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, 1999

[ ] 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)

650 ALPHA DRIVE, CLEVELAND, OHIO 44143
- ----------------------------------------------------- -----------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) ZIP CODE

(440) 449-6150
------------------------------------------------------
(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, 2000, was
$67,715,329. 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, 2000, was 15,876,952.

DOCUMENTS INCORPORATED BY REFERENCE

Applicable portions of the Proxy Statement for the Annual Meeting of
Shareholders to be held on Tuesday, April 25, 2000, are incorporated by
reference in Part III of this form.

The Exhibit index appears on sequential page 34.
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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 the
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 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, Circuit City, Kmart, Sears, Service
Merchandise, 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 by the
introduction of upright and canister vacuum cleaners, electric brooms and mops,
and was expanded in 1999 by the introduction of the Dirt Devil(R) Easy Steamer,
a carpet extractor, and the Dirt Devil(R) Vision with Sensor, a bagless upright
vacuum cleaner with a dirt sensor.

During 1999, 1998, and 1997 plastic products accounted for approximately
91%, 88%, and 90%, 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 1999, 1998, and 1997, metal products accounted for approximately
3%, 4%, and 4%, respectively, of the Company's net sales.

OTHER PRODUCTS. The Company sells accessories, 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 1999, 1998, and 1997, these products accounted for approximately
6%, 8%, and 6%, 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 2000, the Company will introduce the Dirt

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Devil(R)Vision Lite(TM), a lightweight bagless upright and the Dirt Devil(R)Spot
Scrubber(TM), a corded hand-held carpet shampooer. 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 $6.3
million, $4.6 million and $4.7 million in 1999, 1998 and 1997, respectively.

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.
The Company may also license its trademarks and patents.

Marketing and Customers

The Company markets its Dirt Devil(R) products primarily through major
retailers, including mass market retailers (e.g. WalMart, Target, Kmart and
Ames), electronic chains (e.g. Best Buy, Circuit City, and Service Merchandise),
warehouse clubs (e.g. Sam's Club), regional chains and department stores. During
1999, WalMart (including Sam's Club), Kmart and Target accounted for
approximately 36.9%, 13.6% and 12.1%, respectively, of the Company's net sales,
compared to approximately 31.6%, 13.4% and 14.1%, respectively, of the Company's
net sales in 1998. These were the only customers who accounted for approximately
10% or more of the Company's net sales during such periods. During 1999 and
1998, the Company's net sales in the aggregate to its five largest customers
were 68.7% and 64.2%, 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. For example, Dirt
Devil(R)products sold by mass merchants are often bright red in color. 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 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.

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4

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 for any reason, 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
stations 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. 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 new product success.

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's business is seasonal. 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 shopping season. 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 most of its products in its facilities
located in the Cleveland, Ohio metropolitan area and Reynosa, Mexico. 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 assembly, it believes that its fixed costs are lower than many of its
competitors. The Company also believes that this lack of vertical integration
permits it increased flexibility in the introduction and modification of
products. The Company has outsourced some or all manufacturing of certain
products. In the second half of 2000, the Company plans on outsourcing
production of certain additional products in Asia. The Company believes that by
outsourcing these additional products, it may realize increased

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manufacturing flexibility, lower product cost, and lower tooling expenditures.
This additional outsourcing will result in the discontinuing of the Reynosa,
Mexico operation in the second quarter of 2000.

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.

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 two to four months in the case of motors and
cords, from five to ten weeks for sourced products 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
outsource manufacturers and has not experienced any significant raw material or
component shortages.

Employees

As of December 31, 1999, the Company employed approximately 990 full-time
employees, an increase of 310 employees from the prior year-end. In addition,
the Company generally utilizes temporary personnel during the period when the
Company is responding to its peak selling season. During 1999, the peak
temporary personnel level reached approximately 1,000. The Company's employees
are not represented by any labor union, except for the approximate 74 employees
in the Mexican assembly facility. 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 the production areas of 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, 1999, the Company and its subsidiaries owned or leased the
properties listed on the following table.

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

650 Alpha Drive................ -- 57,000 01/17 Corporate
Headquarters
Highland Heights, Ohio
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 and Warehouse
Brecha E-99.................... -- 40,000 04/03 Assembly
Reynosa, Tamquilpas,
Mexico(2)
1350 Rockefeller............... -- 100,000 05/01 Assembly
Wickliffe, OH
20001 Euclid Avenue............ -- 70,200 06/01 Shipping and
Euclid, OH Warehouse

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

(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 2000, the Company will discontinue
operations at this location on May 31, 2000. The property will either be
returned to the landlord in exchange for early termination of the lease or
will be subleased by the Company.

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

EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

Michael J. Merriman....................... 43 President and Chief Executive Officer
James A. Holcomb.......................... 49 Vice President -- Marketing & Strategic
Planning
Robert N. McKee........................... 56 Vice President -- Engineering
T. Keith Moone............................ 44 Vice President -- Sales
Richard G. Vasek.......................... 35 Chief Financial Officer, Vice President --
Finance and Secretary

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 in July 1995,
President and Chief Operating Officer in January 1995, and Director in October
1993.

