Use these links to rapidly review the documentIndex AAF-MCQUAY INC. AND SUBSIDIARIES Item 8. Financial Statements and Supplementary Data

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UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

(Mark One)

|X | Annual Report Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934    
|- | ----------------------------------------------------------------------------------------
|  | For the fiscal year ended June 29, 2002                                                 
|  | 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: 33-80701

AAF-MCQUAY INC.(Exact name of the Registrant as specified in its charter)Delaware(State or other Jurisdiction of
Incorporation or Organization)

41-0404230(I.R.S. Employer
Identification No.)10300 Ormsby Park Place, Suite 600
Louisville, Kentucky(Address of principal executive offices)

40223(Zip Code)


Registrant's
telephone number, including area code (502) 637-0011

Securities
registered pursuant to section 12(b) of the Act:

None

Securities
registered pursuant to Section 12(g) of the Act:

None

Indicate
by checkmark 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.
 X Yes     No

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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.
Not Applicable

The
aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant at June 30, 2002 was $-0-.

The
number of shares outstanding of the registrant's only class of common stock as of September 13, 2002 (latest practicable date) was 2,497.

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Index  AAF-MCQUAY INC. AND SUBSIDIARIES



|         |  |                                                                                      
|-------- |  | -------------------------------------------------------------------------------------
|Part I   |  |                                                                                      
|Item 1   |  | Business                                                                             
|Item 2   |  | Properties                                                                           
|Item 3   |  | Legal Proceedings                                                                    
|Item 4   |  | Submission of Matters to a Vote of Securities Holders                                
|Part II  |  |                                                                                      
|Item 5   |  | Market for Registrant's Common Stock and Related Stockholder Matters                 
|Item 6   |  | Selected Financial Data                                                              
|Item 7   |  | Management's Discussion and Analysis of Financial Condition and Results of Operations
|Item 7a  |  | Quantitative and Qualitative Disclosures about Market Risk                           
|Item 8   |  | Financial Statements and Supplemental Data                                           
|Item 9   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|Part III |  |                                                                                      
|Item 10  |  | Directors and Executive Officers of the Registrant                                   
|Item 11  |  | Executive Compensation                                                               
|Item 12  |  | Security Ownership of Certain Beneficial Owners and Management                       
|Item 13  |  | Certain Relationships and Related Transactions                                       
|Part IV  |  |                                                                                      
|Item 14  |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                      

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Part I

Item 1. Business

General

AAF-McQuay Inc. (the "Company"), a Delaware corporation, is a leading worldwide manufacturer and distributor of commercial air conditioning and air
filtration products and systems primarily for commercial, institutional and industrial customers. The Company believes that it is a leading global manufacturer and distributor of air filtration
products for non-vehicular applications and is a major participant in the global commercial heating, ventilation, air conditioning and refrigeration ("HVAC&R") market. The Company
maintains production facilities in nine countries and its products are sold in over 80 countries. The Company believes that its geographic and product diversification makes it less susceptible to an
economic downturn in any particular served market or region.

In
1994, O.Y.L. Industries Berhad ("OYL"), a member of the Hong Leong Group Malaysia ("Hong Leong"), one of Malaysia's leading manufacturers and exporters of commercial and industrial
air conditioners, refrigerators, freezers and electrical components, purchased all the outstanding stock of the Company for approximately $420 million, including the assumption of debt (the
"OYL Acquisition"). As part of the funding, OYL made a cash investment of $170 million, applied both to purchase the prior owner's interest and to restructure the Company's debt. OYL is a
subsidiary of Hume Industries Malaysia Berhad ("Hume"). Hume, like OYL, is a publicly traded Malaysian company controlled by Hong Leong. Mr. Quek Leng Chan is Hong Leong's controlling
shareholder.

The
Company believes its affiliation with Hong Leong, which has a significant Asian presence, substantially improves the Company's financial and operating flexibility and access to Asian markets. The
Company has also expanded into other new markets outside Asia, including Latin America. In
addition, the Company seeks to expand its product lines through research and development and seeks to pursue strategic technology joint ventures and acquisitions.

During
2002, the Company conducted business in two principal segments: Commercial Air Conditioning & Refrigeration and Filtration Products.

Commercial Air Conditioning and Refrigeration

The Company, through the Commercial Air Conditioning and Refrigeration segment, is a worldwide leader in the design, manufacture, sale and service of HVAC&R equipment
principally for the commercial, industrial and institutional markets. Products include chillers, applied air handling systems, applied terminal systems, industrial refrigerators, service and parts. In
the United States, the Company believes that its share of the commercial air conditioning market is approximately 10%. The Company's products are sold primarily under the widely recognized
McQuay® brand name and services are marketed under the McQuayServiceSM name. This equipment has been installed in many prominent facilities around the world, including the
GTE Headquarters in Dallas, Texas, Motorola production facilities in the United Kingdom and Singapore, Emirates Tower, U.A.E., the Jumerirah Beach Hotel, U.A.E., Kodak facilities in Ontario, Philips
Semiconductor facilities in China, Taiwan and Singapore and the Jai Lie Building in Wuhan, China. The Company's broad range of standard and custom products and services fulfill the HVAC&R requirements
of most building types and sizes and offer multiple solutions to a variety of HVAC&R needs. The Company markets its commercial HVAC&R equipment principally to building contractors, architects,
consulting engineers, building developers and building owners. In addition, the Company manufactures, sells, and services industrial refrigeration equipment under the J&E Hall brand names, including
J&E HallTM, Hallmark®, and Thermotank®. Principal customers for refrigeration products are in the food and beverage, chemical and naval and maritime industries. Three of the
Company's facilities used to produce its air conditioning and

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refrigeration products have earned ISO 9001 certification and five facilities have earned ISO 9002 certification.

The
Company's Commercial Air Conditioning and Refrigeration products are divided among the following business units: (i) chiller products, (ii) applied air handling systems,
(iii) applied terminal systems, and (iv) industrial refrigeration.

Chiller Products.The Company's chiller products include centrifugal, screw, scroll and reciprocating chillers, condensing units and
air-cooled condensers, all of which frequently contain state of the art control systems. These products are normally engineered and assembled to meet specific design criteria for a wide
range of commercial, institutional and industrial applications. Typical applications include large square footage buildings which require integrated HVAC&R systems, served by chillers ranging in
capacity from 10 to over 2,300 tons (the cooling capacity of air conditioning units is measured in tons; one ton being equivalent to 12,000 Btu/h and generally adequate to air condition approximately
350 to 500 square feet of space). The Company is also the only HVAC&R manufacturer to offer a broad line
of dual compressor centrifugal chillers, which offer improved energy efficiency because of their unique part-load capability. The dual compressor centrifugal chiller provides the Company
with additional competitive advantages by virtue of its small footprint, built-in redundancy, and its utilization of HFC-134a, a non-chloroflorocarbon refrigerant.

Under
the trade name McQuayServiceSM, the Company services both its own and its competitors' products and systems and provides start-up assistance, warranty support, full
after market service, and chiller retrofit services. The Company's service operations are conducted primarily in North America through 20 field offices and employ approximately 300 personnel. In
addition to providing a non-cyclical source of revenues, the Company's service business provides access to the growing replacement and retrofit markets.

Applied Air Handling Systems.Products from the Company's applied air handling system business unit provide customized solutions for a
broad range of commercial, institutional and industrial air conditioning needs. Applied air handling systems include the Company's Vision air handlers, roof mounted air handlers, packaged rooftop
systems, indoor self-contained systems and coils. Air handling products complement the Company's chiller products with customized solutions for sound, efficiency and indoor air quality
requirements in central system applications up to 50,000cfm. The Vision product line of air handlers provide "variable dimensioning" capability that gives it an added competitive advantage in the
substantial retrofit/replacement markets. McQuay rooftop and indoor self-contained systems provide the same quality and flexibility in factory packaged and tested cooling/heating solutions
in capacities up to 135 tons. Recognized for their performance, applied air handling systems products are consistently called upon to perform in key applications such as schools, offices and
healthcare facilities.

Applied Terminal Systems.Applied terminal systems consist of HVAC&R units that provide heating and cooling for a defined space on a
"localized" basis. They include fan-coil units, water source heat pumps, packaged terminal air conditioners ("PTAC"), and unit ventilators. Capacities of individual units are less than 20
tons and typically include electronic controls. Typical applications include facilities where air conditioning is required on a "room-by-room" basis such as hotels/motels,
condominiums, schools and office buildings. Within the United States, the Company believes that it is a leading manufacturer of water source heat pumps and unit ventilators. The large installed base
is expected to provide significant replacement and service opportunities.

The
Company globally serves its installed base by providing high value support and distribution services through its Special Markets Group. The Special Markets Group distributes original specification
Certified McQuay Parts and also serves the broader HVAC&R replacement market through the

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distribution of unitary HVAC products, trade parts and supplies. The Company provides value added customer service through e-commerce, electronic parts catalogs and industry leading order
cycle times.

Industrial Refrigeration.The acquisition of J&E Hall in December 1995 expanded the Company's product offerings and also accelerated
its development of the single screw compressors that both the Company and J&E Hall had been developing separately for several years. The Company believes that single screw chillers, rather than the
twin screw chillers produced by a number of its competitors in the commercial HVAC&R markets, provide competitive advantages, including improvements in efficiency and cost, lower service requirements
and noise reduction.

J&E
Hall sells and services industrial refrigeration equipment under several well known J&E Hall brand names, including J&E Hall, Hallmark® and Thermotank®. The
principal customers for industrial refrigeration products are concentrated in the food and meat processing, dairy, brewing and beverage (soft and alcoholic), chemical, petrochemical, pharmaceutical,
naval and merchant marine industries. In fiscal year 1997, the Company acquired Coulstock & Place Engineering Co. Ltd., a motor rewind specialist providing support for the compressor
business.

Competition
in the global industrial refrigeration business is fragmented and over the last two years, the industry has consolidated into a few global companies. Recognizing the consolidation within
the industrial refrigeration industry, over capacity in the market place and strength of its trading currency (pound sterling), J&E Hall embarked on a major restructuring exercise in the beginning of
fiscal year 2000, which was completed in June 2001. The Company believes that these actions will strengthen the Company and enable it to maintain its position as a leading UK provider of
refrigeration service solutions through its extensive network of 13 regional offices.

Commercial Air Conditioning and Refrigeration Strategic Partnerships.

The Company, through its Commercial Air Conditioning and Refrigeration segment, has entered into selective strategic partnerships throughout the world to maximize its market
penetration through enhancement of its manufacturing and distribution capabilities and further diversification of its product lines. The Company has formed partnerships with local companies in India,
Japan, Hungary, Greece, Italy, Mexico and Puerto Rico. The Company has formed strategic partnerships in selected metropolitan markets to increase its market penetration in the domestic market. In
addition, the Company has established regional sales offices in Miami, Florida (to sell its products throughout Latin America), Beirut, Lebanon and Dubai, UAE and markets its products throughout Asia,
including China, through manufacturing and sales joint ventures established by OYL.

Filtration Products

The Company's Filtration Products segment engages in the manufacture, sale and distribution of air filtration products and systems, including air filters. The Company's
filtration products are sold worldwide to commercial, institutional and industrial customers as well as retailers for residential use. Within its Filtration Products segment, the Company has two
principal businesses: replacement filters and environmental products. Replacement filters are sold to commercial and industrial building owners, contractors, retailers for residential applications,
automotive industry, hospitals and computer chip
manufacturers for clean room applications, locomotive and air conditioning original equipment manufacturers and railroad companies. The Company has marketed its replacement filters under the
AmericanAirFilter® and AAF® brand names since the 1920's and also under private label. The environmental products business has two major product areas: Air Pollution Control
Products and Systems ("APC") and Machinery Filtration and Acoustical Systems ("MFAS") products. Environmental products are sold throughout the world for a wide variety of commercial, institutional and
industrial applications. Two of the Company's facilities used to produce its air filtration products have earned ISO 9001 certification, and three facilities have earned ISO 9002 certification.

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Replacement Filter Products

The Company believes that it is one of the world's largest manufacturers and distributors of commercial, industrial and residential air filters, which are used to remove
airborne contaminants from intake and conditioned air, for a wide variety of applications. The Company estimates its global and North American served market share in non-vehicular
applications to be approximately 15% and 20%, respectively. The filters are designed to be used in all types of air filtration systems regardless of the original manufacturer.

The
Filtration Products segment's replacement filter products consist of a broad product line including: (i) standard filters and equipment for use in a wide range of commercial, institutional,
industrial and residential settings; (ii) custom-designed 99.9999%+ high-efficiency filters and equipment for "clean rooms" required by certain industries such as semiconductor
manufacturers and health care; and (iii) specialty intake air filtration systems for locomotives and other niche applications.

Environmental Products

Air Pollution Control Products and Systems.The Company's APC equipment is designed to improve atmospheric quality by removing airborne
pollutants such as dust, mist and fumes from air exhaust streams. The Company's APC systems are sold primarily in Europe, Latin America and Asia and include design and construction services. The
Company markets APC equipment to a broad range of industrial customers including the food, pharmaceutical, chemical, steel, cement, power generation, waste incineration, chemical and pulp and paper
industries, as well as special market niches such as woodworking companies, welding shops, restaurants and fast food outlets. The Company's APC equipment includes wet and dry scrubbers, cartridge and
fabric filter collectors, electrostatic precipitators and dust and mist collection products. These products collect contaminants, recover materials from the manufacturing process and solve
in-plant air quality problems. APC systems, offered
by the Company, are integrated systems engineered to combine air pollution control equipment with peripheral equipment, ductwork and instrumentation to produce an integrated emission control process.

Machinery Filtration and Acoustical Systems.MFAS products and systems are designed to remove particulate contamination from air supplies
to machines to reduce the performance inhibiting effects of corrosion, erosion and fouling. Acoustical systems are designed to protect the environment in which the machines are installed from
excessive noise generated by the machines and their ancillary processes.

Machinery
filtration systems can include weather protection, mechanical separators, high efficiency barrier filters enhanced by lower efficiency pre-filtration and
self-cleaning reverse pulse filters, and they can also incorporate air tempering equipment including anti-ice systems and evaporative coolers. Acoustical equipment includes air
intake ducts and silencers, high temperature exhaust ducts and silencers, ventilation fan silencers and machinery enclosures, all designed individually or as integrated systems with ancillary access,
supports, controls and instrumentation systems. The Company designs and supplies MFAS products and systems to major machinery manufacturers for the oil, gas, electrical and chemical/petro-chemical
industries in the global market. Continued research and development of products and systems allows the Company to provide a complete range of products and a single source, total package capability for
its customers.

Filtration Products Strategic Partnerships

The Company, through its Filtration Products segment, has entered into selective strategic partnerships and alliances throughout the world to maximize its market penetration
through enhancement of its manufacturing and distribution capabilities and further diversification of its product lines. The Company has formed partnerships with local companies in Japan, Saudi Arabia
and Malaysia to manufacture and distribute its products. In addition, the Company has entered into technology sharing agreements for the development of antimicrobial filters.

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Financial Information About Industry Segments, and Domestic Operations and Export Sales

See Note 15 "Business Segments and Geographic Information" in the Notes to the Consolidated Financial Statements.

Sales and Distribution

General.The Company has a diverse base of customers. No customer of the Commercial Air Conditioning and Refrigeration segment or the
Filtration Products segment accounted for more than 10% of the Company's net sales of these products during any of the past three fiscal years.

Commercial Air Conditioning and Refrigeration.The Company distributes its commercial HVAC&R equipment and systems in the United States and
Canada through a network of approximately 150 independent manufacturers' representatives and joint ventures that sell on a commission basis. Replacement parts for HVAC&R equipment are sold through a
network of 90 independent parts distributors and three Company-owned stores. Service products and contracts are sold through the Company's own sales force working from offices located throughout the
United States and Canada. The Company distributes its commercial HVAC&R products and parts internationally through a combination of direct sales personnel, independent distributors and joint venture
partners selling in over 80 countries throughout the world. Backlog for the Commercial Air Conditioning and Refrigeration segment at June 30, 2002 and 2001 was $98 million and
$111 million, respectively. The Company anticipates that substantially all of these orders will be filled in the next 12 months.

Filtration Products.The Company deploys separate sales forces and distribution channels to market its replacement filter and environmental
products. The Company believes it employs the industry's largest commercial replacement filter direct sales force, with approximately 130 factory sales people worldwide to market commercial
replacement filters. Residential replacement filters are sold primarily in the United States through national retail stores. Environmental products are sold through factory direct sales people,
independent distributors, agents and joint venture partners. Backlog for the Filtration Products segment at June 30, 2002 and 2001 was $48 million and $71 million, respectively.
The Company anticipates that substantially all of these orders will be filled in the next 12 months.

Manufacturing

Commercial Air Conditioning and Refrigeration.The Company's commercial HVAC&R products are manufactured in 6 factories in the United
States, Italy and the United Kingdom. The Company's industrial refrigeration products are manufactured in three manufacturing facilities in the United Kingdom. See "Properties."

Filtration Products.In the Company's filter manufacturing business, fiberglass filtermedia is manufactured at 2 facilities, located in the
United States and The Netherlands, and then shipped to
filter assembly facilities throughout Europe and North America from which finished products are then shipped to customers. Air filtration equipment and systems are manufactured at facilities that are
geographically dispersed throughout the world including 11 locations for replacement filters and 3 locations for environmental products. See "Properties."

Purchasing

The principal component parts and materials purchased by the Company for use in its equipment and systems are compressors, electric motors, filter media, copper tubes, glass
pellets and castings, all of which are readily available through multiple sources. No single supplier has accounted for more than 10% of the annual purchases by the Company of raw materials or
component parts in any of the past three fiscal years. The Company believes it has contracts and commitments or readily available sources of supply sufficient to meet its anticipated raw material or
key component requirements. The Company

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maintains alternate sources for key components where dependence upon a single supplier could have an adverse impact upon production to the extent that it is technologically and commercially feasible.

