family of floorcare products
that offer unique features at premium retail price points.

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 under the Royal brand name for home and commercial use
exclusively through its network of independent dealers. The Company also sells
accessories, carpet and upholstery cleaning solutions, attachments, refurbished
cleaners and replacement parts for each of its product lines.

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In order to provide the retailers with distinct product alternatives, the
Company offers different Dirt Devil products in a variety of styles and colors
and with various features. Major retailers currently carrying some portion of
the Dirt Devil product line include Best Buy, Canadian Tire, Kmart, Sam's Club,
Sears, Lowe's, Target, and WalMart. The Company also sells its Dirt Devil
products through independent dealers, who primarily sell the metal line of Royal
vacuum cleaners.

CONSUMER PRODUCTS -- OTHER:

The Company's Consumer Products -- Other segment primarily represents
business conducted by Privacy Technologies, Inc. and Product Launch Partners,
Inc. This business segment designs, sources and distributes consumer products
outside of the Company's traditional floorcare business. Currently, this segment
is substantially comprised of the TeleZapper, which was introduced in the second
half 2001 by Privacy Technologies, Inc. The TeleZapper is a telephone attachment
that helps block unwanted telemarketing calls and removes consumers' phone
numbers from telemarketers' computerized dialing lists. Major retailers
currently offering the TeleZapper include Best Buy, Canadian Tire, Kmart,
RadioShack, Target and Walmart. In order to optimize the value of the TeleZapper
product line, the Company is exploring the possibility of licensing the
TeleZapper intellectual property or an outright sale of the entire TeleZapper
business.

NET SALES BY BUSINESS SEGMENT:

The following table sets forth the amounts and percentages of the Company's
net sales for the three years ended December 31, 2001 for the Company's two
business segments.

For further information on business segments, see Note 13 of the Notes to the
Consolidated Financial Statements.

NEW PRODUCTS

The Company introduces new products and enhances its existing products on a
regular basis for both the retail and dealer markets. 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 $7.9
million, $6.8 million, and $6.3 million in 2001, 2000 and 1999, respectively.

The Company has recently formed licensing and R&D partnerships, including
one with The Procter & Gamble Company to launch, in the second half of 2002, a
new product to clean carpets more effectively. Additionally, the Company has
licensing agreements with third parties, that license the Dirt Devil brand name
for certain other cleaning products in North America and for use of the Dirt
Devil brand name in other countries.

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 and Royal
brand names or through Privacy Technologies.

MARKETING AND CUSTOMERS

The Company markets its Dirt Devil and TeleZapper products primarily
through major retailers, including mass market retailers (e.g. WalMart, Target
and Kmart), electronic chains (e.g. Best Buy and RadioShack), warehouse clubs
(e.g. Sam's Club), home improvement centers (e.g. Lowe's), regional chains and
department stores (e.g. Ames). During 2001, WalMart (including Sam's Club),
Kmart and Target

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accounted for approximately 31.1%, 14.3%, and 14.1% respectively, of the
Company's net sales, compared to approximately 32.6%, 13.5%, and 13.1%,
respectively, of the Company's net sales in 2000. These were the only customers
who accounted for 10% or more of the Company's net sales during such periods.
During 2001 and 2000, the Company's net sales in the aggregate to its five
largest customers were 68.1% and 66.1%, respectively, of its total net sales.
The loss of any of these customers or loss of their shelf space 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 through its internal sales staff. Recently, several major retailers
have experienced significant financial difficulties and some, including Kmart,
have filed for protection from creditors under applicable bankruptcy laws. As of
December 31, 2001, the net exposure related to Kmart as well as other customer
balances for which management believes collection is doubtful was included in
the calculation of allowance for doubtful accounts. The Company sells its
products to certain customers that are in bankruptcy proceedings.

Since Dirt Devil and TeleZapper 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 and TeleZapper 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, websites and from direct response television infomercials.