James A. Holcomb has been Vice President -- Marketing and Strategic
Planning since August 1994.

Robert N. McKee has been Vice President -- Engineering since December 1997.
Prior to that he served as Director -- Consumer Products Engineering for the
Deere & Co.

T. Keith Moone has been Vice President -- Sales since December 1995. Prior
to that he served as the Company's National Sales Manager from May
1994 -- December 1995.

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.

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,
----------------------------
1999 1998
----------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---

Quarters:
First..................................... 4 1/2 3 7 1/8 5 11/16
Second.................................... 7 1/8 3 3/4 6 3/8 4 3/4
Third..................................... 7 4 6 3/8 2 1/2
Fourth.................................... 6 5/8 4 9/16 5 3/16 2 1/4

The Company has not declared or paid any cash dividends and currently
intends not to pay any cash dividends in 2000. 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 new 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.

On March 10, 2000, there were approximately 1,100 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, 1999, are derived from the audited Consolidated Financial Statements of the
Company. Prior period amounts have been reclassified to conform to the 1999
presentation. The data presented below should be read in conjunction with the
Consolidated Financial Statements and notes thereto included elsewhere herein.

YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

CONSOLIDATED STATEMENTS OF
OPERATIONS:
Net sales........................... $407,984 $282,720 $325,417 $286,123 $270,564
Cost of sales....................... 304,452 208,861 229,469 204,000 201,555
-------- -------- -------- -------- --------
Gross margin...................... 103,532 73,859 95,948 82,123 69,009
Advertising and promotion........... 46,546 43,562 47,626 40,443 40,496
Other selling....................... 9,087 7,947 8,448 8,977 11,898
General and administrative.......... 15,960 12,270 12,549 11,515 12,971
Engineering and product
development....................... 6,256 4,567 4,696 3,905 3,281
Special charges..................... -- -- -- -- 16,294
Charge for tooling obsolescence..... 2,621 -- -- -- --
-------- -------- -------- -------- --------
Income (loss) from operations..... 23,062 5,513 22,629 17,283 (15,931)
Interest expense.................... 1,401 1,521 1,412 2,559 4,001
Receivable securitization and other
expense (income), net............. 1,369 (140) 1,033 (622) 311
-------- -------- -------- -------- --------
Income (loss) before taxes........ 20,292 4,132 20,184 15,346 (20,243)
Income tax expense (benefit)........ 7,610 1,606 7,777 5,910 (6,487)
-------- -------- -------- -------- --------
Net income (loss)................. $ 12,682 $ 2,526 $ 12,407 $ 9,436 $(13,756)
======== ======== ======== ======== ========
BASIC EARNINGS PER SHARE
Weighted average number of common
shares outstanding (in
thousands)........................ 18,155 21,368 23,553 24,010 23,999
Earnings (loss) per share........... $ .70 $ .12 $ .53 $ .39 $ (.57)
DILUTED EARNINGS PER SHARE
Weighted average number of common
shares and equivalents outstanding
(in thousands).................... 18,371 21,562 23,944 24,183 23,999
Earnings (loss) per share........... $ .69 $ .12 $ .52 $ .39 $ (.57)
CONSOLIDATED BALANCE SHEET DATA (AT
END OF PERIOD)
Working capital................... $ 38,950 $ 30,240 $ 32,486 $ 29,818 $ 46,045
Total assets...................... 151,892 117,480 134,947 126,141 131,261
Long-term debt.................... 34,704 18,426 13,672 15,743 45,999
Shareholders' equity.............. 44,669 46,723 60,219 56,234 46,575

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

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)
------------------------ -----------------------------
1999 1998 1997 1999 VS. 1998 1998 VS. 1997
------ ------ ------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net sales...................................... 100.0% 100.0% 100.0% 44.3% (13.1)%
Cost of sales.................................. 74.6 73.9 70.5 45.8 (9.0)
----- ----- ----- ----- -----
Gross margin.............................. 25.4 26.1 29.5 40.2 (23.0)
Advertising and promotion...................... 11.4 15.4 14.6 6.9 (8.5)
Other selling.................................. 2.2 2.8 2.6 14.3 (5.9)
General and administrative..................... 3.9 4.3 3.9 30.1 (2.2)
Engineering and product development............ 1.5 1.6 1.4 37.0 (2.7)
Charge for tooling obsolescence................ 0.7 -- -- N/M --
----- ----- ----- ----- -----
Income from operations.................... 5.7 2.0 7.0 318.3 (75.6)
Interest expense............................... 0.4 0.5 0.5 (7.9) 7.7
Receivable securitization and other expense
(income), net................................ 0.3 N/M 0.3 N/M N/M
----- ----- ----- ----- -----
Income before income taxes..................... 5.0% 1.5% 6.2% 391.1% (79.5)%
===== ===== ===== ===== =====

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 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 68.7% of net
sales as compared with approximately 64.2% in 1998. 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 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, and higher provisions for
slow moving and obsolete inventory and accelerated depreciation on tooling
primarily associated with the cordless Mop Vac, 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. 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 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.