The
Company negotiates corporate-wide agreements with many of its major suppliers of purchased material. These agreements, which are typically from one to three years in length, are
intended to increase the responsiveness of suppliers to the Company's needs and to provide the Company with assured sources of supplies at competitive prices and terms.

Competition

General.The commercial HVAC&R and filtration products business segments are highly competitive. In the commercial HVAC&R industry, the
principal methods of competition are lead time, product performance, feature availability, energy efficiency, price, and service. In the refrigeration industry, competitive factors include price,
quality and a vertically integrated approach of supplying products. In the filtration products business, participants generally compete on the basis of service, price, quality, reliability,
efficiency, and conditions of sale and range of product offering. Certain portions of these markets are also very fragmented, both geographically and by product line. The Company believes its
competitive position is strengthened in those international markets in which it has both a manufacturing and a marketing presence and that it has a competitive advantage through its affiliation with
Hong Leong and OYL in gaining access to certain markets where barriers exist for non-local companies.

Commercial Air Conditioning and Refrigeration.International markets for commercial HVAC&R products are competitive and fragmented along
geographic and product lines. On a global basis, the Company's primary competitors across the full range of its HVAC&R product offerings are Carrier Corporation (a subsidiary of United Technologies
Corporation), The Trane Company (a division of American Standard, Inc.) and York International Corporation. Outside North America, the Company also competes with numerous European and Japanese
companies. Competition in the global industrial refrigeration business is fragmented, consisting of a limited number of large companies and a significant number of local companies. The Company
believes that price and quality in addition to a vertically integrated approach to supplying products and systems are significant competitive factors in selling industrial refrigeration products.

Filtration Products.Competition in the air filtration products and systems, air pollution control equipment and systems and MFAS
businesses is very fragmented. Globally, the Company competes with many companies along each product line. The Company believes that price, quality and breadth of product offerings are among the
leading competitive factors in selling air filtration products and systems.

Research and Development

The Company's research and development programs are involved in creating new products, enhancing and redesigning existing equipment and systems to reduce manufacturing costs
and increasing product efficiency. The Company spent approximately $10.2, $9.0 and $8.7 million during its 2002, 2001, and 2000 fiscal years, respectively, for research and development.

A
significant focus of the Company's research and development efforts since 1988 has been to develop and extend its range of water-cooled and air-cooled chillers using advanced single
screw compressor technology. The Company introduced its first single screw air conditioning product in 1994 and has continued to expand the product line and its application through fiscal 2002. J&E
Hall has been marketing industrial refrigeration products using single screw compressor technology since 1978. The Company expects to further enhance single screw air conditioning product technology
during fiscal year 2003 with the continued introduction of the next generation screw compressor and screw chiller

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products. Single screw compressor technology will continue to be an important element of research and development programs in the Commercial Air Conditioning and Refrigeration segment.

The
Company has developed and is now producing the next generation of air handlers which is highly energy and sound efficient. The product is available in a variety of configurations and material
options. The Company expects this family of products to meet the growing market for quiet, high quality air handlers.

Since
the OYL acquisition, the Filtration Products segment continues to introduce new products, including a range of self supporting pleated air filters; premium residential air filters; a new range
of cleaners; a new extended surface pleated filter that exceeds the standards proposed in ASHRAE 62-1989R (American Society of Heating, Refrigeration and Air Conditioning Engineers); a
variety of replacement filters; and a range of self-cleaning filters for gas turbines.

Patents and Trademarks

The Company holds numerous patents related to the design and use of its equipment and systems that are considered important to the overall conduct of its business. The
Company's policy is to maintain patent protection for as many of its new products as possible. The Company believes that certain of its patents are important to distinguish the Company's equipment and
systems from those of its competitors; however, the Company does not consider any particular patent, or any groups of related patents, essential to its operations. The Company believes that its rights
in its patents are adequately protected. In fiscal year 2002, the Filtration Products segment obtained three patents related to filter media and filter design and construction.

The
Company owns several registered trademarks and operates under certain trade names that are important in the marketing of its products, including AmericanAirFilter®, AAF®,
McQuay®, McQuayServiceSM, HermanNelson®, Thermotank®, Hallmark®, J&E HallTM and Beth®. The Company believes that its rights to
use tradenames and trademarks are adequately protected. The Company's trademarks have various terms and expirations. The Company's policy is to renew significant trademarks prior to the expiration of
their current term.

Employees

As of June 30, 2002, the Company employed approximately 4,800 employees worldwide, with approximately 3,200 persons employed in the United States and 1,600 employed in
non-U.S. locations. The Company has a total of six labor union bargaining agreements, covering approximately 1,600 employees, of which two agreements, covering approximately 800
employees,will expire in fiscal year 2003. The Company currently believes that it will be able to obtain new labor agreements without interruption of
work when these agreements expire. The Company considers its relations with its employees to be good.

Environmental Regulations

Environmental laws that affect or could affect the Company's domestic operations include, among others, the Comprehensive Environmental Response, Compensation &
Liability Act ("CERCLA"), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act ("RCRA"), the Occupational Safety and Health Act, the National Environmental Policy Act,
the Toxic Substances
Control Act, any regulations promulgated under these acts and various other federal, state and local laws and regulations governing environmental matters. The Company's foreign operations are also
subject to various environmental statutes and regulations.

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Some
of the refrigerants used in HVAC&R equipment manufactured by the Company are regulated under international agreements and domestic and foreign laws and regulations governing stratospheric ozone
depleting chemicals.

In
1987, the United States became a signatory to the Montreal Protocol on Substances that Deplete the Ozone Layer. The Montreal Protocol has been amended several times since 1987, including in 1990
(the "London Amendments"), in 1992 (the "Copenhagen Amendments"), in 1997 (the "Montreal Amendments"), and in 1999 (the "Beijing Amendments"). Over 140 countries (including the United States) have
ratified the Montreal Protocol and the London Amendments. More than 100 countries (including the United States) have also agreed to abide by the Montreal Protocol as amended by the Copenhagen
Amendments. The United States has not yet ratified the Montreal and Beijing Amendments.

Under
the Montreal Protocol, as amended, the production and consumption (defined as production plus imports minus exports) of chlorofluorocarbons ("CFC") by participating industrialized countries is
banned, with limited exceptions, as of January 1, 1996. Additionally, the Montreal Protocol places a cap on the consumption of hydrochlorofluorocarbons ("HCFC") beginning on January 1,
1996 and mandates a gradual phaseout culminating in 2020, for participating industrialized countries, with a ten-year service tail exemption allowing industrialized countries to supply old
equipment with HCFCs during this period. In addition, certain countries, not including the United States, declared during December 1995 that they would take all appropriate measures to limit
the use of HCFCs as soon as possible.

The
federal Clean Air Act Amendments of 1990 establish minimum statutory timetables for the phaseout of production and consumption of ozone-depleting chemicals in the United States, and authorize the
EPA to establish regulatory timetables which meet or exceed those set forth in the Montreal Protocol, as amended. Pursuant to that authority, the EPA has adopted regulations mandating, among other
things and with limited exceptions, (a) a total ban on the consumption of CFCs by January 1, 1996 (b) a prohibition on the consumption of HCFC-142b and
HCFC-22 (a refrigerant used in some equipment manufactured by the Company) for new equipment manufactured on or after January 1, 2010, (c) a ban on consumption of
HCFC-142b and HCFC-22 for use in any equipment beginning on January 1, 2020, and (d) a phaseout of other HCFCs commencing in 2015 and culminating on
December 31, 2029.

The
manner in which the other signatories to the Montreal Protocol implement its requirements and regulate ozone-depleting refrigerants could differ from the approach and timetables adopted in the
United States.

With
respect to the ban on consumption of CFCs (which began January 1, 1996), the Company was a leader in the industry in redesign of its large cooling capacity central station system HVAC&R
equipment to utilize hydrofluorocarbon-134a ("HFC-134a"), a non-chlorinated refrigerant that is believed to be harmless to the ozone layer and is not scheduled for
elimination pursuant to the Montreal Protocol.

Substantially
all major manufacturers of HVAC&R products, including the Company, produce HVAC&R equipment for smaller cooling capacity applications that utilize HCFC-22. The Company (and
its competitors) must develop substitute refrigerants for use in HVAC&R products that currently use HCFC-22 prior to the phaseout of HCFC-22. Presently, the EPA has identified
several refrigerants that it considers acceptable HCFC-22 substitutes for certain uses applicable to some of the Company's products. The Company is conducting a comprehensive program to
introduce ozone friendly refrigerant for all products before the EPA regulations take effect.

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Item 2. Properties

A description of the Company's principal facilities with the approximate square feet of building space is summarized below. Unless otherwise specified below, the
facilities are devoted to manufacturing:

|Location                                      |  | Square Feet   |  | Leased/Owned |  | Principal Function                                                                                                              
|--------------------------------------------- |  | ------------- |  | ------------ |  | --------------------------------------------------------------------------------------------------------------------------------
|                                              |  |               |  |              |  |                                                                                                                                 
|Commercial Air Conditioning and Refrigeration
|Plymouth, Minnesota                           |  | 166,000       |  | Owned        |  | Americas headquarters, testing, research and development, and applied air handling systems business unit administrative facility
|Staunton, Virginia                            |  | 665,000       |  | Owned        |  | Chiller products                                                                                                                
|Owatonna, Minnesota                           |  | 68,000        |  | Owned        |  | Applied air handling system products                                                                                            
|Faribault, Minnesota                          |  | 244,000       |  | Owned        |  | Applied air handling system products                                                                                            
|Auburn, New York                              |  | 417,000       |  | Owned        |  | Applied terminal system products                                                                                                
|Scottsboro, Alabama                           |  | 270,000       |  | Owned        |  | Held for sale                                                                                                                   
|Cecchina, Italy                               |  | 175,000       |  | Owned        |  | Europe headquarters and chiller products                                                                                        
|Dayton, Ohio                                  |  | 100,000       |  | Leased       |  | Parts distribution                                                                                                              
|Dartford, England                             |  | 10,000        |  | Leased       |  | Headquarters for industrial refrigeration business                                                                              
|Derby, England                                |  | 17,000        |  | Leased       |  | Spares distribution and compressor remanufacturing facility                                                                     
|Birkenhead, England                           |  | 7,000         |  | Owned        |  | Compressor remanufacturing facility                                                                                             
|Doncaster, England                            |  | 5,300
7,900   |  | Owned
Leased |  | Motor rewinding facility
Cabling facility                                                                                       
|Filtration Products                          
|Louisville, Kentucky                          |  | 60,000        |  | Leased       |  | Americas headquarters                                                                                                           
|Atlanta, Georgia                              |  | 113,000       |  | Leased       |  | Replacement filters                                                                                                             
|Columbia, Missouri                            |  | 58,000
35,000 |  | Owned
Leased |  | Replacement filters
Replacement filters                                                                                         
|Hutchins, Texas                               |  | 340,000       |  | Owned        |  | Replacement filters                                                                                                             
|Elizabethtown, Pennsylvania                   |  | 160,000       |  | Leased       |  | Replacement filters                                                                                                             
|Fayetteville, Arkansas                        |  | 175,000       |  | Owned        |  | Replacement filters                                                                                                             
|Los Angeles, California                       |  | 70,000        |  | Leased       |  | Replacement filters                                                                                                             
|Lebanon, Indiana                              |  | 154,000       |  | Leased       |  | Replacement filters                                                                                                             
|Boucherville, Quebec                          |  | 62,000        |  | Owned        |  | Replacement filters                                                                                                             
|Cramlington, England                          |  | 160,000       |  | Owned        |  | Applied air handling systems and environmental products                                                                         
|Linton, England                               |  | 27,000        |  | Owned        |  | Replacement filters                                                                                                             
|                                              |  |               |  |              |  |                                                                                                                                 

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|Amsterdam, The Netherlands |  | 16,000          |  | Leased       |  | European headquarters and administrative office
|-------------------------- |  | --------------- |  | ------------ |  | -----------------------------------------------
|Emmen, The Netherlands     |  | 101,000
116,000 |  | Owned
Leased |  | Replacement filters
Replacement filters        
|Lubeck, Germany            |  | 19,000          |  | Leased       |  | Engineering office                             
|Gasny, France              |  | 109,000         |  | Owned        |  | Environmental products                         
|Ecoparc, France            |  | 46,000          |  | Leased       |  | Replacement filters                            
|Vitoria, Spain             |  | 40,000          |  | Owned        |  | Environmental products                         

In
addition to the properties above, the Company also leases numerous facilities worldwide for use as sales and service offices, regional warehouses and distribution centers. The
Company also leases 11,000 square feet for its Corporate headquarters in Louisville, Kentucky.

Substantially
all of the Company's property is subject to encumbrances. See Notes 5 and 7 to the Consolidated Financial Statements.

Item 3. Legal Proceedings

Environmental Proceedings

The Company is subject to potential liability under CERCLA, and other federal, state and local statutes and regulations governing the discharge of pollutants into the
environment and the handling and disposal of hazardous substances and waste. These statutes and regulations, amongst other things, impose potential liability on the Company for remediating
contamination arising from the Company's past and present operations and from former operations of other entities at sites later acquired and now owned by the Company. Many of the Company's facilities
have operated for many years, and substances which are or might be considered hazardous were generated, used, and disposed of at some locations, both on and off-site. The Company records
liabilities if, in management's judgment, environmental assessments or remedial efforts are probable and the costs can be reasonably estimated. These accrued liabilities are not discounted. Such
estimates are adjusted if necessary based on the completion of a formal study or the Company's commitment to a formal plan of action.

Based
upon estimates prepared by environmental consultants, at June 30, 2002 the Company estimates that related probable remediation costs will be approximately $11 million. The Company
believes that these remaining remediation costs have been adequately reserved for on the balance sheet and are included in other liabilities. The Company has settled or exhausted its remedies against
all of its insurance companies and any third parties, and expects no additional recoveries. No amounts have been recorded in the accompanying Consolidated Balance Sheets relating to any potential
recoveries. It is possible that environmental liabilities may arise in the future. The precise costs associated with such liabilities are difficult to predict at this time.

Miscellaneous

The Company is involved in various other lawsuits arising out of the conduct of its business. The Company believes that the outcome of any such pending claims or proceedings
will not have a material adverse effect upon its business or financial condition. The Company maintains various insurance policies regarding many of such matters, including general liability and
property damage insurance, as well as product liability, workers' compensation and other policies, which it believes provide adequate coverage for its operations. See Note 14 to the
Consolidated Financial Statements.

Item 4. Submission of Matters to a Vote of Security Holders

On April 24, 2002, OYL, the Company's sole shareholder, elected the following persons as members of the Board of Directors of the Company to serve until
the next annual meeting of the stockholder: Quek Leng Chan, Ho Nyuk Choy, Kwek Leng San and Liu Wan Min.

10

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Part II

Item 5. Market for Registrant's Common Stock and Related Stockholder Matters

The Company's common stock is owned by a single shareholder, OYL. There is no public trading market for the Company's common stock.

Item 6. Selected Financial Data

The following table sets forth selected consolidated historical financial data of the Company for the fiscal years ended June 30, 2002, 2001, 2000, 1999,
and 1998. The Company's fiscal year ends on the Saturday closest to June 30. For clarity of presentation in the consolidated financial statements, all fiscal years are shown to begin on
July 1 and end on June 30.

The
table should be read in conjunction with Item 7"Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and
the related Notes thereto.

Selected Financial Data
(Dollars in thousands)

|                                    |                                   | Years Ended June 30, |  
|----------------------------------- | --------------------------------- | -------------------- | -
|
|
|INCOME STATEMENT DATA:              |                                   |                      |  
|                                    | Net sales                         |                      | $
|                                    | Cost of sales                     |                      |  
|                                    |                                   |                      |  
|                                    | Gross profit                      |                      |  
|                                    | Operating expenses                |                      |  
|                                    | Restructuring charges             |                      |  
|                                    |                                   |                      |  
|                                    | Income from operations            |                      |  
|                                    | Interest expense, net             |                      |  
|                                    | Other (income) expense, net       |                      |  
|                                    |                                   |                      |  
|                                    | Income (loss) before income taxes |                      |  
|                                    | Income taxes                      |                      |  
|                                    | Minority interest earnings        |                      |  
|                                    |                                   |                      |  
|                                    | Net income (loss)                 |                      | $
|                                    |                                   |                      |  
|BALANCE SHEET DATA (end of period): |                                   |                      |  
|                                    | Working capital                   |                      | $
|                                    | Total assets                      |                      |  
|                                    | Total debt                        |                      |  
|                                    | Stockholder's equity              |                      |  
|OTHER DATA:                         |                                   |                      |  
|                                    | EBITDA(a)                         |                      | $
|                                    | EBITDA margin(a)                  |                      |  
|                                    | Depreciation and amortization     |                      | $
|                                    | Capital expenditures              |                      |  
|                                    | Net cash provided by (used in)    |                      |  
|                                    |                                   | Operating activities |  
|                                    |                                   | Investing activities |  
|                                    |                                   | Financing activities |  

11

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FOOTNOTES TO TABLE OF SELECTED FINANCIAL DATA

EBITDA represents income (loss) before interest, income taxes, and depreciation and amortization. This statistic and its results as a percentage of revenue may not be
comparable to similarly titled measures reported by other companies. EBITDA is not a measurement of financial performance under Generally Accepted Accounting Principles in the United States of America
("US GAAP") and is not presented as a substitute for net income or cash flow from operating, investing or financing activities determined in accordance with US GAAP. The Company has included
information concerning EBITDA as it is relevant for debt covenant analysis and because certain investors use it as a measure of the Company's ability to service its debt.

12

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies

The discussion and analysis of the Company's financial condition and results of operations are based upon the Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of the Consolidated Financial Statements requires management to make estimates and judgments
that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results could differ from these estimates under
different assumptions or conditions. Note 2 to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated
Financial Statements. The Company believes the following critical accounting policies affect its more significant judgments and estimates in the preparation of its Consolidated Financial Statements.