The Company devotes considerable attention to the design and appearance of
its products and their 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 products in major retail outlets, the Company
provides retailers with distinct product alternatives by offering its Dirt Devil
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 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 and Dirt Devil 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

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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 Consumer Products -- Floorcare business segment's most
significant competitors are Hoover, Eureka and Bissell in the upright vacuum and
carpet shampooer markets and, Black & Decker and Euro Pro in the hand-held
market. Many 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 experiences extensive competition, including price pressure and
increased advertising by its competitors, in all product lines within the
Consumer Products -- Floorcare segment. These trends are expected to continue
into 2002.

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, Royal,
TeleZapper, and other names and logos, which are used in connection with the
sale of its vacuum cleaners, consumer electronics and other products and
accessory parts. The Company considers both the Dirt Devil and TeleZapper
trademarks to be of considerable value and critical to its business. No
challenges to its rights to these trademarks 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 in the Consumer Products -- Floorcare segment are generally not dependent
upon any single patent or group of patents. Within the Consumer
Products -- Other segment, the primary product line, the TeleZapper, is
dependent upon a limited number of patents for that product.

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 holiday 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.

PRODUCTION

The Company currently assembles certain products 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
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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 and Royal brand names 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,
and days to several weeks for component 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, 2001, the Company employed approximately 670 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 2001, the peak temporary personnel level reached approximately 260. 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.

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ITEM 2. PROPERTIES

On December 31, 2001, the Company and its subsidiaries owned or leased the
material properties listed on the following table:

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(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) The Company intends to vacate this facility at the end of the lease term and
transfer operations to the 8120 Tyler Blvd., Mentor, Ohio facility.

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 Complaint asserts that the Company's Dirt Devil 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 filed a lawsuit in federal court, in the Northern District of
Ohio (case #1:01cv 2775), against The Hoover Company (Hoover) on December 10,
2001, under the patent, trademark, and unfair competition laws of the United
States. The Complaint asserts that Hoover infringes certain patents relating to
bagless technology held by the Company. The Company seeks damages, injunction on
future production, and legal fees.

The Company filed a lawsuit in federal court, in the Northern District of
Ohio (case #1:02cv 0338), against Bissell Homecare, Inc. (Bissell) in 2002,
under the patent, trademark, and unfair competition laws of the United States.
The Complaint asserts that Bissell infringes certain patents relating to bagless
technology held by the Company. The Company seeks damages, injunction on future
production, and legal fees.

Bissell Homecare, Inc. (Bissell) filed a lawsuit in federal court, in the
Western District of Michigan (case 1:02cv 0142), against the Company in 2002,
under the patent, trademark, and unfair competition laws of the United States.
The Complaint asserts that the Company's Dirt Devil Easy Steamer and Platinum
Force Extractor infringes certain patents held by Bissell. Bissell seeks
damages, injunction of future production, and legal fees. The Company is
vigorously defending the suit and believes that it is without merit. If Bissell
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.

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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

EXECUTIVE OFFICERS OF THE REGISTRANT

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

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 -- Operations since 2001. Prior
to that, he was Vice President -- Manufacturing from December 1998 to 2001.
Since 1988, he has served in several different roles in the Company's
engineering, purchasing, and sourced products areas.

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.

The Company has not declared or paid any cash dividends and currently
intends not to pay any cash dividends in 2002. The Board of Directors intends to
retain earnings, if any, to support the operations, growth
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of the business and to fund the stock repurchase program. The Company's current
credit agreement prohibits the payment of cash dividends and permits additional
stock repurchases up to $40 million, of which $23.0 million was utilized through
December 31, 2001, in accordance with the stock repurchase programs (see Notes 3
and 11 of the Notes to the Company's Consolidated Financial Statements).

On March 11, 2002, there were approximately 900 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.

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, 2001, are derived from the audited Consolidated Financial Statements of the
Company. Prior period amounts have been reclassified to conform to the 2001
presentation. The data presented below should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere herein.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's discussion and analysis of its financial position and results
of operations are based upon the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. Actual results could differ
from those estimates. Management believes that the critical accounting policies
and areas that require the most significant judgments and estimates to be used
in the preparation of the consolidated financial statements are revenue
recognition including customer based programs and incentives, allowance for
doubtful accounts, useful lives of tooling and other long lived assets and
accrued warranty and customer returns.