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1999 VS. 1998 (continued)
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 principal components are
compensation (including benefits), insurance, provision for doubtful accounts
and professional services. The dollar increases were primarily due to increases
in employee headcount related compensation expense, professional services, and
provision for doubtful accounts.

Engineering and product development expenses for 1999 were $6,256, an
increase of 37.0% from 1998. 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 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
the 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 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 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.

1998 VS. 1997

Net sales for 1998 were $282,720, a decrease of 13.1% from 1997. The
overall decrease in net sales was due to lower sales of the Dirt Devil(R) Mop
Vac(R) and the Dirt Devil(R) Broom Vac(R). The decrease in net sales was
partially offset by increases in sales of the Company's line of upright vacuum
cleaners including the new Dirt Devil(R) Vision. Despite lower shipments to
retailers in 1998, the Company believes that retailers' sales to consumers of
the Company's products increased over 1997. Overall sales to the top 5 customers
for 1998 (all of which are major retailers) accounted for approximately 64.2% of
net sales as compared with approximately 62.3% in 1997.

Gross margin, as a percent of net sales, decreased from 29.5% for 1997 to
26.1% in 1998. The gross margin percentage was negatively affected in 1998
primarily by lower sales of higher margin products and higher manufacturing
variances as a percent of sales.

Advertising and promotion expenses for 1998 were $43,562, a decrease of
8.5% from 1997. The decrease in advertising and promotion expenses was due
primarily to not incurring in 1998 expenses related to the 1997 launch of the
Fred Astaire Super Bowl advertising campaign and the direct response television
campaign launch of the Dirt Devil(R) Mop Vac(R).

Other selling expenses for 1998 were $7,947, a decrease of 5.9% from 1997.
The decrease is primarily due to lower compensation expenses and lower
commissions to manufacturer's representatives. The principal components of other
selling expenses are internal sales and marketing personnel costs.

General and administrative expenses for 1998 were $12,270, a decrease of
2.2% from 1997. The decrease is primarily due to lower compensation related
expenses partially offset by increases in professional services.

10
11

1999 VS. 1998 (continued)
General and administrative expenses increased as a percentage of net sales from
3.9% to 4.3%. The principal components are compensation (including benefits),
insurance, travel, and professional services.

Engineering and product development expenses for 1998 were $4,567, a
decrease of 2.7% from 1997. 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 decrease in 1998 was primarily due to fewer new product introductions in
1998.

Interest expense for 1998 was $1,521, an increase of 7.7% from 1997. The
increase in interest expense resulted, primarily, from higher levels of variable
rate borrowings to finance working capital, capital expenditures and share
repurchases, partially offset by a lower effective borrowing rate and the
receipt of proceeds from the sale of one of the Company's assembly facilities.

Receivable securitization and other expense (income), net principally
reflects the cost of the Company's trade accounts receivable securitization
program and the effect of 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 $1,300.

Due to the factors discussed above, the Company had income before income
taxes for 1998 of $4,132, as compared to income before income taxes for 1997 of
$20,184.

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 $38,950 at December 31, 1999, an increase of
28.8% over December 31, 1998 level. Current assets increased by $29,825
reflecting in part a $10,990 increase of trade accounts receivable, a $19,373
increase of inventories, and a $926 increase in deferred income taxes, which
were partially offset by a decrease in prepaid expenses and other of $2,891.
Current liabilities increased by $21,115 reflecting in part a $3,633 increase of
trade accounts payable, a $5,706 increase of accrued salaries, benefits, and
payroll taxes, a $7,164 increase of accrued advertising and promotion, a $1,950
increase of accrued warranty and customer returns, a $1,436 increase of accrued
income taxes, and a $4,734 increase of current portions of capital lease
obligations and notes payable, which were partially offset by a decrease in
accrued other of $3,508.

In 1999, the Company utilized $18,881 of cash for capital expenditures,
including approximately $10,900 for tooling related to the Dirt Devil(R) Easy
Steamer(TM), the Dirt Devil(R) Vision(TM) with Sensor, the new Dirt
Devil(R)Vision Lite(TM), the Dirt Devil(R) Vision(TM), the Dirt Devil(R) Swivel
Glide(TM), the Dirt Devil(R) Power Lite(TM) and the Dirt Devil(R) Stick Vac(TM).

At December 31, 1999, the Company had a collateralized revolving credit
facility with availability of up to $45,000 and a maturity date of April 1,
2002. 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, 1999. The revolving credit facility is
collateralized by the Company's inventories and certain trade accounts
receivable. The Company's effective interest rate was 8.19% and 8.45% for 1999
and 1998, respectively.

On March 7, 2000 the Company entered into a new $80,000 three year
collateralized revolving credit facility. 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 revolving
credit

11
12

1999 VS. 1998 (continued)
facility permits additional share repurchases up to $40,000 as long as the
Company remains in compliance with all covenants but prohibits the payment of
cash dividends. The new facility replaced the Company's $45,000 revolver.