Revenue Recognition

The Company recognizes revenue when it is realized or realizable and earned. Revenues are generally recognized as products are shipped and title passes to the customer or
services are rendered. Revenues and costs associated with long-term contracts are recognized on the percentage-of-completion method. Provisions are recorded for
losses on contracts whenever it is estimated that costs will exceed contract value. A significant change to any of these estimates could have a material effect on the Company's financial position and
results of operations.

Inventory Valuation

Inventories are valued at the lower of cost or market. The Company maintains reserves to write down its inventory for estimated obsolescence or unmarketable inventory equal to
the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual demand or market conditions in the future are
less favorable than those projected by management, additional inventory write-downs may be required.

Product Warranties

The Company offers certain warranties with the sales of its products. Warranties are recorded as a liability on the balance sheet as charges to current expense for estimated
normal warranty costs and, if applicable, for specific performance issues known to exist on products sold. The expenses estimated to be incurred are provided at the time of sale, based primarily upon
estimates derived from experience..
To the extent the Company experiences a change in warranty claim activity or costs associated with servicing those claims, the product warranty liability will change resulting in a change in the
results of operations in the period in which the change in estimate occurs.

Results of Operations

The following should be read in conjunction with Item 6"Selected Financial Data" and the Consolidated Financial Statements and the Notes thereto.

2002 Compared to 2001

Consolidated net sales were $805.7 million for the fiscal year ended June 30, 2002 compared to $870.9 million for the prior year, a decrease of
$65.2 million. In September 2001, the Company sold its Singapore subsidiary, which had sales of $3.6 million and $20.6 million in fiscal 2002 and 2001, respectively. In
January 2002, the Company sold its Korean joint venture, which had sales of $5.9 million and $10.2 million in fiscal 2002 and 2001, respectively. Additionally, the Company

13

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estimates that sales have increased by approximately $0.9 million for fiscal 2002 due to the impact of favorable currency trends in translating European sales. Excluding the net sales
attributable to the operations in Singapore and Korea for the applicable periods of fiscal 2001 and currency impact, net sales for fiscal 2002 decreased $44.3 million or 5.2%, as compared to
the prior year. Income from operations was $29.8 million or 3.7% of net sales compared to $35.4 million or 4.1% for fiscal 2002 and 2001, respectively. Gross margin decreased year over
year from 26.6% of net sales to 26.0% primarily due to lower volumes, competitive pricing pressures and sales mix. Selling, general and administrative expenses as a percent of net sales increased from
20.4% for fiscal 2001 to 20.9% for fiscal 2002 as a result of an increase in freight costs, marketing efforts and investments in research and development, partially offset by lower commissions,
improved warranty experience and continued focus on cost control.

Commercial Air Conditioning and Refrigeration

Net sales for the Commercial Air Conditioning and Refrigeration segment were $487.5 million in fiscal 2002 compared to $535.0 million in fiscal 2001, a decrease
of $47.5 million. The Company estimates that sales have increased approximately $1.3 million for fiscal 2002 due to the impact of favorable currency trends in translating European sales.
Excluding the currency impact, sales decreased $48.8 million or 9.1% primarily due to decreased sales in North America.

North
America fiscal 2002 net sales decreased approximately 10.0%. This decrease was primarily attributable to the general economic slowdown affecting all equipment product lines, while parts and
service revenues improved slightly. International net sales in fiscal 2002 decreased 6.0%, excluding the impact of the favorable currency trends on translating European sales activity. The decrease is
primarily the result of the restructuring efforts undertaken at the Company's United Kingdom operations in fiscal 2001, partially offset by increased volumes in its other European operations.

Backlog
for the Commercial Air Conditioning and Refrigeration segment was $98 million and $111 million at June 30, 2002 and 2001, respectively. The decrease in backlog was
primarily attributable to general market softness impacting equipment product lines, particularly in North America.

Gross
margin as a percent of sales increased from 25.9% in fiscal 2001 to 26.4% in fiscal 2002. The increase in gross margin percentage was primarily due to the closure of the Company's Scottsboro,
Alabama plant and successful consolidation of its applied air handling manufacturing operations in Minnesota, and the benefits of the restructuring actions taken in its United Kingdom operations,
partially offset by competitive pricing pressures in all equipment product lines. Selling, general and administrative expenses excluding amortization and restructuring increased from 20.2% of net
sales in fiscal 2001 to 21.3% in fiscal 2002 primarily due to an increase in freight costs, marketing efforts and investments in research and development, partially offset by lower commissions,
improved warranty experience and continued focus on cost control. Operating income excluding amortization and restructuring was $24.9 million, or 5.1% of net sales, in fiscal 2002 as compared
to $30.2 million, or 5.6% of net sales, in fiscal 2001.

Filtration Products

Net sales for the Filtration Products segment were $321.7 million in fiscal 2002, a decrease of $18.9 million from $340.6 million in fiscal 2001. This
decrease is primarily attributable to the sale of the Company's Singapore subsidiary in September 2001 and Korean joint venture in January 2002. Additionally, the Company estimates that
sales have decreased approximately $0.4 million for fiscal 2002 due to the impact of unfavorable currency trends in translating European sales. Excluding these three items, net sales increased
$3.2 million or 1.0%.

Domestic
operations net sales decreased 7.5% in fiscal 2002 compared to fiscal 2001. The decline was primarily attributable to the market slowdown in the construction of cleanroom capacity, partially
offset

14

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by an increase in MFAS market activity. Excluding the currency impact and sale of the Company's Singapore subsidiary and Korean joint venture, international sales volume increased 10.0% from fiscal
2001. The increase is primarily attributable to strong MFAS activity in Europe driven by the gas turbine market, partially offset by a decrease in APCS projects in Latin America.

Gross
margins as a percentage of net sales decreased to 25.5% from 27.5% for fiscal years 2002 and 2001, respectively. The decrease in gross margin percentage was primarily the result of sales mix
between MFAS and replacement filter sales and continued competitive pricing pressures in the North American replacement filter business. Selling, general and administrative expenses excluding
amortization and restructuring as a percentage of net sales increased from 19.8% in fiscal 2001 to 20.3% in fiscal 2002 primarily due to an increase in research and development efforts and higher
warranty costs, partially offset by lower commissions and continued focus on cost control. Operating income excluding amortization and restructuring was $16.7 million, or 5.2% of net sales, in
fiscal year 2002, as compared to $26.3 million, or 7.7% of net sales, for fiscal year 2001.

Non-operating Expenses

Interest expense was $14.5 million for fiscal 2002 compared to $19.4 million for fiscal 2001. The decrease in interest expense is primarily due to reduced
borrowing levels and a decrease in interest rates. During fiscal 2002 and 2001, the Company had net other income of $3.6 million and $4.5 million, respectively. As more fully discussed
in Note 18 to the Consolidated Financial Statements, other income in fiscal 2002 is primarily attributable to the reversal of an INPS litigation accrual of approximately $2.6 million and
the reduction of the Company's environmental reserve of approximately $2.3 million based on estimates provided by its environmental consultants. Additionally, the Company sold its Singapore
subsidiary and Korean joint venture, recording a loss of approximately $0.5 million and realizing accumulated foreign currency translation adjustment losses of approximately
$0.6 million. During fiscal 2001, other income of approximately $4.5 million primarily represented the gain associated with the sale of the Company's property in Dartford, United
Kingdom. The remaining components of other income primarily result from foreign currency and equity affiliate transactions.

The
provision for income taxes was $6.9 million and the effective tax rate was 36.9% for fiscal 2002 compared to an income tax provision of $8.5 million and an effective tax rate of
41.6% for fiscal 2001. The effective tax rate differs from the statutory rate primarily due to the effect of nondeductible goodwill amortization and foreign losses not benefited.

2001 Compared to 2000

Consolidated net sales were $870.9 million for the fiscal year ended June 30, 2001 compared to $867.7 million for the prior year, an increase of
$3.2 million. In October 1999, the Company sold its commercial air conditioning operation in France, which had sales of $11.6 million in fiscal 2000. Additionally, the Company
estimates that sales have decreased by approximately $23.3 million for fiscal 2001 due to the impact of unfavorable currency trends in translating European sales. Excluding the net sales
attributable to the operation in France for fiscal 2000 and currency impact, net sales for fiscal 2001 increased $38.1 million or 4.5%, as compared to the prior year. Income from operations was
$35.4 million or 4.1% of net sales compared to $26.2 million or 3.0% for fiscal 2001 and 2000, respectively. Gross margin increased year over year from 26.1% of net sales to 26.6% driven
by improved manufacturing productivity and material cost reduction programs. Selling, general and administrative expenses as a percent of net sales decreased from 21.4% for fiscal 2000 to 20.4% for
fiscal 2001 as a result of cost control programs and lower commission and warranty expense.

15

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Commercial Air Conditioning and Refrigeration

Net sales for the Commercial Air Conditioning and Refrigeration segment were $535.0 million in fiscal 2001 compared to $540.9 million in fiscal 2000, a decrease
of $5.9 million. The decrease is partially due to the sale of the commercial air conditioning and refrigeration operation in France in 1999. Additionally, the Company estimates that sales have
decreased by $5.7 million for fiscal 2001 due to the impact of unfavorable currency trends in translating European sales. Excluding these two items, sales increased $11.4 million or 2.2%
primarily due to increased North America sales.

North
America fiscal 2001 net sales increased approximately 3.5%. This increase was primarily attributable to increased rooftop applied air handling product demand and increased service revenue,
partially offset by decreased sales in applied terminal systems. Applied air handling sales increased 7.8% from the prior year, service revenues increased 13.8% and applied terminal systems sales
decreased 7.6%.

International
net sales in fiscal 2001 decreased 2.4%, excluding the impact of the sale of the operation in France and the impact of the unfavorable currency trends on translating European sales
activity. The decrease is attributable to the ongoing restructuring in the industrial refrigeration business in the United Kingdom where the Company has exited from certain non-core
business.

Backlog
for the Commercial Air Conditioning and Refrigeration segment was $111 million and $124 million at June 30, 2001 and 2000, respectively. The decrease in backlog was
primarily attributable to the softening of office building construction, negatively impacting air handling volume.

Operating
income excluding amortization and restructuring was $30.2 million, or 5.6% of net sales, in fiscal 2001 as compared to $13.0 million, or 2.4% of net sales, in fiscal 2000. The
gross margin rate increased by 1.6 percentage points from the prior year primarily due to improved manufacturing efficiency in the domestic chiller business unit and increased field service
volume. Selling, general and administrative expenses as a percent of sales decreased 1.7 percentage points with the majority of the improvement resulting from lower commission and warranty
expense.

Filtration Products

Net sales for the Filtration Products segment were $340.6 million in fiscal 2001, an increase of $12.0 million from the net sales of $328.6 million in
fiscal 2000. The Company estimates that sales have decreased approximately $17.6 million for fiscal 2001 due to the impact of unfavorable currency trends in translating European sales.
Excluding the currency impact, net sales increased $29.7 million or 9.0%.

Domestic
operations net sales increased 6.4% in fiscal 2001 compared to fiscal 2000. The growth was primarily attributable to continued strong clean room market demand and an increase in MFAS North
America projects. International sales volume increased 11.1% from fiscal 2000, excluding the impact of the unfavorable currency trends on translating European sales activity. The increase is primarily
attributable to improved air filtration product sales in Asia and an increase in APC systems volume in Latin America.

Operating
income excluding amortization and restructuring was $26.3 million in fiscal year 2001, a decrease of $1.7 million or 6.1%, from $28.0 million for fiscal year 2000.
Operating income excluding amortization and restructuring as a percent of sales decreased from 8.5% in fiscal 2000 to 7.7% in fiscal 2001. Gross margins decreased to 27.5% from 29.0% as a percentage
of net sales for the fiscal years 2001 and 2000, respectively. The decrease in gross margin percentage was primarily the result of competitive pricing pressures in North America and Europe in the
replacement filter business. Selling, general and administrative expenses as a percentage of sales decreased 0.6 percentage points in fiscal 2001 from fiscal 2000, primarily due to continued
management focus on overhead cost reduction.

16

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Non-operating Expenses

Interest expense was $19.4 million for fiscal 2001 compared to $21.6 million for fiscal 2000. The decrease in interest expense is primarily due to the reduced
borrowing levels. During fiscal 2001 and 2000, the Company had net other income (expense) of $4.5 million and $(1.6) million, respectively. The increase in income in fiscal 2001 is primarily
related to the sale of property in Dartford, United Kingdom associated with its industrial refrigeration business resulting in a gain of $4.5 million. Additionally, the Company repurchased
$16.2 million of its Senior Notes at a discount resulting in a net gain of $0.4 million. In fiscal 2000, the Company recorded a $1.3 million loss related to the sale of the
commercial air conditioning operation in France, which was completed in October 1999. The remaining components of other income and expenses primarily result from foreign currency and equity
affiliate transactions.

The
provision for income taxes was $8.5 million and the effective tax rate was 41.6% for fiscal 2001 compared to an income tax provision of $2.6 million and an effective tax rate of
87.9% for fiscal 2000.
The effective tax rate differs from the statutory rate primarily due to the effect of nondeductible goodwill amortization and foreign losses not benefited.

Sale of Businesses and Restructuring

On
an on-going basis the Company seeks to evaluate its various businesses and product lines with the objective of enhancing shareholder value. Consistent with this strategy, the Company
intends to pursue global business opportunities that are synergistic with the Company's core business or exit low value-added and non-synergistic operations.

As
more fully described in Note 16 to the Consolidated Financial Statements, the Company sold its Singapore subsidiary for approximately $13.1 million in September 2001. As more
fully described in Note 18 to the Consolidated Financial Statements, the Company sold its 54% ownership interest in its Korean joint venture for approximately $1.6 million in
January 2002. During fiscal year 2000, the Company sold its commercial air conditioning and refrigeration business in France for $13.0 million.

The
Company also seeks to identify opportunities to improve its cost structure on an on-going basis. These opportunities may involve the elimination of certain positions or the closure of
manufacturing facilities. As more fully described in Note 9 to the Consolidated Financial Statements, the Company recognized restructuring charges of $0.5, $7.2, and $3.5 million during
fiscal years 2002, 2001, and 2000, respectively. These restructuring charges relate to actions that have been implemented in both the Commercial Air Conditioning and Refrigeration and Filtration
Products segments. The Company continues to identify and evaluate other opportunities to improve its cost structure and may recognize additional restructuring charges in the future.

Liquidity and Capital Resources

Cash generated from operating activities and supplemented when necessary by short-term credit facilities provides the Company's liquidity needs. For the year ended
June 30, 2002, net cash provided by operating activities was $40.6 million as compared to a generation of $29.0 million for the year ended June 30, 2001. For the fiscal
year ended June 30, 2002, net cash provided by investing activities of $5.2 million included $9.7 million in capital expenditures offset by cash proceeds of $14.9 million
from the sale of businesses in Singapore and Korea, as further explained below.

A
portion of the Company's financing needs is provided by a Bank Credit Agreement which includes a Revolving Credit Facility of $90 million and a Term Loan with a balance of
$12.9 million as of June 30,
2002. At June 30, 2002, the Company had borrowed $31.8 million under the Revolving Credit Facility, $8.9 million in letters of credit were issued and outstanding, and the Company
had remaining borrowing availability of $49.3 million. The Bank Credit Agreement expires in February 2003.

17

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As
of June 30, 2002, the outstanding principal amount of the Company's Senior Unsecured Notes due February 15, 2003 ("Senior Notes") was $93.8 million.

As
of the filing date of this annual report, the Company is in the process of finalizing the terms of and completing the documentation related to a new bank credit agreement ("the Refinancing"). The
proceeds of the Refinancing will be sufficient to replace its existing Bank Credit Agreement and repay its Senior Notes, both of which mature in February 2003. The Company is confident it will
consummate the anticipated Refinancing prior to the maturity of the existing Bank Credit Agreement and Senior Notes. After consummation of the Refinancing and retirement of the Senior Notes, the
Company will remain leveraged to a certain extent and its debt service obligations will continue to be substantial. If the Refinancing is not completed as anticipated, or if the Company's sources of
funds otherwise were to fail to satisfy the Company's requirements, the Company would need to refinance its existing debt or obtain additional financing. There is no assurance that any such new
financing alternatives would be available and, in any case, such new financing (if available) could be expected to be more costly and restrictive than the debt agreements currently in place.

Total
net payments on short-term and long-term debt for the year ended June 30, 2002 were $47.1 million which is a result of $8.3 million in payments on
long-term debt, $15.0 million in repurchases of Senior Notes, net payments under short-term arrangements of $26.2 million and $2.4 million in proceeds from
the issuance of new long-term debt. Total debt of the Company has been reduced from $201.5 million at June 30, 2001 to $156.4 million at June 30, 2002.

In
September 2001, the Company sold its Singapore subsidiary for approximately $13.1 million. In January 2002, the Company sold its 54% ownership interest in its Korean joint
venture for approximately $1.6 million. In October 2000, cash proceeds from the sale of property in the United Kingdom of $6.9 million was used to reduce short-term
borrowings. In October 1999, the Company sold its commercial air conditioning and refrigeration business in France for $13.0 million with the proceeds being used to reduce debt.

Planned
capital expenditures are approximately $13 and $14 million for each of fiscal 2003 and 2004, respectively.

The
ongoing costs of compliance with existing environmental laws and regulations and the estimated costs to clean up and monitor existing contaminated sites is not expected to have a material adverse
effect on the Company's capital expenditures or financial position. See "Legal Proceedings" and Note 14 to the Consolidated Financial Statements.

The
Company has manufacturing facilities and sells products in various countries around the world. As a result, the Company is exposed to movements in exchange rates of various currencies against the
U.S. dollar. Management's response to currency movements varies (e.g., changes in pricing actions, changes in cost structures and changes in hedging strategy). Currently, the Company enters into
short-term forward exchange contracts to hedge its exposure to currency fluctuations affecting certain foreign currency denominated trade payables and certain intercompany debt of its
foreign subsidiaries. The Company will continue to report, from time to time, fluctuations in both earnings and equity due to foreign exchange movements since it is not cost-effective to
establish a hedging strategy that eliminates all risks.