Revenue Recognition -- The Company's revenue recognition policy is to
recognize revenues when products are shipped. All sales are final upon shipment
of product to the customer. The Company records estimated reductions to net
sales for customer programs and incentive offerings including pricing
arrangements, promotions and other volume based incentives. If market conditions
were to soften, the Company may take actions to increase customer incentives,
possibly resulting in a reduction of net sales and gross margins at the time the
incentive is offered.

Allowance for Doubtful Accounts -- The Company maintains an allowance for
trade accounts receivable for which collection on specific customer accounts is
doubtful. In determining collectibility, management reviews available customer
financial statement information, credit rating reports as well as other external
documents and public filings. When it is deemed probable that a specific
customer account is uncollectible, that balance is included in the reserve
calculation. Actual results could differ from these estimates under different
assumptions.

Useful Lives of Tooling -- The Company capitalizes the cost of tooling used
in the production of its products by third party suppliers and global contract
manufacturers. The tooling is depreciated on a straight-line basis over 2 - 4
years, based on the nature of the product and the estimated product life cycle.
The useful lives are reviewed on a quarterly basis by management and useful
lives may be shortened if needed. In determining whether or not shortening of
useful lives is required, management reviews retail sell-through data, forecast
demands and the timeframe of new product introductions.

Accrued Warranty and Customer Returns -- 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 reserve is maintained
for future returns from current shipments. Management calculates the reserve
utilizing historical return rates by product family. These rates are reviewed
and adjusted periodically. Management utilizes judgment for estimating return
rates of new products and adjusts those estimates as actual results become
available.

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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.

2001 VS. 2000

Net sales for 2001 were $428,425, an increase of 4.9% from 2000. The
increase in sales for 2001 was attributable to the shipments of the TeleZapper,
which was introduced during the third quarter of 2001. These sales increases
were partially offset by lower sales of certain product lines within the
Consumer Products -- Floorcare segment including Dirt Devil canisters and stick
vacuums. Overall sales to the top 5 customers for 2001 (all of which are major
retailers) accounted for approximately 68.1% of net sales as compared with
approximately 66.1% in 2000. 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, including Kmart, have
filed for protection from creditors under applicable bankruptcy laws. As of
December 31, 2001, the net exposure related to Kmart as well as other customer
balances for which management believes collection is doubtful was included in
the calculation of allowance for doubtful accounts. The Company sells its
products to certain customers that are in bankruptcy proceedings.

Gross margin, as a percent of net sales, increased from 22.6% for 2000 to
24.0% in 2001. The gross margin percentage was positively affected in 2001
primarily by shipments of the TeleZapper. The increase was partially offset by
competitive pressure resulting in lower selling prices and margins on various
floorcare products.

Selling, general and administrative expenses for 2001 were $84,701, an
increase of 6.3% from 2000. Selling, general and administrative expenses
increased as a percentage of net sales from 19.5% in 2000 to 19.8% in 2001. The
dollar increase is primarily attributable to employee compensation and related
benefits, higher professional fees associated with litigation (see Note 5 of the
Company's Consolidated Financial Statements), bad debt expense primarily
associated with the bankruptcy filing by Kmart, and expenses associated with
upgrades to the Company's information technology systems.

Interest expense for 2001 was $2,415, a decrease of 31.1% from 2000. The
decrease in interest expense resulted from a lower effective borrowing rate
combined with lower levels of variable rate borrowings to finance working
capital, share repurchases, and capital expenditures.

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 decrease during 2001 was due to lower
receivable securitization expense associated with a lower effective borrowing
rate and reduced foreign currency transaction losses on Canadian sales activity.

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Due to the factors discussed above, the Company had income before income
taxes for 2001 of $14,382 as compared to income before income taxes for 2000 of
$7,464. The components of the Company's effective income tax expense rate of
35.2% are described in Note 6 of the Company's Consolidated Financial
Statements.