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, 1999, was
$40,000. The maximum amount of receivables that can be sold is seasonally
adjusted. At December 31, 1999 and 1998, the Company had received approximately
$23,100 and $22,000, respectively, from the sale of trade accounts receivable.
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 $1,281, $916 and $892 in 1999, 1998 and 1997, 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 6.51%, 6.79% and 6.64%
for the years 1999, 1998 and 1997, respectively. The Company, as agent for the
purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables.

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 for 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, 2000, the Company has repurchased approximately 1,098
for an aggregate purchase price of $6,308 under the new program. The program is
scheduled to expire 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,
1999(b) 1999 1999 1999 1998 1998 1998 1998
-------- --------- -------- --------- -------- --------- -------- ---------

Net sales........................... $131,766 $106,520 $80,488 $89,210 $106,006 $73,607 $51,259 $51,848
Gross margin........................ 35,536 25,156 20,824 22,016 30,950 19,258 12,153 11,498
Net income (loss)................... 3,660 4,407 2,863 1,752 5,134 2,169 (2,234) (2,543)
Net income (loss) per share --
diluted (a)....................... $ 0.21 $ 0.24 $ 0.15 $ 0.09 $ 0.26 $ 0.10 $ (0.10) $ (0.11)

- ---------------
(a) The sum of 1998 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's business is seasonal. 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 shopping season. 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 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's most significant
competitors are Hoover, Eureka, and Bissell in the upright vacuum and carpet
shampooer market and in the hand-held market, Black & Decker. These competitors
and several others are subsidiaries or divisions of companies that are more
diversified and have greater financial resources than the Company.

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 increase in 2000.

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 the implementation
of SFAS No. 133 will not have a material impact on its consolidated financial
position, results of operations, or cash flows.

The Company adopted Statement of Position ("SOP") 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use, in the first
quarter of 1999. The impact of implementing SOP 98-1 did not have a material
impact on its consolidated financial position, results of operations, or cash
flows.

YEAR 2000 COMPLIANCE

The Company developed a detailed Year 2000 Action Plan and began the
process of assessing the magnitude of the Year 2000 on its primary computer
systems in 1998. Additionally, the Company began gathering data, identifying,
and developing remediation plans for affected non-IT systems and equipment. In
conjunction with the internal assessment, the Company also began evaluating and
monitoring key suppliers and customers in regard to their respective Year 2000
preparedness and compliance.

As of the date of this filing, the Company has not experienced any internal
problems related to Year 2000 compliance issues nor has the Company experienced
any disturbances or interruption in its ability to transact business with its
suppliers or customers. The Company, however, continues to monitor its systems,
suppliers, and customers for any unanticipated issues that have yet to surface.
The Company has appropriately expensed the costs related to Year 2000
preparedness as incurred. As of December 31, 1999, the Company has spent
approximately $150.

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
within the vacuum cleaner segment of 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

13
14

Company's line of Dirt Devil(R) Vision uprights with bagless technology and the
Dirt Devil(R) Easy Steamer(TM); the dependence upon the Company's ability to
continue to successfully develop and introduce innovative products; and the
uncertainty of the Company's foreign suppliers to continuously to supply sourced
finished goods and component parts.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company does not have any derivative financial instruments as of
December 31, 1999. 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. There were no forward exchange
or currency swap contracts outstanding as of December 31, 1999.

14
15

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, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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, 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 the opinion expressed
above.

PricewaterhouseCoopers LLP

Cleveland, Ohio
March 7, 2000

15
16

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
(DOLLARS IN THOUSANDS)

ASSETS
Current assets:
Cash...................................................... $ 1,427 $ --
Trade accounts receivable, less allowance for doubtful
accounts of $900 and $1,500 at December 31, 1999 and
1998, respectively...................................... 48,526 37,536
Inventories............................................... 50,461 31,088
Deferred income taxes..................................... 5,074 4,148
Prepaid expenses and other................................ 1,681 4,572
-------- --------
Total current assets.................................... 107,169 77,344
-------- --------
Property, plant and equipment, at cost:
Land...................................................... 1,541 1,541
Buildings................................................. 7,777 7,777
Molds, tooling, and equipment............................. 49,515 64,865
Furniture and office equipment............................ 7,787 7,022
Assets under capital leases............................... 4,694 4,714
Leasehold improvements and other.......................... 5,137 3,718
-------- --------
76,451 89,637
Less accumulated depreciation and amortization.......... (37,556) (52,837)
-------- --------
38,895 36,800
-------- --------
Tooling deposits............................................ 5,177 2,770
Other....................................................... 651 566
-------- --------
Total assets............................................ $151,892 $117,480
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.................................... $ 22,280 $ 18,647
Accrued liabilities:
Advertising and promotion............................... 15,932 8,768
Salaries, benefits, and payroll taxes................... 8,005 2,299
Warranty and customer returns........................... 10,050 8,100
Income taxes............................................ 3,366 1,930
Other................................................... 3,301 6,809
Current portions of capital lease obligations and notes
payable................................................. 5,285 551
-------- --------
Total current liabilities............................... 68,219 47,104
-------- --------
Revolving credit agreement................................ 32,200 10,600
Capitalized lease obligations, less current portion....... 2,504 2,833
Notes payable, less current portion....................... -- 4,993
-------- --------
Total long-term debt.................................... 34,704 18,426
-------- --------
Deferred income taxes..................................... 4,300 5,227
-------- --------
Total liabilities....................................... 107,223 70,757
-------- --------
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 25,464,352 and 25,347,924 at December 31,
1999 and 1998, respectively............................. 212 211
Additional paid-in capital................................ 42,528 42,115
Retained earnings......................................... 55,226 42,544
Accumulated other comprehensive income.................... -- --
-------- --------
97,966 84,870
Less treasury shares, at cost (8,491,000 and 5,726,400
shares at December 31, 1999 and 1998, respectively)..... (53,297) (38,147)
-------- --------
Total shareholders' equity.............................. 44,669 46,723
-------- --------
Total liabilities and shareholders' equity.............. $151,892 $117,480
======== ========