Management
believes, based upon current levels of operations and forecasted earnings, that cash flows from operations, together with borrowings under the Bank Credit Agreement and the Refinancing (see
Note 7 to the Consolidated Financial Statements) and other short-term credit facilities, will be adequate to make payments of principal and interest on debt, to permit anticipated
capital expenditures and to fund working capital requirements and other cash needs.

18

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New Accounting Standards

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141,Business
Combinations, and No. 142,Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance
with the Statements. Other intangible assets will continue to be amortized over their useful lives.

The
Company will adopt SFAS 142 in the first quarter of fiscal 2003. Application of the nonamortization provisions of Statement 142 is expected to result in a decrease in amortization expense
of $6.3 million ($5.1 million, net of taxes) in fiscal 2003. The Company does not anticipate a change in the useful lives of its finite lived intangible assets, and the Company will
reclassify an assembled workforce intangible asset with an unamortized balance of approximately $3.1 million to goodwill at the date of adoption. During the first half of fiscal 2003, the
Company will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets and determine what effect, if any, the results of these tests will have on the
results of operations and financial position of the Company. Based upon a preliminary evaluation, however, the Company believes that no impairment will result.

In
August 2001, the Financial Accounting Standards Board issued SFAS No. 143,Accounting for Asset Retirement Obligations, which is
effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses the financial accounting and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. Adoption of SFAS No. 143 is not expected to materially impact the Company's consolidated financial statements.

In
August 2001, the Financial Accounting Standards Board issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes
SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of Accounting Principles Board Opinion No. 30,Reporting the Results of OperationsReporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that
Opinion). SFAS No. 144 also amends Accounting Research Bulletin No. 51,Consolidated Financial Statements, to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. The provisions of this statement are effective for fiscal years beginning after December 15, 2001. Adoption of SFAS
No. 144 is not expected to materially impact the Company's consolidated financial statements.

In
April 2002, the Financial Accounting Standards Board issued SFAS No. 145,Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections, which is effective for fiscal years beginning after May 15, 2002. SFAS 145 addresses the financial accounting and
reporting for a number of areas, including gains and losses derived from the extinguishment of debt and the treatment of sale-leaseback transactions. Adoption of SFAS No. 145 is not
expected to materially impact the Company's consolidated financial statements.

In
June 2002, the Financial Accounting Standards Board issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal
Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 supercedes Emerging Issues
Task Force (EITF) Issue 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be

19

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measured and recorded at fair value. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption permitted.
Adoption of SFAS No. 146 is not expected to materially impact the Company's consolidated financial statements.

Seasonality

The demand for certain replacement filter products, particularly residential filters, is seasonal in nature. Normally, sales of residential filters are relatively low in the
winter and early spring with an increase in sales during the late spring, summer and fall months. Replacement air filter sales in the commercial and industrial markets are also higher during the
spring and summer months, although these sales are driven primarily by maintenance cycles. Sales of some air filtration equipment are seasonal to the extent that construction activity increases during
the warmer months.

Sales
of commercial air conditioning equipment are generally not seasonal. However, the Company's air conditioning service business is seasonal in nature due to off-season maintenance
cycles and service needs during the summer months. Demand for unitary air conditioning equipment in the small unit commercial new construction markets varies according to the season, with increased
demand generally from March to October. Demand in the small unit commercial replacement markets is impacted by seasonal temperature fluctuations. Sales of unit ventilators for educational facilities
tend to increase in the second and third calendar quarters of any given year in part due to the start of a new school year as well as the availability of bond or other funds budgeted for capital
expenditures.

Euro Conversion

Management has implemented systems for the conversion to the Euro effective July 1, 2001. The Euro conversion has not had a material effect on the Company's operating
results or competitive position. The Company will continue to investigate opportunities for European-wide system infrastructures.

Forward-Looking Statements

When used in this report the words "believes," "anticipates," "estimates," "plans" and "expects" and similar expressions are intended to identify forward-looking statements.
These forward-looking statements are intended to provide management's current expectations or plans for the future operating and financial performance of the Company, based on assumptions currently
believed to be valid. A variety of factors could cause actual results to differ materially from those anticipated in the Company's forward-looking statements, some of which include risk factors
previously discussed in this and other SEC reports filed by the Company. These risk factors include, but are not limited to, economic conditions in the United States, changes in world financial
markets, environmental laws and regulations, risks associated with currency fluctuations, the ability to refinance its existing debt, a weakening in Asian markets, unforeseen competitive pressures,
warranty expenses, market acceptance of new products, unseasonably cool spring or summer weather, unforeseen difficulties in maintaining mutually beneficial relationships with strategic partnerships
and alliances, and the results of restructuring activities. Readers are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date on which those
statements are made. The Company undertakes no obligation to update any forward-looking statements to reflect unanticipated events or circumstances occurring after that date.

20

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Item 7A. Quantitative and Qualitative Disclosure about Market Risk

The Company's earnings are affected by fluctuations in the value of the U.S. dollar, as compared to foreign currencies, as a result of transactions in foreign
markets. At June 30, 2002, the result of a uniform 10% strengthening in the value of the dollar relative to the currencies in which the Company's transactions are denominated would result in a
decrease in operating income of approximately $0.4 million for the year ending June 30, 2002. This calculation assumes that each exchange rate would change in the same direction relative
to the U.S. dollar. In addition to the direct effects of changes in exchange rates, which are a changed dollar value of the resulting sales, changes in exchange rates also affect the volume of sales
or the foreign currency sales price as competitors' services become more or less attractive. The Company's sensitivity analysis of the effects of changes in foreign currency exchange rates does not
factor in a potential change in sales levels or local currency prices.

Total
short-term and long-term debt outstanding at June 30, 2002 was $156.4 million, consisting of $51.8 million in variable rate borrowing and
$104.6 million in fixed rate borrowing. At this level of variable rate borrowing, a hypothetical 10% increase in interest rates would decrease pre-tax current year earnings by
approximately $0.2 million for the year ended June 30, 2002. At June 30, 2002, the fair value of the Company's fixed rate debt outstanding was estimated at $104.6 million
using quoted market price. A hypothetical 10% change in interest rates would not result in a material change in the fair value of the Company's fixed rate debt. The Company may, at times, seek to
limit the impacts of interest rate fluctuations on its debt through the use of interest rate derivative instruments. See Note 8 to the Consolidated Financial Statements for further information.

21

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Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS



|                                                                                                   
|---------------------------------------------------------------------------------------------------
|Financial Statements                                                                               
|Reports of the Independent Auditors                                                                
|Consolidated Balance Sheetsas of June 30, 2002 and 2001                                           
|Consolidated Statements of IncomeYears ended June 30, 2002, 2001 and 2000                         
|Consolidated Statements of Cash FlowsYears ended June 30, 2002, 2001 and 2000                     
|Consolidated Statements of Stockholder's EquityYears ended June 30, 2002, 2001 and 2000           
|Consolidated Statements of Comprehensive IncomeYears ended June 30, 2002, 2001 and 2000           
|Schedule IIValuation and Qualifying Accounts and ReservesYears ended June 30, 2002, 2001 and 2000

22

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REPORT OF INDEPENDENT AUDITORS

The
Board of Directors and Stockholder
AAF-McQuay Inc.:

We
have audited the accompanying consolidated balance sheet of AAF-McQuay Inc. and subsidiaries as of June 30, 2002, and the related consolidated statements of income, cash
flows, stockholder's equity and comprehensive income for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 14(a) as of and for the year ended
June 30, 2002. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audit.

We
conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AAF-McQuay Inc. and subsidiaries as of
June 30, 2002, and the results of their operations and their cash flows for the year ended June 30, 2002, in conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

| | GRAPHIC
| | -------

Louisville,
Kentucky
August 5, 2002

23

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REPORT OF INDEPENDENT AUDITORS

The
Board of Directors and Stockholder
AAF-McQuay Inc.

We
have audited the accompanying consolidated balance sheet of AAF-McQuay Inc. and subsidiaries as of June 30, 2001, and the related consolidated statements of income, cash
flows, stockholder's equity and comprehensive income for each of the two years in the period ended June 30, 2001. Our audits also included the information for each of the two years in the
period ended June 30, 2001 included in the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards 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. An audit
also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AAF-McQuay Inc. and subsidiaries at
June 30, 2001, and the consolidated results of their operations and their cash flows for each of the two years in the period ended June 30, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the information for each of the two years in the period ended June 30, 2001 included in the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

GRAPHIC

Louisville,
Kentucky
August 10, 2001

24

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AAF-McQUAY INC. AND SUBSIDIARIES    CONSOLIDATED BALANCE SHEETS(Dollars in thousands, except per share data)

|                                                                              |                                                                                             | June 30, |                           
|----------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------- | -------- | --------------------------
|
|ASSETS                                                                        |                                                                                             |          |                           
|Current assets:                                                               |                                                                                             |          |                           
|                                                                              | Cash and cash equivalents                                                                   |          | $                         
|                                                                              | Accounts receivable                                                                         |          |                           
|                                                                              | Inventories                                                                                 |          |                           
|                                                                              | Other current assets                                                                        |          |                           
|                                                                              |                                                                                             |          |                           
|                                                                              |                                                                                             |          | Total current assets      
|Property, plant and equipment, net                                            |                                                                                             |          | 110,475                   
|Cost in excess of net assets acquired and other identifiable intangibles, net |                                                                                             |          | 184,165                   
|Other assets and deferred charges                                             |                                                                                             |          | 15,611                    
|                                                                              |                                                                                             |          |                           
|                                                                              |                                                                                             |          | Total assets              
|                                                                              |                                                                                             |          |                           
|LIABILITIES AND STOCKHOLDER'S EQUITY                                          |                                                                                             |          |                           
|Current liabilities:                                                          |                                                                                             |          |                           
|                                                                              | Short-term borrowings                                                                       |          | $                         
|                                                                              | Current maturities of long-term debt                                                        |          |                           
|                                                                              | Accounts payable, trade                                                                     |          |                           
|                                                                              | Accrued warranty                                                                            |          |                           
|                                                                              | Accrued employee compensation                                                               |          |                           
|                                                                              | Other accrued liabilities                                                                   |          |                           
|                                                                              |                                                                                             |          |                           
|                                                                              |                                                                                             |          | Total current liabilities 
|Long-term debt                                                                |                                                                                             |          | 9,940                     
|Deferred income taxes                                                         |                                                                                             |          | 21,057                    
|Other liabilities                                                             |                                                                                             |          | 55,242                    
|                                                                              |                                                                                             |          |                           
|                                                                              |                                                                                             |          | Total liabilities         
|Stockholder's equity:                                                         |                                                                                             |          |                           
|                                                                              | Preferred stock ($1 par value; 1,000 shares authorized, none issued)                        |          |                           
|                                                                              | Common stock ($100 par value; 8,000 shares authorized, 2,497 shares issued and outstanding) |          |                           
|                                                                              | Additional paid-in capital                                                                  |          |                           
|                                                                              | Retained earnings                                                                           |          |                           
|                                                                              | Accumulated other comprehensive income (loss)                                               |          |                           
|                                                                              |                                                                                             |          |                           
|                                                                              |                                                                                             |          | Total stockholder's equity
|                                                                              |                                                                                             |          |                           
|Total liabilities and stockholder's equity                                    |                                                                                             | $        | 613,336                   
|                                                                              |                                                                                             |          |                           

See
Notes to Consolidated Financial Statements.

25

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AAF-McQUAY INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF INCOME(Dollars in thousands)

|                              |                                     | Years Ended June 30,
|----------------------------- | ----------------------------------- | --------------------
|
|Net sales                     |                                     | $                   
|Cost of sales                 |                                     |                     
|                              |                                     |                     
|Gross profit                  |                                     |                     
|Operating expenses:           |                                     |                     
|                              | Selling, general and administrative |                     
|                              | Amortization of intangible assets   |                     
|                              | Restructuring charges               |                     
|                              |                                     |                     
|                              |                                     |                     
|                              |                                     |                     
|Income from operations        |                                     |                     
|Interest expense, net         |                                     |                     
|Other (income) expense, net   |                                     |                     
|                              |                                     |                     
|Income before income taxes    |                                     |                     
|Income taxes                  |                                     |                     
|Minority interest in earnings |                                     |                     
|                              |                                     |                     
|Net income                    |                                     | $                   
|                              |                                     |                     

See
Notes to Consolidated Financial Statements.

26

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AAF-McQUAY INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in thousands)

|                                                     |                                                                     | Years Ended June 30,                           |        
|---------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------- | -------
|
|Cash flows from operating activities:                |                                                                     |                                                |        
|                                                     | Net income                                                          |                                                | $      
|                                                     | Adjustments to reconcile to cash from operating activities:         |                                                |        
|                                                     | Depreciation and amortization                                       |                                                |        
|                                                     | Gain (loss) on the sale of business/property                        |                                                |        
|                                                     | Deferred income taxes                                               |                                                |        
|                                                     | Other non-cash items, net                                           |                                                |        
|                                                     | Changes in operating assets and liabilities:                        |                                                |        
|                                                     |                                                                     | Accounts receivable                            |        
|                                                     |                                                                     | Inventories                                    |        
|                                                     |                                                                     | Accounts payable and other accrued liabilities |        
|                                                     |                                                                     | Other assets/liabilities, net                  |        
|                                                     |                                                                     |                                                |        
|Net cash flows from operating activities             |                                                                     |                                                | 40,648 
|Cash flows from investing activities:                |                                                                     |                                                |        
|                                                     | Capital expenditures                                                |                                                |        
|                                                     | Acquisition of additional interest in joint venture, net of cash    |                                                |        
|                                                     | Proceeds from the sale of business/property                         |                                                |        
|                                                     |                                                                     |                                                |        
|Net cash flows from investing activities             |                                                                     |                                                | 5,213  
|Cash flows from financing activities:                |                                                                     |                                                |        
|                                                     | Net borrowings (repayments) under short-term borrowing arrangements |                                                |        
|                                                     | Payments on long-term debt                                          |                                                |        
|                                                     | Proceeds from issuance of long-term debt                            |                                                |        
|                                                     | Repurchase of senior notes                                          |                                                |        
|                                                     | Payment of debt issuance costs                                      |                                                |        
|                                                     |                                                                     |                                                |        
|Net cash flows from financing activities             |                                                                     |                                                | (47,073
|Effect of exchange rate changes on cash              |                                                                     |                                                | (1,221 
|                                                     |                                                                     |                                                |        
|Net increase (decrease) in cash and cash equivalents |                                                                     |                                                | (2,433 
|Cash and cash equivalents at beginning of year       |                                                                     |                                                | 14,254 
|                                                     |                                                                     |                                                |        
|Cash and cash equivalents at end of year             |                                                                     | $                                              | 11,821 
|                                                     |                                                                     |                                                |        

See
Notes to Consolidated Financial Statements.

27

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AAF-McQUAY INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY(Dollars in thousands)

|                                                           |  |   |     |  |   |         |  | Accumulated Other
Comprehensive
Income (Loss) |        |  |  
|---------------------------------------------------------- |  | - | --- |  | - | ------- |  | --------------------------------------------- | ------ |  | -
|
|Balance, June 30, 1999                                     |  | $ | 250 |  | $ | 179,915 |  | $                                             | 17,762 |  | $
|Net income                                                 |  |   |    |  |   |        |  |                                               | 102    |  |  
|Currency translation adjustment                            |  |   |    |  |   |        |  |                                               |       |  |  
|                                                           |  |   |     |  |   |         |  |                                               |        |  |  
|Balance, June 30, 2000                                     |  |   | 250 |  |   | 179,915 |  |                                               | 17,864 |  |  
|Net income                                                 |  |   |    |  |   |        |  |                                               | 11,742 |  |  
|Currency translation adjustment                            |  |   |    |  |   |        |  |                                               |       |  |  
|Minimum pension liability adjustment, net of tax of $2,110 |  |   |    |  |   |        |  |                                               |       |  |  
|                                                           |  |   |     |  |   |         |  |                                               |        |  |  
|Balance, June 30, 2001                                     |  |   | 250 |  |   | 179,915 |  |                                               | 29,606 |  |  
|Net income                                                 |  |   |    |  |   |        |  |                                               | 11,808 |  |  
|Currency translation adjustment                            |  |   |    |  |   |        |  |                                               |       |  |  
|Minimum pension liability adjustment, net of tax of $5,243 |  |   |    |  |   |        |  |                                               |       |  |  
|                                                           |  |   |     |  |   |         |  |                                               |        |  |  
|Balance, June 30, 2002                                     |  | $ | 250 |  | $ | 179,915 |  | $                                             | 41,414 |  | $
|                                                           |  |   |     |  |   |         |  |                                               |        |  |  

See
Notes to Consolidated Financial Statements.

28

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AAF-McQUAY INC. AND SUBSIDIARIES    CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(Dollars in thousands)

|                                   |                                                                                           | Years Ended June 30, |       
|---------------------------------- | ----------------------------------------------------------------------------------------- | -------------------- | ------
|
|Net income                         |                                                                                           | $                    | 11,808
|Other comprehensive income (loss): |                                                                                           |                      |       
|                                   | Foreign currency translation adjustments                                                  |                      |       
|                                   | Write off of accumulated foreign currency translation adjustments due to sale of business |                      |       
|                                   | Minimum pension liability adjustment, net of tax                                          |                      |       
|                                   |                                                                                           |                      |       
|Comprehensive income (loss)        |                                                                                           | $                    | 11,653
|                                   |                                                                                           |                      |       

See
Notes to Consolidated Financial Statements.

29

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AAF-McQUAY INC. AND SUBSIDIARIES    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Organization

The accompanying financial statements include the accounts of AAF-McQuay Inc. ("the Company"), a wholly owned subsidiary of AAF-McQuay
Group Inc., and its subsidiaries. AAF-McQuay Group Inc. is a wholly owned subsidiary of O.Y.L. Industries Berhad ("OYL").