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 Easy Steamer(TM) (which was
introduced in mid 1999) and the Dirt Devil 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 Broom
Vac(TM). Overall sales to the top 5 customers for 2000 (all of which are major
retailers) accounted for approximately 66.1% of net sales as compared with
approximately 67.1% in 1999.

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.

Selling, general and administrative expenses for 2000 were $79,694, an
increase of 2.4% from 1999. Selling, general and administrative expenses
increased as a percentage of net sales from 19.0% in 1999 to 19.5% in 2000. The
dollar increase is primarily due to increases in employee related benefit
expenses, professional services associated with litigation and increased
engineering and product development expenses associated with new product
introductions.

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 borrowing
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.

LIQUIDITY AND CAPITAL RESOURCES

The Company has used cash generated from operations to fund its working
capital needs, capital expenditures and share repurchases. Working capital was
$32,566 at December 31, 2001, a decrease of 18.3% over the December 31, 2000
level. Current assets increased by $1,820 reflecting in part a $5,337 increase
of inventories partially offset by a $6,111 decrease of trade accounts
receivable. Current liabilities increased by $9,139 reflecting a $5,224 increase
in trade accounts payable, $3,903 increase of accrued salaries, benefits, and
payroll taxes, a $1,370 increase of accrued income taxes, partially offset by a
$1,907 decrease of accrued advertising and promotion.

In 2001, the Company utilized $13,842 of cash for capital expenditures,
including approximately $4,600 for tooling related to the new Dirt Devil
Platinum Force line of products which includes a bagless upright, full size
extractor, corded hand vac, bagged upright and bagless stick vac and
approximately $4,800 for computer equipment and software and consulting
services, primarily related to the Oracle ERP implementation and other
information technology upgrades.
11

At December 31, 2001, the Company had a reducing collateralized revolving
credit facility with availability of up to $72,000 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, 2001. 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 $22,952 was utilized through December 31, 2001. The Company's effective
interest rate was 7.34% and 9.28% for 2001 and 2000, 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, 2001, was
$35,000. At December 31, 2001 and 2000, the Company had received approximately
$24,700 and $19,200, 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 $993, $1,559, and $1,281 in 2001, 2000
and 1999, 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 5.42%,
7.56% and 6.51% for 2001, 2000, and 1999, respectively. The Company, as agent
for the purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables. Additionally, the program
contains covenants which the Company was in compliance with as of December 31,
2001.

In February 2000, the Company's Board of Directors authorized a common
share repurchase program that enabled the Company to purchase, in the open
market and through negotiated transactions, up to an additional 4,250 of its
outstanding common shares. The Company completed the program repurchasing 3,289
shares for an aggregate purchase price of $20,065 in February 2001. In April
2001, 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 3,400 of its outstanding
common shares. As of March 11, 2002, the Company has repurchased approximately
1,052 for an aggregate purchase price of $5,250 under the program that expires
in December 2002.

The following tables present total contractual obligations and other
commercial commitments of the Company as of December 31, 2001:

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

(a) The existing revolving credit facility has a maturity date of March 2003.
The Company is in negotiations with its bank group to renew and extend the
revolving line of credit for a three year period beginning April 1, 2002.

The Company believes that cash generated by operations along with its
revolving credit facilities 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.

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

(a) The sum of 2001 and 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.

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 holiday 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.

OTHER

The Company's Consumer Products -- Floorcare segment's most significant
competitors are Hoover, Eureka and Bissell in the upright vacuum and carpet
shampooer markets and, Black & Decker and Euro Pro in the hand-held market. 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
experiences extensive competition, including price pressure and increased
advertising by its competitors, in all product lines within the Consumer
Products-Floorcare segment. These trends are expected to continue into 2002.

13

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.

ACCOUNTING STANDARDS

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

The Company is required to implement the following new accounting
pronouncements during the first quarter of 2002:

SFAS No. 141, "Business Combinations" -- This statement requires that all
business combinations be accounted for under a single method, the purchase
method. Use of the pooling-of-interests method is no longer permitted.