The accompanying notes are an integral part of these financial statements.
16
17

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Net sales.............................................. $407,984 $282,720 $325,417
Cost of sales.......................................... 304,452 208,861 229,469
-------- -------- --------
Gross margin......................................... 103,532 73,859 95,948
Advertising and promotion.............................. 46,546 43,562 47,626
Other selling.......................................... 9,087 7,947 8,448
General and administrative............................. 15,960 12,270 12,549
Engineering and product development.................... 6,256 4,567 4,696
Charge for tooling obsolescence........................ 2,621 -- --
-------- -------- --------
Income from operations............................... 23,062 5,513 22,629
Interest expense, net.................................. 1,401 1,521 1,412
Receivable securitization and other expense (income),
net.................................................. 1,369 (140) 1,033
-------- -------- --------
Income before income taxes............................. 20,292 4,132 20,184
Income tax expense..................................... 7,610 1,606 7,777
-------- -------- --------
Net income........................................... $ 12,682 $ 2,526 $ 12,407
======== ======== ========
BASIC
Weighted average number of common shares outstanding
(in thousands).................................... 18,155 21,368 23,553
Earnings per share................................... $ .70 $ .12 $ .53
DILUTED
Weighted average number of common shares and
equivalents outstanding (in thousands)............ 18,371 21,562 23,944
Earnings per share................................... $ .69 $ .12 $ .52

The accompanying notes are an integral part of these financial statements

17
18

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

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

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

Balance at December 31,
1996....................... 25,231,100 $210 $41,500 $27,611 $(107) 1,201,000 $(12,980) $56,234
Translation adjustment..... 107 107
Compensatory effect of
stock options............ 81 81
Shares issued from stock
option plan.............. 80,624 1 316 317
Purchase of treasury
shares................... 1,200,000 (8,927) (8,927)
Net income................. 12,407 12,407
---------- ---- ------- ------- ----- --------- -------- -------
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
========== ==== ======= ======= ===== ========= ======== =======

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

18
19

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

1999 1998 1997
------- -------- -------
(DOLLARS IN THOUSANDS)

Cash flows from operating activities:
Net income................................................ $12,682 $ 2,526 $12,407
------- -------- -------
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 11,896 9,390 9,407
Charge for tooling obsolescence........................ 2,621 -- --
Compensatory effect of stock options................... -- 68 81
Loss (gain) on sale of property, plant and equipment,
net.................................................. 85 (1,125) --
Deferred income taxes.................................. (1,853) 443 3,186
(Increase) decrease in assets:
Trade accounts receivable, net......................... (10,990) 9,509 (7,284)
Inventories............................................ (19,373) 5,107 (2,143)
Refundable and accrued income taxes.................... 1,436 955 1,474
Prepaid expenses and other............................. 2,891 (1,361) (595)
Other.................................................. (308) (325) --
Increase (decrease) in liabilities:
Trade accounts payable................................. 2,745 (8,001) 5,969
Accrued advertising and promotion...................... 7,164 (808) (2,106)
Accrued salaries, benefits, and payroll taxes.......... 5,706 (3,451) (230)
Accrued warranty and customer returns.................. 1,950 (600) 725
Accrued other.......................................... (3,508) 1,279 1,850
------- -------- -------
Total adjustments.................................... 462 11,080 10,334
------- -------- -------
Net cash from operating activities..................... 13,144 13,606 22,741
------- -------- -------
Cash flows from investing activities:
Purchases of tooling, property, plant, and equipment,
net.................................................... (16,474) (8,667) (14,548)
Proceeds from sale of property, plant and equipment....... -- 6,806 --
(Increase) decrease in tooling deposits................... (2,407) (1,624) 2,816
------- -------- -------
Net cash from investing activities..................... (18,881) (3,485) (11,732)
------- -------- -------
Cash flows from financing activities:
Proceeds (payments) on bank debt, net..................... 22,488 9,127 (1,413)
Payments on notes payable................................. (302) (4,280) (418)
Proceeds from exercise of stock options................... 414 150 317
Payments on capital lease obligations..................... (286) (233) (214)
Purchase of treasury shares............................... (15,150) (16,240) (8,927)
------- -------- -------
Net cash from financing activities..................... 7,164 (11,476) (10,655)
------- -------- -------
Net increase (decrease) in cash............................. 1,427 (1,355) 354
------- -------- -------
Cash at beginning of year................................... -- 1,355 1,001
------- -------- -------
Cash at end of year......................................... $ 1,427 $ -- $ 1,355
======= ======== =======
Supplemental disclosure of cash flow information:
Cash payments for:
Interest.................................................. $ 1,594 $ 1,687 $ 1,689
======= ======== =======
Income taxes, net of refunds.............................. $ 8,021 $ 208 $ 3,117
======= ======== =======

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

19
20

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 requires management to make
estimates and assumptions that affect reported amounts and related disclosures.
Actual results could differ from those estimates.