The
Company is a worldwide manufacturer and marketer of commercial air conditioning and refrigeration and air filtration products and systems primarily for commercial, institutional and industrial
customers. The Company maintains production facilities in nine countries and its products are sold in over 80 countries.

2.    Summary of Significant Accounting Policies



The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All intercompany transactions and balances have been eliminated. The
accompanying consolidated financial statements reflect the financial results of the Company for the fiscal years ended June 30, 2002, 2001 and 2000. The Company's fiscal year end is the
Saturday closest to June 30 and, for clarity of presentation in the consolidated financial statements, fiscal years are shown to begin on July 1 and end on June 30.

The
preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates and assumptions.



Cash and cash equivalents include cash on hand, demand deposits and short-term cash investments which are highly liquid in nature and have original maturities of
three months or less.



Inventories are valued at the lower of cost or market at June 30, 2002 and 2001. The Company maintains reserves to write down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Cost is determined by the
last-in, first-out (LIFO) method for U.S. inventories (64% in 2002 and 65% in 2001), and the first-in, first-out (FIFO) method for the Company's foreign
subsidiaries (36% in 2002 and 35% in 2001). Inventories on the accompanying Consolidated Balance Sheets are reflected net of related inventory reserves of $11.7 and $11.9 million as of
June 30, 2002 and 2001, respectively.



Property, plant and equipment are capitalized at cost and depreciated using the straight-line method over their estimated useful lives as follows:

Buildings

20 to 40 yearsMachinery and Equipment

3 to 12 years


30

---

Maintenance
and repairs are charged to operations when incurred, while expenditures, which have the effect of extending the useful life of an asset, are capitalized.



The Company capitalizes qualifying costs of computer software developed or obtained for internal use and amortizes these costs on a straight-line basis over the
software's useful life, which is generally a period of three to five years.



The excess of cost over fair values of net assets acquired is being amortized on a straight-line basis over forty years. Other identifiable intangibles acquired
include trademarks and tradenames, technical drawings, technology; and assembled work force, which are being amortized on a straight-line basis over forty, fifteen and ten years,
respectively.

On
a periodic basis, the Company evaluates the carrying value of its intangible assets in accordance with 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, to determine if the facts and
circumstances suggest that intangible assets may be impaired. If this review indicates that intangible assets may not be recoverable, as determined based on the undiscounted cash flow of the entity
acquired over the remaining amortization period, the Company's carrying value of intangible assets is reduced to the then estimated fair value of such assets.

In
June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141,Business
Combinations, and No. 142,Goodwill and Other Intangible Assets,
effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.

The
Company will adopt SFAS 142 in the first quarter of fiscal 2003. Application of the nonamortization provisions of Statement 142 is expected to result in a decrease in amortization expense
of $6.3 million ($5.1 million, net of taxes) in fiscal 2003. The Company does not anticipate a change in the useful lives of its finite lived intangible assets, and the Company will
reclassify an assembled workforce intangible asset with an unamortized balance of approximately $3.1 million to goodwill at the date of adoption. During the first half of fiscal 2003, the
Company will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets and determine what effect, if any, the results of these tests will have on the
results of operations and financial position of the Company. Based upon a preliminary evaluation, however, the Company believes that no impairment will result.



The costs related to the issuance of debt are capitalized and amortized on a straight-line basis to interest expense over the terms of the related debt, which
approximates the effective interest method.



The Company uses derivative financial instruments primarily for the management of its interest rate and foreign currency exposures. Derivative instruments are viewed as risk
management tools by the Company and are not used for trading or speculative purposes.

The
Company manages its interest rate risk by entering into both fixed and variable rate debt at the lowest possible costs. In addition, the Company enters into interest rate swap agreements in order
to

31

---

achieve a cost effective mix of fixed and variable rate indebtedness. Under these agreements, the Company agrees to exchange, at specified intervals, the difference between fixed and variable
interest amounts calculated from an agreed upon referenced notional amount. The differential between interest rate payments due and amounts receivable under the interest rate swap agreements is
recognized as yield adjustments to interest expense over the term of the related debt.

The
Company manages its foreign currency risk by hedging its foreign currency exposures with foreign currency derivative instruments (forward contracts). Foreign currency derivative instruments are
matched to the underlying foreign currency exposures and are executed to minimize foreign exchange transaction costs. Gains and losses on foreign exchange forward contracts are recognized in income
and offset the foreign exchange gains and losses on the underlying foreign currency transactions.

In
June 1998, the Financial Accounting Standards Board issued SFAS No. 133,Accounting for Derivative Instruments and for Hedging
Activities,which was amended by Statement Nos. 137 and 138, in June 1999 and June 2000, respectively. The Statement requires the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that do not receive hedge accounting treatment are adjusted to fair value through income. If a derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of assets, liabilities, or firm commitments through earnings or are recognized in
other comprehensive income until the hedged item is recognized in earnings. The Company adopted Statement No. 133, as amended, on July 1, 2000 resulting in no cumulative effect of an
accounting change being recognized in the consolidated statements of income or comprehensive income.



Environmental investigatory, remediation, operating and maintenance costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably
estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to each individual site, including existing technology, current laws and
regulations and prior remediation experience. Information related to environmental matters is presented in Note 14 to the consolidated financial statements.



Assets and liabilities of the Company's subsidiaries outside the U.S. are translated into U.S. dollars at the exchange rates in effect at the end of the period. Revenue and
expense accounts are translated at a weighted average of exchange rates in effect during the period. Translation adjustments that arise from translating a foreign subsidiary's financial statements
from local currency (the functional currency) to U.S. dollars are reflected as a separate component of stockholder's equity.

Transaction
gains and losses that arise from exchange rate changes on transactions denominated in a currency other than the local currency are included currently in other (income) expense in the
results of the Company's operations. The Company recognized net foreign currency transaction losses of $521,000, $1,101,000 and $25,000, for the fiscal years ended June 30, 2002, 2001 and 2000,
respectively.



Revenues are generally recognized as products are shipped and title passes to the customer or services are rendered. Revenues and costs associated with long-term
contracts are recognized on the percentage-of-completion method. Provisions are recorded for losses on contracts whenever it is estimated that costs will exceed contract value.

In
December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides guidance on
the

32

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recognition, presentation and disclosure of revenue in financial statements. The Company adopted SAB 101 in the fourth quarter of fiscal 2001. The adoption of SAB 101 had no effect on the Company's
results of operations or financial position.



Warranties are recorded as a liability on the balance sheet as charges to current expense for estimated normal warranty costs and, if applicable, for specific performance
issues known to exist on products sold. The expenses estimated to be incurred are provided at the time of sale, based primarily upon estimates derived from experience. Warranty costs on some purchased
parts and components are partially reimbursed to the Company by supplying vendors. Estimated obligations beyond one year are classified as other long-term liabilities. Revenue from the
sale of extended warranty and related service contracts is deferred and amortized over the respective contract life on a straight-line basis.



Research and development costs were approximately $10.2, $9.0 and $8.7 million, for the fiscal years ended June 30, 2002, 2001 and 2000, respectively, and are
included in selling, general and administrative expenses in the accompanying Consolidated Statements of Income.



The cost of advertising is expensed as incurred. The Company incurred $4.2, $4.3 and $3.6 million of advertising costs in 2002, 2001 and 2000, respectively.



Post-retirement and post-employment benefits are provided to certain employees and former employees of the Company. These benefits include life
insurance and health care. Benefits are accrued over the employees' service periods or at the date of the event triggering the benefit.



The Company applies Accounting Principles Board Opinion ("APB") No. 25,Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock-based compensation plans. Information related to stock-based compensation awards is presented in Note 12 to the consolidated financial
statements along with the disclosures required under SFAS No. 123,Accounting for Stock-Based Compensation.



The Company uses the liability method for financial accounting and reporting of income taxes. Under the liability method, deferred tax assets and liabilities are determined
based on the difference between financial statement carrying amounts and the tax bases of assets and liabilities. These differences are measured at the enacted tax rates that will be in effect when
these differences reverse.



Net income, foreign currency translation adjustments and minimum pension liability adjustments, net of tax, are included in other comprehensive income in accordance with SFAS
No. 130,Reporting Comprehensive Income.

33

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In August 2001, the Financial Accounting Standards Board issued SFAS No. 143,Accounting for Asset Retirement
Obligations, which is effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses the financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Adoption of SFAS No. 143 is not expected to materially impact the Company's
consolidated financial statements.

In
August 2001, the Financial Accounting Standards Board issued SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes
SFAS No. 121,Accounting for the Impairment of Long-Lived Assets and for the Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions of APB Opinion No. 30,Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS
No. 144 also amends Accounting Research Bulletin No. 51,Consolidated Financial Statements, to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The provisions of this statement are effective for fiscal years beginning after December 15, 2001. Adoption of SFAS No. 144
is not expected to materially impact the Company's consolidated financial statements.

In
April 2002, the Financial Accounting Standards Board issued SFAS No. 145,Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections, which is effective for fiscal years beginning after May 15, 2002. SFAS 145 addresses the financial accounting and
reporting for a number of areas, including gains and losses derived from the extinguishment of debt and the treatment of sale-leaseback transactions. Adoption of SFAS No. 145 is not
expected to materially impact the Company's consolidated financial statements.

In
June 2002, the Financial Accounting Standards Board issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal
Activities. SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 supercedes Emerging Issues
Task Force (EITF) Issue 94-3,Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as defined in EITF 94-3 was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. The provisions of this statement are effective for exit or disposal activities
that are initiated after December 31, 2002, with early adoption permitted. Adoption of SFAS No. 146 is not expected to materially impact the Company's consolidated financial statements.

3.    Accounts Receivable

Accounts receivable consist of the following (dollars in thousands):

2002

2001Accounts receivable, trade

$
188,724

$
189,500Accounts receivable, other


6,432


8,653195,156


198,153Less allowance for doubtful receivables


6,217


6,211$
188,939

$
191,942


The
Company manufactures and sells heating, ventilating, air conditioning, refrigeration and air filtration products to companies in various industries with the most significant sales concentration
being

34

---

in the construction industry. The Company performs periodic evaluations of its customers' financial condition and generally does not require collateral. For domestic equipment sales, it is the
Company's practice to attach liens in the event of non-payment, when such recourse is available. Trade receivables generally are due within 30-90 days.

4.    Inventories

Inventories consist of the following (dollars in thousands):

2002

2001FIFO cost:Raw materials

$
38,471

$
42,706Work-in-process


15,006


17,691Finished goods


42,464


41,85195,941


102,248LIFO adjustment


(995
)

(446
)$
94,946

$
101,802


5.    Property, Plant and Equipment

Property, plant and equipment consists of the following (dollars in thousands):

2002

2001Land

$
7,573

$
7,693Buildings


60,383


59,794Machinery and equipment


148,436


141,321216,392


208,808Less accumulated depreciation and amortization


105,917


90,064$
110,475

$
118,744


At
June 30, 2002, substantially all property, plant and equipment are encumbered by various debt obligations of the Company. Depreciation expense was $17.5, $17.3, and $19.2 million for
fiscal 2002, 2001 and 2000, respectively. Pursuant to the close of the Scottsboro, Alabama air handling manufacturing facility (see Note 9), certain assets with a carrying amount of
$3.3 million are held for sale. The assets, consisting principally of building and land, are expected to be sold by the end of fiscal 2003.

35

---

6.    Intangible Assets

Intangible assets consist of the following (dollars in thousands):

2002

2001Cost in excess of net assets acquired

$
135,298

$
143,867Other intangibles:Technology


14,138


14,021Trademarks


58,873


58,874Drawings


54,000


54,000Workforce


16,771


17,046Total other intangibles


143,782


143,941Less accumulated amortization


94,915


86,077$
184,165

$
201,731


Amortization
of intangible assets in the Consolidated Statement of Income for fiscal 2001 includes the write-off of intangibles and goodwill in the amount of $1.1 million related to
the Company's German subsidiary. This write-off was based on an analysis of projected undiscounted cash flows, which were no longer deemed adequate to support the value of intangibles and
goodwill associated with the business.

7.    Debt

In September 1999, the Company refinanced a previous bank agreement with a new Bank Credit Agreement. The Bank Credit Agreement expires in February 2003 and
includes a term loan ("Term Loan") and a $90 million revolving credit commitment ("Revolver"). Use of the Revolver is subject to the Company's availability (as defined in the Bank Agreement)
and is based on the Company's level of domestic receivables and inventories. Interest on advances is generally payable quarterly, at the Company's option on 1.) the higher of the domestic base rate
(prime) or a rate based on the Federal Funds Rate plus a specified premium or 2.) the average rate at which Eurodollar deposits are offered to prime banks in the London interbank market ("LIBOR") plus
a specified premium. The interest rate premiums are determined by an interest rate matrix, which is based on a certain financial ratio as
described in the Bank Credit Agreement. As of June 30, 2002, the Company's interest rate premiums were LIBOR + 1.50% or prime + 0% for Revolver borrowings and
LIBOR + 1.75% or prime + 0% for Term Loan borrowings. The interest rate premiums are subject to an increase depending on the applicable ratio. At June 30, 2002, the
Company's borrowing rate under the Revolver was approximately 3.4%. The average effective interest rate under the Revolver for the fiscal year ended June 30, 2002 was approximately 4.6%. A
commitment fee of 0.25% is required on the unused portion of the Revolver. At June 30, 2002, the Company had borrowed $31.8 million under the Revolving Credit Facility,
$8.9 million in letters of credit were issued and outstanding, and the Company had remaining borrowing availability of $49.3 million.

At
June 30, 2002, certain of the Company's foreign subsidiaries had available lines of credit with foreign banks of approximately $31 million which may be drawn as needed at an average
interest rate of approximately 6%. Outstanding borrowings against international lines of credit amounted to approximately $7.2 and $10.5 million at June 30, 2002 and 2001, respectively.
In addition, certain of the Company's foreign subsidiaries have non-borrowing bank facilities (letters of credit, guarantees, performance bonds, etc.) totaling $21.9 million as of
June 30, 2002 and $21.3 million as of June 30, 2001 of which approximately $12.4 million was used at June 30, 2002 and June 30, 2001.

The
weighted average effective interest rate on short-term borrowings was 3.9% and 5.8% at June 30, 2002 and 2001, respectively.

36

---

Long-term
debt consists of the following (dollars in thousands):

2002

2001Senior Term Loans1

$
12,875

$
17,975Senior Unsecured Notes due February 15, 2003, bearing interest at 8.875%1


93,834


108,834Other issues


10,792


10,740117,501


137,549Less: Current maturities2


(107,561
)

(6,120
)$
9,940

$
131,429


As
of the filing date of this annual report, the Company is in the process of finalizing the terms and documentation related to a new bank credit agreement ("the Refinancing"). The purpose of the
Refinancing will be to replace both its existing Bank Credit Agreement and Senior Notes, which mature in February 2003. Although the Company is confident in its ability to consummate the
Refinancing, accounting principles generally accepted in the United States of America require the amounts contemplated in the Refinancing to be shown in current maturities of long-term
debt until the Refinancing documents are executed, a portion of which would otherwise be shown in long-term debt.

The
term loan portion of the Bank Credit Agreement is a direct obligation of the Company. This term loan is secured by substantially all the domestic assets of the Company and its domestic
subsidiaries and a portion of the capital stock of certain foreign subsidiaries. Interest is generally payable quarterly. As of June 30, 2002, the repayment schedule calls for 7 monthly
payments of $425,000 with a final payment of $9.9 million due at maturity (February 1, 2003).

The
Bank Credit Agreement contains covenants that, among other things, imposes limitations on incurrence of indebtedness, capital expenditures, transactions with affiliates, mergers and the
disposition of assets, investments by the Company, and transactions involving the capital of the Company, including payment of any dividends. In addition, the Bank Credit Agreement contains financial
covenants relating to net worth and fixed charge coverage. The Company is in compliance with the Bank Credit Agreement.

The
term loan portion of the Bank Credit Agreement contains provisions requiring accelerated payments as a result of asset sales above a prescribed minimum. Accelerated payments of $3.5 million
were required during the fiscal year ended June 30, 2000. No accelerated payments were required for the years ended June 30, 2002 or 2001.

In
February 1996, the Company issued the 8.875% Senior Unsecured Notes ("Senior Notes") with the proceeds being used to reduce indebtedness under the previous bank agreement. The Senior Notes
were issued under an indenture agreement which, among other things, contains restrictive covenants relating to dividend distributions, additional debt, sale of assets, transactions with affiliates,
guarantees
and investments by the Company and its subsidiaries. The Senior Notes are not redeemable prior to maturity (February 15, 2003) and are not subject to any sinking fund requirement.

During
the year ended June 30, 2002, the Company repurchased bond principal amounts totaling $15.0 million of its Senior Notes at a small discount. In total, $31.2 million of
Senior Notes have been repurchased as of June 30, 2002. The Company plans to hold these repurchased notes until their maturity in February 2003.

Included
in other issues of long-term debt are various term loans incurred by certain foreign subsidiaries, as well as obligations under Industrial Revenue Bonds and mortgage notes. The
foreign

37

---

term loans are secured by certain assets of the issuing foreign subsidiary and contain various repayment terms.

The
Company paid cash interest of $14.0, $18.3 and $20.7 million for the fiscal years ended June 30, 2002, 2001 and 2000, respectively.

Maturities
of long-term debt during each of the next five fiscal years subsequent to June 30, 2002 are as follows (dollars in millions): 2003-$107.6;
2004-$1.2; 2005-$1.1; 2006-$1.2; 2007-$.8; Thereafter-$5.6.

8.    Financial Instruments

The Company operates internationally and borrows at floating interest rates, giving rise to exposure to market risks from changes in foreign exchange rates and interest rates.
The Company may utilize derivatives to reduce those risks. The notional amounts of derivatives noted below do not represent amounts exchanged by the parties and, thus, are not a measure of the
exposure of the Company through its use of derivatives. The Company does not hold or issue derivative financial instruments for trading purposes.