SFAS No. 142, "Goodwill and Other Intangible Assets" -- This statement
addresses financial accounting and reporting for acquired goodwill and other
intangible assets, and in summary discontinues the amortization of goodwill and
other intangibles with indefinite lives.

SFAS No. 143, "Accounting for Asset Retirement Obligations" -- This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs.

SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" -- This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets.

The Company expects that the implementation of the above standards 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 release 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: the financial strength of the retail industry
particularly in the major mass retail channel; the impact of Kmart's recent
bankruptcy filing on Royal's future sales and earnings; the competitive pricing
and aggressive product development environment within the floorcare 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 continued 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(TM), the dependence upon the
Company's ability to continue to successfully develop and introduce innovative
products; the uncertainty of the Company's global suppliers to continuously
supply sourced finished goods and component parts; and general business and
economic conditions

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 has hedged certain foreign currency commitments of future
payments and receipts by purchasing foreign currency-forward contracts. As of
December 31, 2001, there were no such contracts outstanding. 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.
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, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, 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 11, 2002

15

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these financial statements.
17

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

The accompanying notes are an integral part of these financial statements.
18

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these financial statements.
19

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 or sources and markets a full line
of cleaning products for home and some for commercial use, primarily in North
America under the Dirt Devil and Royal brand names. In 1984, the Company
introduced the first in a line of Dirt Devil 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 brand name recognition
to gain acceptance for other Dirt Devil floorcare products. The Company
continues to market certain metal vacuum cleaners for home and commercial use
under the Royal brand name.

During 2001, the Company's subsidiary, Privacy Technologies, Inc. ("Privacy
Technologies") introduced the TeleZapper -- a telephone attachment that helps
block unwanted telemarketing calls and removes consumers' phone numbers from the
telemarketers' computerized dialing lists.

The Company also created Product Launch Partners, Inc. Product Launch
Partners, Inc. was established as a vehicle for inventors and start-up consumer
product companies to joint venture with the Company on new product launch
opportunities.

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 the allowance for doubtful accounts, the reserve
for returns and allowances, and depreciation and amortization, among others.

Certain prior year amounts have been reclassified to conform to the 2001
presentation.

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 has used 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
20

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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, 2001 and
2000 were $0 and $2,670, 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 costs incurred under
the Company's cooperative advertising program. Advertising and promotion costs
were $44,486, $47,154 and $46,546 for the years ended December 31, 2001, 2000
and 1999, respectively.

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

Inventories at December 31, consisted of the following:

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 2001 and 2000, $185 and $94, 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 $1,555 and $1,407 at December 31, 2001 and 2000, 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 indicate that the carrying amount of property, plant and equipment
may not be recoverable under the provisions of Statement

21

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

Fair Value of Financial Instruments -- Financial instruments consist of a
revolving credit agreement that is carried at an amount which approximates fair
value.

New Accounting Pronouncements -- The Company implemented Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities, in the first quarter of 2001. The
implementation of SFAS No. 133 did not have a material impact on its
consolidated financial position, results of operations, or cash flows.

The Company is required to implement the following new accounting
pronouncements during the first quarter of 2002:

SFAS No. 141, "Business Combinations" -- This statement requires that all
business combinations be accounted for under a single method, the purchase
method. Use of the pooling-of-interests method is no longer permitted.

SFAS No. 142, "Goodwill and Other Intangible Assets" -- This statement
addresses financial accounting and reporting for acquired goodwill and other
intangible assets, and in summary, discontinues the amortization of goodwill and
other intangibles with indefinite lives.

SFAS No. 143, "Accounting for Asset Retirement Obligations" -- This
statement addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs.

SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" -- This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets.

The Company expects that the implementation of the above standards 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 2001 and 2000, 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 certain Royal metal products
during 2001 and the Dirt Devil Corded Mop Vac, Dirt Devil Stick Vac and Dirt
Devil Broom Vac during 2000, the Company recorded accelerated depreciation
expense of $191 and $1,788 during 2001 and 2000, 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 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 of 1999.