Certain prior year amounts have been reclassified to conform to the 1999
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.

Foreign operations are conducted in their local currency. Assets and
liabilities of Royal's international operations are translated at current
exchange rates, and income and expenses are translated using weighted average
exchange rates. The effects of these translation adjustments are reported as a
separate component of shareholders' equity as Accumulated Other Comprehensive
Income. The net effect of currency gains and losses realized on business
transactions is included in the determination of net income.

As of December 31, Accumulated Other Comprehensive Income consisted of the
following:

1999 1998 1997
---- ---- -----

Foreign currency translation adjustments.................... $ 0 $ 0 $ 306
Less: Reclassification adjustments.......................... 0 0 (306)
---- ---- -----
Accumulated other comprehensive income...................... $ 0 $ 0 $ 0
==== ==== =====

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.

20
21
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,
1999 1998
------------ ------------

Finished goods............................................. $37,280 $16,648
Work in process and component parts........................ 13,181 14,440
------- -------
$50,461 $31,088
======= =======

PROPERTY, PLANT AND EQUIPMENT -- the Company capitalizes as additions to
property, plant and equipment expenditures at cost for molds, tooling, land,
buildings, equipment, furniture, 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 1999, $163 of such 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 their respective lease terms. Accumulated
amortization on assets under capital leases totaled $2,525 and $2,338 at
December 31, 1999 and 1998, respectively.

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

Buildings................................................... 40 years
Buildings under capital lease............................... 20 years
Molds, tooling, and equipment............................... 3-5 years
Furniture and office equipment.............................. 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS -- Financial instruments consist of a
revolving credit agreement and notes payable and are carried at amounts which
approximate fair value.

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.

The Company adopted Statement of Position ("SOP") 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use, in the first
quarter of 1999. The impact of implementing

21
22
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. ACCOUNTING POLICIES: (CONTINUED)
SOP 98-1 did not have a material impact on its consolidated financial position,
results of operations, or cash flows.

2. CHARGES FOR TOOLING OBSOLESCENCE:

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, previously during the 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) (Ultra MVP) 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 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, 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.

Also, during 1999, the Company shortened the useful lives of tooling for
certain product families due to declining sales volumes and the launch of
replacement products. As a result of the reduced remaining useful lives for
certain product families, including the Mop Vac and Ultra MVP, the Company
recorded accelerated depreciation expense of $1,574 during 1999.

3. DEBT:

22
23
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. DEBT: (CONTINUED)
compliance with all covenants but prohibits the payment of cash dividends. The
new facility replaced the Company's $45,000 million revolver.

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, 1999, was
$40,000. The maximum amount of receivables that can be sold is seasonally
adjusted. At December 31, 1999 and 1998, the Company had received approximately
$23,100 and $22,000, respectively, from the sale of trade accounts receivable.
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 $1,281, $916 and $892 in 1999, 1998 and 1997, 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 6.51%, 6.79% and 6.64%
for the years 1999, 1998 and 1997, respectively. The Company, as agent for the
purchaser of the receivables, retains collection and administrative
responsibilities for the purchased receivables.

The Company has a 7.9% fixed rate mortgage note payable in the amount of
$4,968. The note is collateralized by an assembly and distribution facility.
Monthly payments of principal and interest are payable through November 1, 2000,
at which time the balance of approximately $4,775 is due. The carrying amount of
the mortgage note payable approximates fair value.

Aggregate maturities of the notes payable and revolving credit facility at
December 31, 1999, prior to the March 2000 refinancing, are as follows:

2000............................................ $ 4,968
2001............................................ --
2002............................................ 32,200
-------
$37,168
=======

4. LEASES:

Royal leases various facilities, equipment and vehicles under capital and
operating lease agreements. Operating lease payments totaled $796, $602 and $579
for the years ended December 31, 1999, 1998, and 1997, respectively.

Minimum commitments under all capital and operating leases at December 31,
1999 are as follows:

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

2000............................................ $ 573 $ 900
2001............................................ 574 515
2002............................................ 312 57
2003............................................ 315 11
2004............................................ 317 5
Thereafter...................................... 1,680 --
------ ------
Total minimum lease payments.................... 3,771 $1,488
======
Less amount representing interest............... 950
------
Total present value of capital obligation....... 2,821
Less current portion............................ 317
------
Long-term obligation under capital leases....... $2,504
======

23
24
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. COMMITMENTS AND CONTINGENCIES:

At December 31, 1999, the Company estimates having contractual commitments
for future advertising and promotional expense of approximately $11,400
including commitments for television advertising through December 31, 2000.
Other contractual commitments for items in the normal course of business total
approximately $2,750.