Interest rate risk management:The Company may, at times, seek to limit the impacts of changing interest rates on its interest expense
through the use of interest rate derivative instruments. In January 2000, the Company entered into an interest rate swap transaction whereby the Company receives a fixed rate and pays a
floating rate on the basis of 3-month LIBOR. The January 2000 swap has a three-year term and a notional amount of $30 million and effectively converts a portion
of the Company's fixed rate borrowings to a floating rate. In November 2001, the Company terminated its $30 million floor, which required the Company to make payments if
3-month LIBOR falls below a certain level. The transaction cost of this termination was paid by accepting a lower swap rate on the January 2000 swap and by changing the floating
rate basis from 3-month to 6-month LIBOR. In January 2002, the Company
increased the swap notional amount from $30 million to $60 million. The measurement dates and maturity dates of the swap match interest payment dates and maturity date of the Senior
Notes. These positions are not accounted for as hedges. The Company records the swap in its balance sheet at fair market value. At June 30, 2002 and 2001, the fair market value of the interest
rate swap was an asset of $0.5 and $1.4 million, respectively. The net result of these positions recognized for the years ended June 30, 2002 and 2001 was income of $0.7 and
$0.3 million, respectively.

Foreign currency management:The Company enters into short-term foreign exchange contracts to hedge its exposure to currency
fluctuations affecting certain foreign currency denominated trade payables and certain intercompany debt of its foreign subsidiaries. The notional amount of foreign exchange forward contracts
outstanding at June 30, 2002 and 2001 was approximately $28.4 and $28.9 million, respectively. The U.S. dollar equivalent notional amount of these foreign exchange forward contracts by
applicable foreign currency at June 30, 2002 and 2001 was as follows: Canadian dollars- $4.2 and $4.5 million; Euro-related currencies- $6.3 and $6.8 million; British
pounds- $15.9 and $12.4 million; Mexican peso- $2.0 and $5.0 million; and various other currencies- $0 and $0.2 million.

The
Company is exposed to credit-related losses in the event of non-performance by counter parties to derivative financial instruments. The Company monitors the credit worthiness of the
counter parties and presently does not anticipate nonperformance by the counter parties. The credit exposure of derivative financial instruments is represented by the fair value of contracts with a
positive fair value.

SFAS
No. 107,Disclosures about Fair Values of Financial Instruments,defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties. The carrying values reported in the balance sheets for cash and cash equivalents, accounts receivable and
short-term borrowings approximate their respective fair values. The fair value of the Company's Senior Unsecured Notes is estimated using a quoted market price.

38

---

The carrying amount of the Company's long-term debt at June 30, 2002 of $117.5 million approximates fair value. The fair values of the Company's foreign exchange forward
contracts are based on current settlement values and fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counter parties' credit
standing. At June 30, 2002 and 2001, the net carrying amount of these contracts approximates their fair value.

9.    Restructuring

During the second quarter of fiscal 2002, the Company approved and commenced restructuring efforts in the Filtration Products segment. Restructuring costs of
$0.5 million were recorded, primarily representing severance accruals related to the elimination of approximately 30 employees in its Latin American and European filtration products
manufacturing units. These restructuring actions were completed in the third quarter of fiscal 2002.

The
Company initiated several restructuring plans during fiscal 2001 in both the Commercial Air Conditioning and Refrigeration and Filtration Products segments. Restructuring costs of approximately
$7.2 million were recorded. During the first quarter of fiscal 2001, the Company announced its intention to close its air handling manufacturing facility in Scottsboro, Alabama. Related to this
closure, the Company recorded restructuring costs of approximately $2.2 million, primarily related to severance accruals for the elimination of approximately 330 employees. Additionally during
fiscal 2001, the Commercial Air Conditioning and Refrigeration segment continued restructuring efforts in its United Kingdom operations recording restructuring costs of approximately
$4.4 million. This amount primarily represents severance accruals related to the elimination of approximately 180 employees in its industrial refrigeration headquarters and air handling, plate
freezer and compressor manufacturing units. The remaining restructuring costs of approximately $0.6 million primarily relate to severance costs for the Filtration Products segment and the
elimination of approximately 15 positions in Germany. At June 30, 2002, the Company has substantially completed all these restructuring plans.

During
fiscal year 2000, restructuring costs of $3.5 million were recorded. The Commercial Air Conditioning and Refrigeration business segment continued the restructuring of the United Kingdom
operations in the third and fourth quarters of fiscal 2000, recording approximately $2.7 million primarily representing severance accruals. Additionally, the Filtration Products business
segment restructured the United Kingdom operations in the fourth quarter of fiscal 2000 resulting in a restructuring charge of approximately $0.8 million for severance accruals. These combined
efforts resulted in the elimination of approximately 140 employees in the United Kingdom. These restructuring plans were completed in fiscal 2001.

10.    Provision for Income Taxes

Pretax income (loss) subject to taxation by the U.S. and foreign jurisdictions for the fiscal years ended 2002, 2001 and 2000 was as follows (dollars in thousands):

2002

2001

2000Domestic

$
8,804

$
14,700

$
4,513Foreign


10,014


5,820


(1,503
)Total

$
18,818

$
20,520

$
3,010


Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax

39

---

purposes. Significant components of the Company's deferred tax assets and liabilities at June 30, 2002 and 2001 are as follows (dollars in thousands):

2002

2001Deferred tax assets:Net operating loss carryforwards

$
8,031

$
10,012Fixed assets


1,858


951Post-retirement benefits


12,176


4,813Other accruals


17,275


23,304Tax credit carryforwards


414


390Other


4,879


5,950Total deferred tax assets


44,633


45,420Valuation allowance


(8,613
)

(12,281
)Net deferred tax assets

$
36,020

$
33,139Deferred tax liabilities:Unrepatriated foreign earnings

$
3,905

$
2,755Fixed assets


11,942


13,790Intangible assets


26,782


28,907Inventories


5,690


6,028Other


8,758


7,688Total deferred tax liabilities


57,077


59,168Net deferred tax liabilities

$
21,057

$
26,029


Deferred
tax assets for net operating loss carryforwards and other items at June 30, 2002 and 2001 include approximately $2.0 million related to periods prior to the acquisition by OYL
which have been offset by a valuation allowance. If realized, the benefit of these deferred tax assets will be applied to reduce goodwill related to the acquisition. During fiscal years 2002 and 2001,
the deferred tax asset valuation allowance decreased by approximately $3.6 million and $7.6 million, respectively. The decrease is principally attributable to the release of valuation
allowances associated with the use or expiration of corresponding deferred tax assets during the fiscal year.

Significant
components of the provision (benefit) for income taxes are as follows (dollars in thousands):

2002

2001

2000Federal taxes-current

$
3,617

$
9,792

$
2,278Federal taxes-deferred


341


(4,223
)

(168
)State taxes


1,100


1,307


377Foreign taxes-current


2,398


3,229


3,428Foreign taxes-deferred


(512
)

(1,565
)

(3,268
)Total

$
6,944

$
8,540

$
2,647


During
the fiscal years ended June 30, 2002, 2001 and 2000, the Company paid income taxes (net of tax refunds) of approximately $8.9, $15.5, and $(1.8) million, respectively. A reconciliation
between the

40

---

Company's reported tax provision (benefit) and the tax provision (benefit) computed based on the U.S. statutory rate is as follows (dollars in thousands):

2002

2001

2000Statutory U.S. Federal income tax provision

$
6,586

$
7,182

$
1,054Nondeductible goodwill amortization


1,089


1,089


1,095State taxes, net of federal benefit


715


1,307


377Export sales benefit


(1.068
)

(87
)

(88
)Other


(378
)

(951
)

209Reported tax provision

$
6,944

$
8,540

$
2,647


At
June 30, 2002, the Company has net operating loss and tax credit carryforwards of approximately $24 million and $0.4 million, respectively, in the United States and various
foreign countries. Approximately $2.4 million of the net operating loss carryforwards and all tax credit carryforwards expire in fiscal years 2003 through 2013. The remaining net operating loss
carryforwards can be carried forward indefinitely.

11.    Employee Benefit Plans

The Company has frozen defined benefit pensions plans in effect for certain of the Company's domestic hourly employees and active defined benefit pension plans for certain of
its foreign employees. Benefits are computed using formulas, which are generally based on age and years of service. Plan assets consist primarily of common stock, insurance contracts and government
obligations. The Company's method of funding pension costs is to contribute amounts to the plans sufficient to meet minimum funding requirements, plus such amounts as the Company may determine to be
appropriate from time to time.

The
Company also sponsors defined benefit health care plans for certain salaried and non-salaried employees whereby certain health care and life insurance benefits are provided on
retirement. The benefits are provided only for a frozen group of active employees and retirees.

41

---

The following table sets forth the funded status of the defined benefit pension and defined benefit health care plans, and amounts recognized in the Consolidated Balance Sheets (dollars in thousands):

|                                                     |  |   |        |   |   |        |   |   |         | Other
Postretirement Benefits |  
|---------------------------------------------------- |  | - | ------ | - | - | ------ | - | - | ------- | ----------------------------- | -
|
|
|
|Change in Benefit Obligation                         |  |   |        |   |   |        |   |   |         |                               |  
|Benefit obligation at beginning of year              |  | $ | 25,888 |   | $ | 25,269 |   | $ | 93,452  |                               | $
|Service cost                                         |  |   | 24     |   |   | 131    |   |   | 2,708   |                               |  
|Interest cost                                        |  |   | 1,808  |   |   | 1,854  |   |   | 5,742   |                               |  
|Plan participants' contributions                     |  |   |       |   |   |       |   |   | 1,090   |                               |  
|Actuarial (gains)/losses                             |  |   | (60    | ) |   | 1,148  |   |   | (10,165 | )                             |  
|Benefits paid                                        |  |   | (2,222 | ) |   | (2,430 | ) |   | (3,456  | )                             |  
|Curtailments loss                                    |  |   |       |   |   |       |   |   |        |                               |  
|Settlements                                          |  |   |       |   |   | (84    | ) |   |        |                               |  
|Plan amendments                                      |  |   |       |   |   |       |   |   | 291     |                               |  
|Effects of currency exchange rates                   |  |   |       |   |   |       |   |   | 8,212   |                               |  
|                                                     |  |   |        |   |   |        |   |   |         |                               |  
|Benefit obligation at end of year                    |  | $ | 25,438 |   | $ | 25,888 |   | $ | 97,874  |                               | $
|                                                     |  |   |        |   |   |        |   |   |         |                               |  
|Change in Plan Assets                                |  |   |        |   |   |        |   |   |         |                               |  
|Fair value of plan assets at beginning of year       |  | $ | 23,206 |   | $ | 28,723 |   | $ | 78,008  |                               | $
|Actual return on plan assets                         |  |   | 155    |   |   | (3,625 | ) |   | (1,521  | )                             |  
|Benefits paid                                        |  |   | (2,222 | ) |   | (2,430 | ) |   | (3,456  | )                             |  
|Employer contributions                               |  |   | 277    |   |   | 664    |   |   | 2,382   |                               |  
|Contributions by plan participants                   |  |   |       |   |   |       |   |   | 1,090   |                               |  
|Settlements                                          |  |   |       |   |   | (126   | ) |   |        |                               |  
|Effects of currency exchange rates                   |  |   |       |   |   |       |   |   | 6,919   |                               |  
|                                                     |  |   |        |   |   |        |   |   |         |                               |  
|Fair value of plan assets at end of year             |  |   | 21,416 |   |   | 23,206 |   |   | 83,422  |                               |  
|                                                     |  |   |        |   |   |        |   |   |         |                               |  
|Funded status                                        |  |   | (4,022 | ) |   | (2,682 | ) |   | (14,452 | )                             |  
|Unrecognized prior service cost                      |  |   |       |   |   |       |   |   | 308     |                               |  
|Unrecognized net actuarial (gain)/loss               |  |   | 2,420  |   |   | 361    |   |   | 22,978  |                               |  
|                                                     |  |   |        |   |   |        |   |   |         |                               |  
|Prepaid (accrued) benefit cost                       |  | $ | (1,602 | ) | $ | (2,321 | ) | $ | 8,834   |                               | $
|                                                     |  |   |        |   |   |        |   |   |         |                               |  
|Amounts recognized in the Consolidated Balance Sheet |  |   |        |   |   |        |   |   |         |                               |  
|Prepaid benefit cost                                 |  | $ | 2,309  |   | $ | 1,972  |   | $ | 1,958   |                               | $
|Accrued benefit cost                                 |  |   | (5,525 | ) |   | (4,712 | ) |   | (9,984  | )                             |  
|Intangible asset                                     |  |   |       |   |   |       |   |   | 93      |                               |  
|Accumulated other comprehensive loss                 |  |   | 1,614  |   |   | 419    |   |   | 16,767  |                               |  
|                                                     |  |   |        |   |   |        |   |   |         |                               |  
|Net amount recognized                                |  | $ | (1,602 | ) | $ | (2,321 | ) | $ | 8,834   |                               | $
|                                                     |  |   |        |   |   |        |   |   |         |                               |  

The aggregate accumulated benefit obligation for defined benefit pension plans with an accumulated benefit obligation in excess of plan assets was $52.4 and
$10.5 million as of June 30, 2002 and 2001, respectively. The aggregate projected benefit obligation for defined benefit pension plans with a projected benefit obligation in excess of
plan assets was $117.8 and $54.8 million as of June 30, 2002 and 2001, respectively. The aggregate fair value of plan assets for defined benefit pension plans with either an accumulated
benefit obligation or a projected benefit obligation in excess of plan assets was $96.3 and $44.1 million as of June 30, 2002 and 2001, respectively.

42

---

The
net periodic benefit cost related to the defined benefit pension plans included the following components (dollars in thousands):

|                               |  | Pension Benefits Plans
Inside the United States |        | Pension Benefits Plans
Outside the United States |  
|------------------------------ |  | ----------------------------------------------- | ------ | ------------------------------------------------ | -
|
|Service cost                   |  | $                                               |       |                                                  | $
|Interest cost                  |  |                                                 | 1,790  |                                                  |  
|Expected return on plan assets |  |                                                 | (2,006 | )                                                |  
|Net amortization/deferral      |  |                                                 |       |                                                  |  
|Curtailment                    |  |                                                 |       |                                                  |  
|                               |  |                                                 |        |                                                  |  
|Net periodic (benefit) cost    |  | $                                               | (216   | )                                                | $
|                               |  |                                                 |        |                                                  |  
|Assumptions as of June 30:     |  |                                                 |        |                                                  |  
|Discount rate                  |  |                                                 | 7.25   | %                                                |  
|Expected return on plan assets |  |                                                 | 9.00   | %                                                |  
|Rate of compensation increase  |  |                                                 | N/A    |                                                  |  

The
net periodic benefit cost related to the defined benefit health care plans included the following components (dollars in thousands):

2002

2001

2000Service cost

$
151

$
205

$
204Interest cost


217


469


393Net amortization/deferral


(237
)

1


(18
)Net periodic benefit cost

$
131

$
675

$
579Weighted average discount rate as of June 30


7.25
%

7.25
%

7.75
%


The
health care cost trend rate used to determine the health care benefit obligation was 8.00% for 2002. This rate decreases gradually annually to the ultimate medical trend rate of 5.00% in 2008, and
remains at that level thereafter. The trend rate is a significant factor in determining the amounts reported. A one-percentage-point change in these assumed health care cost trend rates
would have the following effects (dollars in thousands):

Increase

DecreaseEffect on total service and interest cost components

$
39

$
(33
)Effect on postretirement benefit obligation


258


(219
)


The
Company has a defined contribution plan that covers domestic employees. Company contributions to the plan are based on employee compensation. The Company expensed $1.5, $1.5 and
$1.3 million under this plan during the fiscal years ended June 30, 2002, 2001 and 2000, respectively.

The
Company also sponsors a 401(k) defined contribution plan that covers domestic employees. Participants may contribute a percentage of their compensation to the plan. The Company with certain
limitations matches contributions. During the fiscal years ended June 30, 2002, 2001 and 2000, the Company expensed $1.5, $1.5 and $1.2 million, respectively, related to this plan.

43

---

12.    Stock-based Compensation

In 1998, the Company adopted a Stock Option Plan which provides for the grant of non-qualified stock options to certain members of management and key employees to
purchase the common stock of the Company's parent AAF-McQuay Group Inc. which has 1,000 shares outstanding. The Company has elected to follow APB No. 25, Accounting for Stock Issued to Employees, in accounting for its stock-based compensation.

Under
the stock option plan, options to purchase common stock may be granted until 2007. Options may be granted at fair market value at the date of the grant or at fair market value at the date of
grant discounted for a lack of marketability and are exercisable up to 10 years after the date of grant unless terminated sooner or in the event of a public offering of the Company's shares,
two years following the later of the public offering or the date the grantee becomes vested in that portion of the option. Generally, stock options vest and thus can be exercised at
331/3% on each of the first three anniversaries of the date of the grant or 100% at termination of employment because of disability, death or wrongful termination or change in ownership
control.

In
fiscal 2002, the stock option plan was terminated and all remaining options granted under the plan were cancelled in exchange for a nominal payment.

As
of June 30, 2002, 2001 and 2000, there were stock options for 0, 6.6 and 10.3 shares of AAF-McQuay Group, Inc. issued and outstanding under the plan. Transactions are
summarized as follows:

Stock Options

Weighted Average
Exercise PriceOutstanding at June 30, 1999

40.0

$
198,219Forfeited

29.7


196,204Outstanding at June 30, 2000

10.3

$
203,214Forfeited

3.7


203,214Outstanding at June 30, 2001

6.6

$
203,214Forfeited

1.0


203,214Cancelled

5.6


203,214Outstanding at June 30, 2002

0


n/aShares exercisable at June 30, 2000

7.0

$
203,214Shares exercisable at June 30, 2001

6.0

$
203,214Shares exercisable at June 30, 2002

0


n/a


In
electing to follow APB No. 25 for expense recognition purposes, the Company is obligated to provide the expanded disclosures required under SFAS No. 123 for stock-based compensation
including, if materially different from reported results, disclosure of pro forma net income had compensation expense been measured under the fair value recognition provisions of SFAS No. 123.
No options were granted in fiscal year 2002, 2001 or 2000.