22

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During 1999, the Dirt Devil 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 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 of 1999.

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 with 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 during the fourth quarter of 1999.

3. DEBT:

At December 31, 2001, the Company had a reducing collateralized revolving
credit facility with availability of up to $72,000 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, 2001. 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 $22,952 was utilized through December 31, 2001. The Company's effective
interest rate was 7.34% and 9.28% for 2001 and 2000, 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, 2001, was
$35,000. At December 31, 2001 and 2000, the Company had received approximately
$24,700 and $19,200, 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 $993, $1,559, and $1,281 in 2001, 2000
and 1999, 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 5.42%,
7.56%, and 6.51% for 2001, 2000, and 1999, respectively. The Company, as agent
for the purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables. Additionally, the program
contains covenants which the Company was in compliance with as of December 31,
2001.

4. LEASES:

Royal leases various facilities, equipment, computers, software and
vehicles under capital and operating lease agreements. Operating lease payments
totaled $2,905, $1,912, and $796 for the years ended December 31, 2001, 2000,
and 1999, respectively.

23

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Minimum commitments under all capital and operating leases at December 31,
2001 are as follows:

5. COMMITMENTS AND CONTINGENCIES:

At December 31, 2001, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $3,000,
including commitments for television advertising through December 31, 2002.
Other contractual commitments for items in the normal course of business total
approximately $4,300.

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 Complaint asserts that the Company's Dirt Devil 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 filed a lawsuit in federal court, in the Northern District of
Ohio (case #1:01cv 2775), against The Hoover Company (Hoover) on December 10,
2001, under the patent, trademark, and unfair competition laws of the United
States. The Complaint asserts that Hoover infringes certain patents relating to
bagless technology held by the Company. The Company seeks damages, injunction on
future production, and legal fees.

The Company filed a lawsuit in federal court, in the Northern District of
Ohio (case #1:02cv 0338), against Bissell Homecare, Inc. (Bissell) in 2002,
under the patent, trademark, and unfair competition laws of the United States.
The Complaint asserts that Bissell infringes certain patents relating to bagless
technology held by the Company. The Company seeks damages, injunction on future
production, and legal fees.

Bissell Homecare, Inc. (Bissell) filed a lawsuit in federal court, in the
Western District of Michigan (case 1:02cv 0142), against the Company in 2002,
under the patent, trademark, and unfair competition laws of the United States.
The complaint asserts that the Company's Dirt Devil Easy Steamer and Platinum
Force Extractor infringes certain patents held by Bissell. Bissell seeks
damages, injunction of future production, and

24

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

legal fees. The Company is vigorously defending the suit and believes that it is
without merit. If Bissell 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:

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, 2001 and
2000, the components of the net deferred tax asset were as follows:

25

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

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. These Federal Income Tax refunds were received in 2001.
For the years ended December 31, 2001 and 2000, the R & E credit amounted to
$400 and $200, respectively.

7. MAJOR CUSTOMERS:

Royal's three largest customers represented approximately 31.1%, 14.3%, and
14.1% of total net sales in 2001. The Company's three largest customers
represented approximately 32.6%, 13.5% and 13.1% in 2000 and 36.9%, 13.6% and
12.1% of total net sales in 1999. 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,
including Kmart, have filed for protection from creditors under applicable
bankruptcy laws. As of December 31, 2001, the net exposure related to Kmart as
well as other customers balances for which management believes collection is
doubtful was included in the calculation of allowance for doubtful accounts. 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.

26

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

The 1,651 exercisable options at December 31, 2001 are exercisable at an
average exercise price of $6.14. The Company's current option plans, which
provide for a total of 3,060 options, have 59 options remaining for future
grants at December 31, 2001.