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 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, as well as the Hoover lawsuit mentioned above, 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:

1999 1998 1997
------ ------ ------

Current:
Federal................................................ $8,683 $ 873 $ 399
State and local........................................ 780 290 190
Deferred................................................. (1,853) 443 7,188
------ ------ ------
Total.................................................... $7,610 $1,606 $7,777
====== ====== ======

Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and tax basis of assets and liabilities. At December 31, 1999 and 1998,
the components of the net deferred tax liability were as follows:

1999 1998
------ -------

Deferred tax assets:
Warranty and customer returns............................. $4,261 $ 3,315
Bad debt reserve.......................................... 351 585
Inventory basis difference................................ 846 724
Accrued vacation, compensation and benefits............... 419 414
State and local taxes..................................... 359 625
Accrued advertising....................................... 192 20
Self insurance reserves................................... 183 156
Deferred compensation plan................................ 43 958
Other..................................................... 13 88

24
25
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES: (CONTINUED)

1999 1998
------ -------

Deferred tax liabilities:
Accounts receivable mark to market........................ (1,315) (2,493)
Basis difference in fixed and intangible assets........... (3,679) (4,558)
State and local taxes..................................... (768) (803)
Other..................................................... (131) (110)
------ -------
Net deferred tax asset (liability).......................... $ 774 $(1,079)
====== =======

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
1999 INCOME 1998 INCOME 1997 INCOME
------ ------- ------ ------- ------ ------------

Tax expense at statutory rate..... $6,900 34.0% $1,404 34.0% $6,862 34.0%
Capital (gains) losses on
disposition of foreign
subsidiaries and other non
deductible expenses............. -- -- -- -- (93) -0.5
State and local income taxes, net
of federal benefit.............. 507 2.5 186 4.5 1,008 5.0
Federal surtax on income over $10
million......................... 196 1.0 -- -- -- --
Other, net........................ 7 -- 16 0.4 -- --
------ ---- ------ ---- ------ ----
$7,610 37.5% $1,606 38.9% $7,777 38.5%
====== ==== ====== ==== ====== ====

7. MAJOR CUSTOMERS:

Royal's three largest customers represented approximately 36.9%, 13.6%, and
12.1% of total net sales in 1999. The Company's three largest customers
represented approximately 31.6%, 13.4% and 14.1% in 1998 and 35.9%, 9.5% and
10.7% of total net sales in 1997. 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 OPTIONS:

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

25
26
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. STOCK OPTIONS: (CONTINUED)
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 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:

1999 1998 1997
--------------- --------------- ---------------

Options outstanding at beginning of the
year..................................... 2,244 2,301 2,491
Options granted during the year............ 673 100 166
Options exercised during the year.......... (116) (36) (81)
Options canceled during the year........... (37) (121) (275)
--------------- --------------- ---------------
Options outstanding at end of the year..... 2,764 2,244 2,301
=============== =============== ===============
Options exercisable at end of the year..... 669 662 528
Option price range per share............... $2.50 to $10.25 $2.50 to $10.25 $3.00 to $10.25

The 669 exercisable options at December 31, 1999, are exercisable at an
average exercise price of $4.96 . The Company's current option plans, which
provide for a total of 3,060 options, have 31 options remaining for future
grants at December 31, 1999.

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,
---------------------------
1999 1998 1997
------ ------- ------

Net income (in thousands) As reported.......................... $12,682 $ 2,526 $12,407
Pro forma............................ $12,314 $ 2,289 $12,195

Basic earnings per share As reported.......................... $ .70 $ .12 $ .53
Pro forma............................ $ .68 $ .11 $ .52

Diluted earnings per share As reported.......................... $ .69 $ .12 $ .52
Pro forma............................ $ .67 $ .11 $ .51

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

26
27
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. STOCK OPTIONS: (CONTINUED)
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,
-----------------------------
1999 1998 1997
------- ------- -------

Expected volatility............................. 39.0% 38.9% 34.7%
Risk-free interest rate......................... 6.70% 5.26% 5.83%
Expected life of options in years............... 7 years 7 years 7 years
Expected dividend yield......................... 0% 0% 0%

During fiscal years 1999, 1998 and 1997 the weighted average grant-date
fair value of options granted was $1.44, $2.22, and $3.16 per share,
respectively.

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 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 $906, $788 and $779 for the
years ended December 31, 1999, 1998 and 1997, 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 $25, $154 and $163 for the years ended December 31, 1999,
1998 and 1997, respectively. The deferred compensation liability and related
assets recorded by the Company were $111 and $2,332 as of December 31, 1999 and
1998, respectively.
27
28
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. BENEFIT PLANS: (CONTINUED)
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 provides for 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, 2000, the Company has repurchased approximately 1,098
shares for an aggregate purchase price of $6,308 under the new program. The
program is scheduled to expire in February 2001.