The
Company's pro forma net income for the years ended June 30, 2002, 2001, and 2000 would be $11.8, $11.7, and $0.1 million, respectively. For pro forma disclosure, stock-based
compensation is amortized to expense on a straight-line basis over the vesting period.

44

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13.    Leases and Commitments

The following is a schedule of future minimum lease payments required under third party operating leases that have initial or remaining noncancelable lease terms in excess of
one year (dollars in thousands):

Year2003

$
7,5582004


6,2292005


5,1822006


3,7602007


3,104Thereafter


10,640


Rental
expense associated with third party operating leases was approximately $11.2, $10.9 and $10.5 million for the fiscal years ended June 30, 2002, 2001 and 2000, respectively. It is
expected that, in the normal course of business, leases that expire will be renewed or replaced by leases on other property and equipment.

The
Company has a contract whereby a third party manages a portion of its data processing operations. Monthly charges during the fiscal years ended June 30, 2002, 2001 and 2000 averaged
approximately
$695,000, $732,000 and $838,000,respectively, under this contract. This contract extends through December 31, 2005.

14.    Contingencies



The Company is subject to potential liability under CERCLA, and other federal, state and local statutes and regulations governing the discharge of pollutants into the
environment and the handling and disposal of hazardous substances and waste. These statutes and regulations, amongst other things, impose potential liability on the Company for remediating
contamination arising from the Company's past and present operations and from former operations of other entities at sites later acquired and now owned by the Company. Many of the Company's facilities
have operated for many years, and substances which are or might be considered hazardous were generated, used, and disposed of at some locations, both on and off-site. The Company records
liabilities if, in management's judgment, environmental assessments or remedial efforts are probable and the costs can be reasonably estimated. These accrued liabilities are not discounted. Such
estimates are adjusted if necessary based on the completion of a formal study or the Company's commitment to a formal plan of action.

Based
upon estimates prepared by environmental consultants, at June 30, 2002 the Company estimates that related probable remediation costs will be approximately $11 million. During
fiscal 2002, based on updated estimates from its environmental consultants, the Company reduced its environmental reserve by approximately $2.3 million. This adjustment is reflected in other
income/expense in the Company's Consolidated Statement of Income. The Company believes that these remaining remediation costs have been adequately reserved for on the balance sheet and are included in
other liabilities.

The
Company has settled or exhausted its remedies against all of its insurance companies and any third parties, and expects no additional recoveries. No amounts have been recorded in the accompanying
Consolidated Balance Sheets relating to any potential recoveries. It is possible that environmental liabilities may arise in the future. The precise costs associated with such liabilities are
difficult to predict at this time.

45

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The Company is involved in various lawsuits in the ordinary course of business. These lawsuits primarily involve claims for damages arising out of the use of the Company's
products. The Company is also involved in litigation and administrative proceedings involving employment matters and commercial disputes. Some of these lawsuits include claims for punitive as well as
compensatory damages. The Company is insured for product liability claims for amounts in excess of established deductibles and accrues for the estimated liability on a
case-by-case basis up to the limits of the deductibles. All other claims and lawsuits are also handled on a case-by-case basis.

During
the third quarter of fiscal 2002, the Company won the appeal of a case involving its Italian subsidiary and the Adv. Istituto Nazionale della Previdenza Sociale (INPS). Based on the judgment of
its Italian counsel, the Company reversed its loss contingency associated with this case in the amount of $2.6 million. The amount is reflected in other income/expense in the Consolidated
Statement of Income.



In the normal course of business, the Company may provide financial performance guarantees, which are generally backed by standby letters of credit or surety bonds. In general,
the Company would only be liable for the amount of these guarantees in the event of default in the performance of obligations, the probability of which is remote in management's opinion. Bank bonds,
indemnities and guarantees amounting to approximately $14.5 million were outstanding with recourse to the Company as of June 30, 2002. In addition, the Company has other guarantees in
support of working capital credit lines established with local financial institutions for its foreign business units.

The
Company does not believe that the potential liability from the ultimate outcome of environmental, litigation and financial guarantee matters will have a material adverse effect on its financial
position, results of operations or liquidity.

46

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15.    Business Segments and Geographic Information

The Company globally manufactures and markets commercial air conditioning and air filtration products and systems within two principal segments: Commercial Air Conditioning and
Refrigeration, the manufacture, sale and distribution of heating, ventilating, air conditioning, industrial refrigeration equipment products, and Filtration Products, the manufacture and sale of air
filtration products and systems. Information relating to operations in each industry segment and information by geographic area is as follows as of and for the fiscal years ended June 30, 2002,
2001 and 2000:

|Classified By Industry:    |                                                |       |   |         |         |   |        
|-------------------------- | ---------------------------------------------- | ----- | - | ------- | ------- | - | -------
|
|
|Net Sales:                 |                                                |       |   |         |         |   |        
|                           | Commercial Air Conditioning and Refrigeration. |       | $ | 487,476 |         | $ | 534,965
|                           | Filtration Products                            |       |   | 321,660 |         |   | 340,593
|                           | Eliminations                                   |       |   | (3,404  | )       |   | (4,704 
|                           |                                                |       |   |         |         |   |        
|                           |                                                | Total |   | $       | 805,732 |   | $      
|                           |                                                |       |   |         |         |   |        
|Operating Income (Loss):   |                                                |       |   |         |         |   |        
|                           | Commercial Air Conditioning and Refrigeration. |       | $ | 18,601  |         | $ | 17,195 
|                           | Filtration Products                            |       |   | 11,669  |         |   | 19,885 
|                           | Corporate                                      |       |   | (503    | )       |   | (1,730 
|                           |                                                |       |   |         |         |   |        
|                           |                                                | Total |   | $       | 29,767  |   | $      
|                           |                                                |       |   |         |         |   |        
|Total Assets:              |                                                |       |   |         |         |   |        
|                           | Commercial Air Conditioning and Refrigeration. |       | $ | 369,316 |         | $ | 383,987
|                           | Filtration Products                            |       |   | 247,057 |         |   | 269,619
|                           | Corporate                                      |       |   | (3,037  | )       |   | 408    
|                           |                                                |       |   |         |         |   |        
|                           |                                                | Total |   | $       | 613,336 |   | $      
|                           |                                                |       |   |         |         |   |        
|Depreciation/Amortization: |                                                |       |   |         |         |   |        
|                           | Commercial Air Conditioning and Refrigeration. |       | $ | 19,227  |         | $ | 19,149 
|                           | Filtration Products                            |       |   | 9,096   |         |   | 10,339 
|                           | Corporate                                      |       |   | 19      |         |   | 22     
|                           |                                                |       |   |         |         |   |        
|                           |                                                | Total |   | $       | 28,342  |   | $      
|                           |                                                |       |   |         |         |   |        
|Capital Expenditures:      |                                                |       |   |         |         |   |        
|                           | Commercial Air Conditioning and Refrigeration. |       | $ | 7,167   |         | $ | 10,319 
|                           | Filtration Products                            |       |   | 2,568   |         |   | 5,682  
|                           | Corporate                                      |       |   | 4       |         |   | 5      
|                           |                                                |       |   |         |         |   |        
|                           |                                                | Total |   | $       | 9,739   |   | $      
|                           |                                                |       |   |         |         |   |        

The
Company estimates corporate expenses and determines fixed allocations of these expenses for each business segment at the beginning of the fiscal year. Any over or under allocation of actual
expenses incurred results in income or expense reported at the corporate level. The $0.5, $1.7, and $0.4 million noted above represents the under allocation of expenses for fiscal years 2002,
2001 and 2000, respectively. Assets at the corporate level consist of cash, receivables, property and other assets.

47

---

The
reconciliation of segment profit to the Company's earnings before taxes for each year is as follows:

2002

2001

2000(dollars in thousands)Operating income from business segments

$
30,270

$
37,080

$
26,590Under allocation of corporate expenses


(503
)

(1,730
)

(387
)Interest expense, net


(14,521
)

(19,372
)

(21,627
)Other income (expense), net


3,572


4,542


(1,566
)Income before income taxes

$
18,818

$
20,520

$
3,010


Classified By Geographic Region2002

2001

2000(dollars in thousands)Net Sales:U.S

$
506,309

$
559,956

$
537,372Europe


266,154


245,756


271,549Other


33,269


65,142


58,783Total

$
805,732

$
870,854

$
867,704


Transfers
between geographic areas are not significant.

The
composition of the Company's property, plant and equipment, net, between those in the United States and those in Europe and other countries as of the end of each year is as follows:

2002

2001

2000(dollars in thousands)U.S

$
88,583

$
95,561

$
97,390Europe


20,600


19,146


24,419Other


1,292


4,037


3,189Total

$
110,475

$
118,744

$
124,998


16.    Related Party Transactions

Hong Leong and its subsidiary companies, including OYL and the Company, have a policy of buying from related companies whenever feasible. During fiscal years ended
June 30, 2002, 2001 and 2000, pursuant to this policy, the Company and various of its subsidiaries sold an aggregate of approximately $7.6, $6.7 and $9.5 million, respectively, of the
Company's products to various OYL entities in the ordinary course of business. Additionally, during fiscal years 2002, 2001 and 2000, the Company purchased approximately $6.7, $3.1 and
$8.4 million, respectively, of product from OYL and its subsidiary companies in the ordinary course of business. The Company does not expect a change in this policy and plans to continue to buy
from and sell to OYL and Hong Leong related entities in the future.

On
September 29, 2001, the Company sold its Singapore subsidiary AAF Asia Pte. Ltd. ("Singapore") to AAF Group Pte. Ltd. ("AAF Group"), a wholly owned subsidiary of OYL, for fair
market value of approximately $13.1 million, which resulted in an immaterial gain after the write-off of associated goodwill and intangible assets. The Singapore subsidiary had
sales and net income of $3.6 million and $75,000, respectively, for the three month-period ended September 30, 2001. Proceeds from the sale were used to pay down debt. Concurrent with
the sale, the Company entered into a Technology and Trademark License Agreement with AAF Group. Under this license agreement, the Company has granted AAF Group an exclusive,
non-transferable right and license to manufacture and sell certain

48

---

AAF products and to use certain AAF trademarks in Asia. In exchange for these grants, AAF Group has agreed to pay the Company earned royalty payments ranging from 5% to 7% of the invoice price of
licensed products. The Company has been paid or was owed approximately $822,600 pursuant to the license agreement for the year ended June 30, 2002. Effective July 1, 2002, this license
agreement was amended and royalty rates were reduced to a range between 3% and 5% of the invoice price of licensed products. Also concurrent with the sale, the Company and Singapore entered into a
Support Services Agreement under which the parties agreed to provide each other with certain marketing and advertising, education and training, technical and production, planning, accounting,
financial, legal, computing and other administrative and management services. In exchange, the party receiving the services agreed to reimburse the other party for all costs incurred on behalf of the
receiving party. The Company has not been paid or was not owed anything pursuant to the support services agreement for the year ended June 30, 2002. Singapore has been paid or was owed
approximately $120,000 pursuant to the support services agreement for the year ended June 30, 2002.

The
Company has entered into trademark license and royalty agreements with O.Y.L. Manufacturing Company SDN BHD ("OMC") (the "OMC Agreement"), Shenzhen O.Y.L. Electrical Co. Ltd. ("Shenzhen")
(the "Shenzhen Agreement") and P.T. O.Y.L. Sentra Manufacturing ("PT OYL") (the "PT OYL Agreement"). Pursuant to such Agreements, the Company has granted OMC, Shenzhen and PT OYL,
respectively, nonexclusive, nontransferable rights and licenses to use the trademark "McQuay" in connection with the sale and marketing of certain products exclusively through Shenzhen's, OMC's and PT
OYL's respective international distribution networks. In exchange for such grants, OMC, Shenzhen and PT OYL have each agreed to pay the Company earned royalty payments ranging from 2%
to 5% of the accumulated net sales of such products. The Company has been paid or was owed $312,400, $340,500 and $506,400 pursuant to the OMC Agreement, $408,800, $225,000 and $525,600 pursuant to
the Shenzhen Agreement, and $0, $0 and $11,621 pursuant to the PT OYL Agreement for the years ended June 30, 2002, 2001 and 2000, respectively. Each of OMC, Shenzhen and PT OYL are subsidiaries
of OYL.

In
August 1995, the Company entered into an agreement with Wuhan-McQuay Air Conditioning & Refrigeration Company Ltd. ("Wuhan-McQuay"), a joint venture of Wuhan-New
World Refrigeration Industrial Company Limited and McQuay Asia (Hong Kong) Ltd., an OYL subsidiary, to license certain technology and trademarks for use in the People's Republic of China in
exchange for a royalty of 2%-3% of net sales. Pursuant to such agreement, the Company has paid or was owed royalties from Wuhan-McQuay of $91,100, $449,500 and $43,000 for the years ended
June 30, 2002, 2001 and 2000, respectively. Payments are to be paid quarterly contingent on Wuhan-McQuay's financial condition and receipt of approval from the Government of the People's
Republic of China.

AAF-McQuay
UK Limited, a wholly owned subsidiary of the Company, carries a short-term credit facility with availability of £8.5 million
($13.0 million). Borrowings under this facility totaled £1.3 million ($2.0 million) and £2.8 million ($3.9 million) at June 30, 2002
and 2001, respectively. This facility was originally supported by a letter of credit from OYL that expired in May 2002.

17.    Investment in Affiliates

The Company has entered into a number of partnerships with local entities throughout the world to maximize its brand name exposure, increase its market penetration and enhance
its manufacturing and distribution capabilities. The Company currently has eleven (11) joint ventures (20% to 50% Company ownership) accounted for by the equity method. The Company sold $13.2,
$18.4, and $17.4 million for fiscal years 2002, 2001 and 2000, respectively, to these joint ventures. The Company has loans outstanding to five of the joint ventures for a total principal sum
of $2.6 million as of June 30, 2002

49

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and to eight of the joint ventures for a total principal sum of $3.3 million as of June 30, 2001. Summary financial information for the affiliated companies (20% to 50% owned) is as
follows:

2002

2001

2000(dollars in thousands)Current assets

$
25,482

$
25,005

$
28,798Property, plant and equipment and other assets


2,157


2,749


2,660Current liabilities


19,963


18,900


21,693Long-term debt


2,895


2,750


3,218Net sales


53,563


52,406


59,460Gross profit


12,876


12,073


15,234Net income (loss)


533


996


223


Investments
in affiliates of $4.1 and $3.9 million is included in Other assets and deferred charges in the Consolidated Balance Sheets at June 30, 2002 and 2001, respectively. The
Company provides guarantees for obligations of its joint ventures totaling $0.4 million as of June 30, 2002.

18.    Other Income (Expense)

During the fiscal years ended June 30, 2002, 2001 and 2000, the Company had net other income (expense) of $3.6, $4.5, and $(1.6) million, respectively. In fiscal 2002,
the Company won the appeal of a case involving its Italian subsidiary and the Adv. Istituto Nazionale della Previdenza Sociale (INPS) resulting in the reversal of approximately $2.6 million
loss contingency. The Company also reduced its environmental reserve (see Note 14) by approximately $2.3 million in fiscal 2002 as the result of updated costs estimates from its
environmental consultants. On January 30, 2002, the Company sold its 54% ownership interest in its Korean joint venture to its partner, Century Corporation, for approximately
$1.6 million. This transaction resulted in a pre-tax loss of approximately $0.5 million. In addition, the Company realized approximately $0.6 million in related
accumulated currency translation adjustment losses. The Korean joint venture's sales of $5.9 million and net income of $0.1 million are included in the Company's fiscal 2002 results. The
remaining components of other income and expense for fiscal 2002 result primarily from foreign currency and equity affiliate transactions. In fiscal 2001, the Company completed the sale of property in
Dartford, United Kingdom associated with its industrial refrigeration business resulting in a gain of $4.5 million before taxes. Proceeds from the sale of approximately $6.9 million were
used to reduce debt. Additionally, during the fiscal year ended June 30, 2001, the Company repurchased $16.2 million of its Senior Notes at a discount resulting in a net gain of
approximately $0.4 million before taxes. See Note 7 for further discussion. In fiscal 2000, the Company recorded a loss of $1.3 million due to the sale of the commercial air
conditioning operation in France in October 1999. Gain or losses from foreign currency and equity affiliate transactions are also included in other income (expense) for the fiscal years ended
June 30, 2001 and 2000.

19.    Selected Quarterly Financial Data (Unaudited)

(Dollars in thousands)

|                       |  | Fiscal 2002 Quarters |         | Fiscal 2001 Quarters
|---------------------- |  | -------------------- | ------- | --------------------
|
|Sales                  |  | $                    | 210,077 |                     
|Gross margin           |  |                      | 56,199  |                     
|Income from operations |  |                      | 10,131  |                     
|Net income (loss)      |  |                      | 3,452   |                     

50

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Schedule II. Valuation and Qualifying Accounts and Reserves

AAF-MCQUAY INC.(dollars in thousands)

|Col. A                             |  | Col. B |        | Col. C
Additions |   | Col. D |  | Col. E
|---------------------------------- |  | ------ | ------ | ---------------- | - | ------ |  | ------
|
|                                   |  |        |        |                  |   |        |  |       
|Year Ended June 30, 2002           |  |        |        |                  |   |        |  |       
|Allowance for doubtful receivables |  | $      | 6,211  |                  | $ | 1,555  |  |       
|Reserve for inventory valuation    |  |        | 11,947 |                  |   | 3,011  |  |       
|Accrued warranty expense           |  |        | 30,599 |                  |   | 10,041 |  |       
|Year Ended June 30, 2001           |  |        |        |                  |   |        |  |       
|Allowance for doubtful receivables |  | $      | 6,968  |                  | $ | 1,015  |  |       
|Reserve for inventory valuation    |  |        | 11,468 |                  |   | 1,369  |  |       
|Accrued warranty expense           |  |        | 29,439 |                  |   | 12,585 |  |       
|Year Ended June 30, 2000           |  |        |        |                  |   |        |  |       
|Allowance for doubtful receivables |  | $      | 7,057  |                  | $ | 2,218  |  |       
|Reserve for inventory valuation    |  |        | 7,215  |                  |   | 5,193  |  |       
|Accrued warranty expense           |  |        | 28,627 |                  |   | 14,963 |  | $     

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

On February 26, 2002, the Company filed a Current Report on Form 8-K which reported the Company's decision to change its principal
independent certified accountant to KPMG LLP. There have been no disagreements with the accountants on accounting or financial disclosure matters during the Company's current fiscal year.