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:

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:

27

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

During fiscal years 2001, 2000 and 1999 the weighted average grant-date
fair value of options granted was $2.17, $2.39 and $1.44 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 2001 and 2000, the Company awarded 116 and 330 stock rights under the
plans, respectively, with a weighted average fair value at the date of grant of
$4.25 and $4.89 per share for the years ended December 31, 2001 and 2000,
respectively. The Company amortizes unearned compensation to expense over the
five-year vesting period. Compensation expense related to these awards was $586
and $361 for 2001 and 2000, respectively. At December 31, 2001, 4 total stock
rights were reserved for future issuance.

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 each of the last three
years, 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 $965, $1,017, and
$906 for the years ended December 31, 2001, 2000 and 1999, 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. The Company's provisions for matching and discretionary contributions
totaled approximately $72, $77, and $25 for the years ended December 31, 2001,
2000 and 1999, respectively. The deferred compensation liability which equals
the related assets recorded by the Company was $419 and $395 as of December 31,
2001 and 2000, 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."

28

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. SHARE REPURCHASE PROGRAM:

In February 2000, the Company's Board of Directors authorized a common
share repurchase program that enabled the Company to purchase, in the open
market and through negotiated transactions, up to an additional 4,250 of its
outstanding common shares. The Company completed the program repurchasing 3,289
shares for an aggregate purchase price of $20,065 in February 2001. In April
2001, 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 3,400 of its outstanding
common shares. As of March 11, 2002, the Company has repurchased approximately
1,052 for an aggregate purchase price of $5,250 under the program that expires
in December 2002.

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.

13. BUSINESS SEGMENT INFORMATION:

The Company has two reportable segments: Consumer Products -- Floorcare and
Consumer Products -- Other. The operations of the Consumer Products -- Floorcare
segment includes the design, assembly or sourcing, marketing and distribution of
a full line of plastic and metal vacuum cleaners. The primary brand names
associated with this segment include Dirt Devil and Royal. These products are
sold primarily to major mass merchant retailers and independent dealers in North
America. The operations of the Consumer Products -- Other segment represents
business conducted by Privacy Technologies, Inc. and Product Launch Partners,
Inc., both of which are wholly owned subsidiaries of the Company. Currently, the
primary product line within this segment is the TeleZapper, a telephone
attachment that helps block unwanted telemarketing

29

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

calls and removes consumers' phone numbers from telemarketers' computerized
dialing lists. These products are sold primarily to major mass merchant
retailers and national electronic chains in North America.

The Company's reportable segments are distinguished by the nature of
products sold. The Company evaluates performance and allocates resources to
reportable segments primarily based on net sales and operating income. The
accounting policies of the reportable segments are the same as those described
in Note 1. The Company records its federal and state tax assets and liabilities
at corporate. There are no intersegment sales.

Financial information for the Company's reportable segments consisted of
the following:

30

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Financial information related to the Company's operations by geographic
location consisted of the following:

31

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 2004" and
"Directors whose Terms Expire in 2003" in the Company's Proxy Statement, dated
March 27, 2002, 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
27, 2002, 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 2001", "Aggregated Option/SAR Exercises in
2001 and Year-End Option/SAR Values", and "Change-in-Control and Other
Employment Arrangements" in the Company's Proxy Statement, dated March 27, 2002,
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 27, 2002, is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None

32

PART IV

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

33

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 15th day of
March, 2002.

ROYAL APPLIANCE MFG. CO.
Registrant

By /s/ MICHAEL J. MERRIMAN

--------------------------------------
Michael J. Merriman
Chief Executive Officer and President

Date March 15, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of the 15th day of March 2002.

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

* 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

34

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 11, 2002, appearing on page 15 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 11, 2002

35

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR YEARS ENDED DECEMBER 31, 1999, 2000, AND 2001

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

Note:

(A) Uncollectible accounts charged off, less recoveries.

(B) Reserve for product model changes.

(C) Disposal of obsolete inventory.

36

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

INDEX TO EXHIBITS
FOR FORM 10-K

37

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

INDEX TO EXHIBITS
FOR FORM 10-K -- (CONTINUED)