12. EARNINGS PER SHARE:

In the fourth quarter of 1997, the Company adopted SFAS No. 128, Earnings
per Share, which modifies the calculation of earnings per share. The Standard
replaces the previous presentation of primary and fully diluted earnings per
share to basic and diluted.

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. All prior periods presented have been restated to reflect this
adoption.

1999 1998 1997
------- ------- -------

Net income.................................................. $12,682 $ 2,526 $12,407
======= ======= =======
BASIC:
Common shares outstanding, net of treasury shares,
beginning of year...................................... 19,622 22,911 24,030
Weighted average common shares issued during year......... 68 17 40
Weighted average treasury shares repurchased during
year................................................... (1,535) (1,560) (517)
------- ------- -------
Weighted average common shares outstanding, net of treasury
shares, end of year....................................... 18,155 21,368 23,553
======= ======= =======
Net income per common share................................. $ .70 $ .12 $ .53
======= ======= =======
DILUTED:
Common shares outstanding, net of treasury shares,
beginning of year...................................... 19,622 22,911 24,030
Weighted average common shares issued during year......... 68 17 40
Weighted average common share equivalents................. 216 194 391
Weighted average treasury shares repurchased during
year................................................... (1,535) (1,560) (517)
------- ------- -------
Weighted average treasury shares outstanding, net of
treasury shares, end of year.............................. 18,371 21,562 23,944
======= ======= =======
Net income per common share................................. $ .69 $ .12 $ .52
======= ======= =======

28
29
ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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. All prior period
disclosures are also provided below:

1999 1998 1997
-------- -------- --------

Revenues, net:
United States............................ $390,121 $268,227 $309,274
All other countries...................... 17,863 14,493 16,143
-------- -------- --------
$407,984 $282,720 $325,417
======== ======== ========
Long lived assets, net:
United States............................ $ 34,676 $ 31,325 $ 41,087
All other countries...................... 4,219 5,475 1,805
-------- -------- --------
$ 38,895 $ 36,800 $ 42,892
======== ======== ========

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 2002" and
"Directors whose Terms Expire in 2001" in the Company's Proxy Statement, dated
March 24, 2000, 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
24, 2000, 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 Grants in 1999", "Aggregated Option Exercises in 1999
and Year-End Option Values", and "Change-in-Control and Other Employment
Arrangements" in the Company's Proxy Statement, dated March 24, 2000, 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 24, 2000, 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........................... 17
Consolidated Balance Sheets at December 31, 1999 and 1998... 18
Consolidated Statements of Operations -- Years Ended
December 31, 1999, 1998 and 1997............................ 19
Consolidated Statement of Shareholders' Equity -- Years
Ended December 31, 1999, 1998
and 1997.................................................... 20
Consolidated Statements of Cash Flows -- Years Ended
December 31, 1999, 1998 and
1997........................................................ 21
Notes to Consolidated Financial Statements.................. 22-31
(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.................................................... 35
Schedule II -- Valuation and Qualifying Accounts............ 36
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....................... 37-38
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1999........................................... --

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, 2000.
ROYAL APPLIANCE MFG. CO.
Registrant

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

Date March 16, 2000

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 2000.

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

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

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

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

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

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

31
32

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 March 7, 2000, appearing on page 17 of the Form 10-K also included
an audit of the financial statement schedule listed as Exhibit 27 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
March 7, 2000

32
33

ROYAL APPLIANCE MFG. CO. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year Ended
December 31, 1997............... $1,350 $ 225 $ 175(A) $1,400
Year Ended
December 31, 1998............... $1,400 $ 134 $ 34(A) $1,500
Year Ended
December 31, 1999............... $1,500 $ 595 $1,195(A) $ 900

INVENTORY RESERVE:
Year Ended
December 31, 1997............... $1,401 $ 305(B) $ 712(C) $ 994
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

Note: (A) Uncollectible accounts charged off, less recoveries.
(B) Reserve for product model changes.
(C) Disposal of obsolete inventory.

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34

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.
4(b) Receivable Purchase and Servicing Agreement dated as of
September 29, 1997, by the Registrant, Royal Appliance
Receivables, Inc., as Seller, and Llama Retail Funding L.P.,
as Purchaser. Filed as Exhibit 4(b) of Registrant's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997, filed with the Commission on November
12, 1997, and incorporated herein by reference. 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(d) Lease dated December 11, 1981 by and between Syndicated
Properties and the Registrant, as amended, filed as Exhibit
10.7 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 Mssrs. Merriman, McKee, Holcomb, Moone and
Vasek, as Exhibit 10(g) to the Annual Report on Form 10-K
for the year ended December 31, 1994, incorporated herein by
reference.
10(h) 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.

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35

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

10(i) Royal Appliance 401(k) Plus Plan, effective October 1, 1999.
10(j) Form of Amendment to Severance and Employment Agreement
between the registrant and Mssrs. Merriman and Vasek
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.
27 Financial Data Schedule for Current Period
99.1 Form 11-K Annual Report for Royal Appliance 401(k)
Retirement Savings Plan
99.2 Consent of independent accountants