51

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Part III

Item 10. Directors and Officers of the Registrant

The following table sets forth the name, age, and position of the Company's directors and executive officers.

|Name                   |  | Age |  | Position                                             
|---------------------- |  | --- |  | -----------------------------------------------------
|Ho Nyuk Choy           |  | 48  |  | President, Chief Executive Officer and Director      
|Eric R. Roberts        |  | 44  |  | Executive Vice President of McQuay Americas          
|Bruce D. Krueger       |  | 40  |  | Vice President of Finance and Chief Financial Officer
|Stephen T. Kapsalis    |  | 44  |  | Vice President of Environmental Products             
|Claudio Capozio        |  | 48  |  | Vice President of McQuay Europe                      
|Gary R. Boyd           |  | 50  |  | Vice President of Human Resources                    
|John G. Ferencz        |  | 48  |  | Tax Director and Secretary                           
|Ronald J. Pederson     |  | 44  |  | Treasurer                                            
|Tan Sri Quek Leng Chan |  | 59  |  | Director                                             
|Liu Wan Min            |  | 58  |  | Director                                             
|Kwek Leng San          |  | 47  |  | Director                                             

Ho Nyuk Choyjoined AAF-McQuay Inc. in January 2000 as President and Chief Executive Officer and also continues to serve as
the Joint Group Managing Director of OYL. Mr. Ho has served as Group Managing Director of OYL since 1993. From 1989 to 1993, he served in various management positions with OYL. Mr. Ho is
a Director of McQuay Asia (Hong Kong) Limited.

Eric R. Robertshas served as Executive Vice President of McQuay Americas since June 2000. From October 1999 to June 2000,
Mr. Roberts served as Vice President & General Manager of the Applied Air Handling business unit within the McQuay North America segment and was general manager of the business unit
since March 1998. Mr. Roberts was Director of Marketing for McQuay International from January 1997 to March 1998. Prior to joining McQuay, Mr. Roberts was Director
of Marketing for Onan Corporation, a division of Cummins Engine Company.

Bruce D. Kruegerhas served as Vice President of Finance and Chief Financial Officer of the Company since November 1999. From October 1997
until October 1999, Mr. Krueger served as Vice President and Corporate Controller of the Company. He joined the Company as Vice President and Global Controller of the Air Filtration
Division of AAF in January of 1996 and has held senior financial management positions in the air filtration industry since 1992. Prior to 1992, Mr. Krueger served as Director of Internal Audit
at Clarcor and was with Coopers & Lybrand from 1984 to 1990.

Stephen T. Kapsalishas served as Vice President of AAF's Environmental Products Division for the Company since August 2000. From 1995 to 1998,
Mr. Kapsalis served as Vice President of the
Environmental Products business unit in Europe, and from 1998 until assuming his current position, he served as Vice President of AAF Europe. Prior to joining the Company, he served as President of
Winter Welding and Machine Corporation from 1990 to 1995 and served as a Manager in the Power Construction and Engineering Industry for eight years.

52

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Claudio Capoziohas served as Vice President of McQuay Europe since August 1999. From July 1995 to August 1999, Mr. Capozio
served as General Manager and Managing Director of the Company's Italian subsidiary, where he was Sales and Marketing Manager from April 1994 to July 1995. Before joining McQuay in
April 1994, Mr. Capozio worked for AMP, an international air conditioning manufacturer part of the RC Group, as General Manager and Managing Director from 1990 to 1994 and as Marketing
Director from 1986 to 1989.

Gary R. Boydhas served as Vice President of Human Resources for the Company since July 1997 and as Vice President of Human Resources for McQuay
International from February 1996 until July 1997. From 1984 to 1996, Mr. Boyd served in various Human Resources positions at Cummins Engine Company, most recently as Director of
Human Resources for Worldwide operations for Onan Corporation, a division of Cummins Engine Company.

John G. Ferenczhas served as Tax Director and Secretary for the Company since January 2002, with oversight responsibility for the Company's
legal affairs. From July 1998 to January 2002, he served as DirectorCorporate Tax. Prior to joining the Company in 1998, Mr. Ferencz served as Director of
International Tax for Harsco Corporation, was with Price Waterhouse from 1983 to 1988 and graduated from the Dickinson School of Law.

Ronald J. Pedersonhas served as the Treasurer since July 1997. From March 1995 until July 1997, Mr. Pederson served as the
Assistant Treasurer of the Company. He served as Manager of Treasury Operations from February 1988 through March 1995.

Tan Sri Quek Leng Chanhas served as Executive Chairman of Hume since 1990. He has served as Chairman and Chief Executive Officer of Hong Leong since
1968. Mr. Quek currently serves as Executive Chairman of Hong Leong Credit Berhad, Hong Leong Bank Berhad, Hong Leong Industries Berhad, Hong Leong Properties Berhad, Hume Cemboard Berhad,
Camerlin Group Berhad and Tasek Corporation Berhad and as Chairman of Guoco Group Limited, Benchmark Group PLC and HLG Capital Berhad. Mr. Quek is Deputy Chairman of Brierley Investments
Limited and a Director of OYL, First Capital Corporation Ltd, Hong Leong Finance Limited and Thistle Hotels PLC. Mr. Quek is a brother of Kwek Leng San.

Liu Wan Mincurrently serves as Joint Group Managing Director of OYL since December 1999 and has served as Deputy Chairman of OYL since 1993.
From 1974 to 1993, Mr. Liu served as Group Managing Director of OYL. From 1996 through 1997, Mr. Liu served as the Group Managing Director of Nanyang Press Holdings Bhd.

Kwek Leng Sanhas served on the Board of Directors of Hong Leong Industries Berhad since September 1990. Mr. Kwek currently serves as
President & Chief Executive Officer of Hong Leong Industries Berhad and Hume Industries (Malaysia) Berhad and as Executive Chairman of Malaysian Pacific Industries Berhad. He is also the Group
Managing Director of Camerlin Group Berhad and a director of Hume Cemboard Berhad, O.Y.L. Industries Bhd and Southern Steel Berhad. From September 1990 to August 1993, Mr. Kwek
was the Group Managing Director of Malaysian Pacific Industries Berhad. Mr. Kwek is a brother to Tan Sri Quek Leng Chan. Mr. Kwek was elected as a Director of the Company at a special
meeting of the sole shareholder on July 1, 2001.

Except
for Kwek Leng San who was elected as a Director at a special meeting of the sole shareholder on July 1, 2001, each of the Directors has been a Director since May 2, 1994. All
Directors hold office until the next annual meeting of shareholders of the Company and until their successors have been elected and qualified. The Company does not currently pay the Directors any fees
for serving on the Board of Directors, although the Company may consider a change in this policy in the future. Executive officers of the Company are elected by and serve at the discretion of the
Board of Directors. Except as noted above, there are no family relationships among the Directors or executive officers of the Company.

53

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Item 11. Executive Compensation



The following table sets forth information concerning compensation paid or accrued by the Company to the following individuals for services rendered in all capacities to the
Company and its subsidiaries during the 2002, 2001 and 2000 fiscal years: (i) the Chief Executive Officer and (ii) each of the next four most highly compensated executive officers.

Summary Compensation Table

|                                                                            |  |                |  | Annual Compensation     |  |                      
|--------------------------------------------------------------------------- |  | -------------- |  | ----------------------- |  | ---------------------
|
|
|
|Ho Nyuk Choy
President and Chief Executive
Officer and Director (c)         |  | 2002
2001
2000 |  | 465,576
455,976
223,188 |  | 83,804
140,000
81,667
|Eric R. Roberts
Executive Vice President of McQuay
Americas                 |  | 2002
2001
2000 |  | 221,019
220,331
161,854 |  | 30,375
81,825
31,546 
|Bruce D. Krueger
Vice President of Finance and
Chief Financial Officer      |  | 2002
2001
2000 |  | 202,469
190,001
181,490 |  | 27,810
61,023
47,960 
|Stephen T. Kapsalis
Vice President of AAF's Environmental
Products Division |  | 2002
2001
2000 |  | 185,769
154,808
161,539 |  | 132,300
56,000
37,122
|Claudio Capozio
Vice President of McQuay Europe                             |  | 2002
2001
2000 |  | 144,382
141,571
130,566 |  | 77,605
31,597
21,658 



Stock Option Plan

In fiscal 1998, the Company adopted a Stock Option Plan that provides for the grant of non-qualified stock options to certain members of management and key
employees to purchase the common stock of the Company's parent AAF-McQuay Group Inc. The Company granted options under the stock option plan during fiscal year 1999. The related
impact to the Statement of Income was based on an independent valuation of the Company at or near the grant date.

54

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There
were no options granted during fiscal year 2000, 2001 or 2002. In fiscal 2002, the stock option plan was terminated and all remaining options granted under the plan were cancelled in exchange
for a nominal payment.



Mr. Ho Nyuk Choy is the only officer or employee of the Company who participated in deliberations of the Company's Board of Directors concerning executive officer
compensation during the last fiscal year. The Company's Board of Directors determines the compensation paid to the President and Chief Executive Officer.

55

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Item 12. Security Ownership of Certain Beneficial Owners and Management

PRINCIPAL STOCKHOLDERS

The following table sets forth information as of September 13, 2002, with respect to the beneficial ownership of shares of the Company's Common Stock by each person
known to the Company to own 5% or more of its Common Stock (determined in accordance with the applicable rules of the Commission), by each the Company's directors and current executive officers named
in the summary compensation table, and by such directors and executive officers as a group.

Common Stock, par value $100.00 per share

|Name                                                                        |  | Number of Shares |  | Percent Outstanding
|--------------------------------------------------------------------------- |  | ---------------- |  | -------------------
|                                                                            |  |                  |  |                    
|5% Beneficial Owners                                                        |  |                  |  |                    
|AAF-McQuay Group Inc.(a)
10300 Ormsby Park Pl. Ste 600
Louisville, KY 40223 |  | 2,497            |  | 100                
|Directors and Executive Officers                                            |  |                  |  |                    
|Tan Sri Quek Leng Chan(a)                                                   |  | 2,497            |  | 100                
|Liu Wan Min                                                                 |  | 0.00             |  | *                  
|Kwek Leng San                                                               |  | 0.00             |  | *                  
|Ho Nyuk Choy                                                                |  | 0.00             |  | *                  
|Bruce D. Krueger                                                            |  | 0.00             |  | *                  
|Eric R. Roberts                                                             |  | 0.00             |  | *                  
|Stephen T. Kapsalis                                                         |  | 0.00             |  | *                  
|All current directors and executive officers as a group (10 persons)(a)     |  | 2,497            |  | 100                

56

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Security Ownership of Management in Parents of the Company

The following tables set forth information as of June 30, 2002, for OYL and Hume with respect to the beneficial ownership of shares of each of those company's equity
securities by the Company's directors and current executive officers who hold such securities and the directors and executive officers as a group.

OYL Ordinary Shares, par value RM 1.00 per share

|Name                                                                 |  | Number of Shares |     | Percent Outstanding
|-------------------------------------------------------------------- |  | ---------------- | --- | -------------------
|Tan Sri Quek Leng Chan                                               |  | 84,912,228       | (a) | 65.0               
|Liu Wan Min                                                          |  | 6,160,000        |     | 4.7                
|Ho Nyuk Choy                                                         |  | 284,000          |     | *                  
|Bruce D. Krueger                                                     |  | 3,800            |     | *                  
|Eric R. Roberts                                                      |  | 2,200            |     | *                  
|All current directors and executive officers as a group (10 persons) |  | 91,362,228       |     | 69.7               

Hume Ordinary Stock Units, par value RM 1.00 per unit

|Name                                                                 |  | Number of Shares |     | Percent Outstanding
|-------------------------------------------------------------------- |  | ---------------- | --- | -------------------
|Tan Sri Quek Leng Chan                                               |  | 164,846,024      | (b) | 66.1               
|Liu Wan Min                                                          |  | 1,500,000        |     | *                  
|All current directors and executive officers as a group
(10 persons) |  | 166,346,024      |     | 66.1               

57

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Item 13. Certain Relationships and Related Transactions

Hong Leong and its subsidiary companies, including OYL and the Company, have a policy of buying from related companies whenever feasible. During fiscal years
ended June 30, 2002, 2001 and 2000, pursuant to this policy, the Company and various of its subsidiaries sold an aggregate of approximately $7.6, $6.7 and $9.5 million, respectively, of
the Company's products to various OYL entities in the ordinary course of business. Additionally, during fiscal years 2002, 2001 and 2000, the Company purchased approximately $6.7, $3.1 and
$8.4 million, respectively, of product from OYL and its subsidiary companies in the ordinary course of business. The Company does not expect a change in this policy and plans to continue to buy
from and sell to OYL and Hong Leong related entities in the future.

On
September 29, 2001, the Company sold its Singapore subsidiary AAF Asia Pte. Ltd. ("Singapore") to AAF Group Pte. Ltd. ("AAF Group"), a wholly owned subsidiary of OYL, for fair
market value of approximately $13.1 million, which resulted in an immaterial gain after write-off of associated goodwill and intangible assets. The Singapore subsidiary had sales
and net income of $3.6 million and $75,000, respectively, for the three month-period ended September 30, 2001. Proceeds from the sale were used to pay down debt. Concurrent with the
sale, the Company entered into a Technology and Trademark License Agreement with AAF Group. Under this license agreement, the Company has granted AAF Group an exclusive, non-transferable
right and license to manufacture and sell certain AAF products and to use certain AAF trademarks in Asia. In exchange for these grants, AAF Group has agreed to pay the Company earned royalty payments
ranging from 5% to 7% of the invoice price of licensed products. The Company has been paid or was owed approximately $822,600 pursuant to the license agreement for the year ended June 30, 2002.
Effective July 1, 2002, this license agreement was amended and royalty rates were reduced to a range between 3% and 5% of the invoice price of licensed products. Also concurrent with the sale,
the Company and Singapore entered into a Support Services Agreement under which the parties agreed to provide each other with certain marketing and advertising, education and training, technical and
production, planning, accounting, financial, legal, computing and other administrative and management services. In exchange, the party receiving the services agreed to reimburse the other party for
all costs incurred on behalf of the receiving party. The Company has not been paid or was not owed anything pursuant to the support services agreement for the year ended June 30, 2002.
Singapore has been paid or was owed approximately $120,000 pursuant to the support services agreement for the year ended June 30, 2002.

The
Company has entered into trademark license and royalty agreements with O.Y.L. Manufacturing Company SDN BHD ("OMC") (the "OMC Agreement"), Shenzhen O.Y.L. Electrical Co. Ltd. ("Shenzhen")
(the "Shenzhen Agreement") and P.T. O.Y.L. Sentra Manufacturing ("PT OYL") (the "PT OYL Agreement"). Pursuant to such Agreements, the Company has granted OMC, Shenzhen and PT OYL,
respectively, nonexclusive, nontransferable rights and licenses to use the trademark "McQuay" in connection with the sale and marketing of certain products exclusively through Shenzhen's, OMC's and PT
OYL's respective international distribution networks. In exchange for such grants, OMC, Shenzhen and PT OYL have each agreed to pay the Company earned royalty payments ranging from 2%
to 5% of the accumulated net sales of such products. The Company has been paid or was owed $312,400, $340,500 and $506,400 pursuant to the OMC Agreement, $408,800, $225,000 and $525,600 pursuant to
the Shenzhen Agreement, and $0, $0 and $11,621 pursuant to the PT OYL Agreement for the years ended June 30, 2002, 2001 and 2000, respectively. Each of OMC, Shenzhen and PT OYL are subsidiaries
of OYL.

In
August 1995, the Company entered into an agreement with Wuhan-McQuay Air Conditioning & Refrigeration Company Ltd. ("Wuhan-McQuay"), a joint venture of Wuhan-New
World Refrigeration Industrial Company Limited and McQuay Asia (Hong Kong) Ltd., an OYL subsidiary, to license certain technology and trademarks for use in the People's Republic of China in
exchange for a royalty of 2%-3% of net sales. Pursuant to such agreement, the Company has paid or was owed royalties from

58

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Wuhan-McQuay of $91,100, $449,500 and $43,000 for the years ended June 30, 2002, 2001 and 2000, respectively. Payments are to be paid quarterly contingent on Wuhan-McQuay's financial condition
and receipt of approval from the Government of the People's Republic of China.

AAF-McQuay
UK Limited, a wholly owned subsidiary of the Company, carries a short-term credit facility with availability of £8.5 million
($13.0 million). Borrowings under this facility totaled £1.3 million ($2.0 million) and £2.8 million ($3.9 million) at June 30, 2002
and 2001, respectively. This facility was originally supported by a letter of credit from OYL that expired in May 2002.

59

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Part IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K



| | 1.  | Financial Statements                                                                                                                                           
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                
| |     |                                                                                                                                                                
| |     |                                                                                                                                                                
| |     |                                                                                                                                                                
| |     |                                                                                                                                                                
| |     |                                                                                                                                                                
| | 2.  | Financial Statement Schedules                                                                                                                                  
| | II. | Valuation and Qualifying Accounts and Reserves                                                                                                                 
| |     | All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.



|3.1   |  | Articles of Incorporation1                                                                                                     
|----- |  | -------------------------------------------------------------------------------------------------------------------------------
|3.2   |  | By-Laws1                                                                                                                       
|4.1   |  | Indenture dated as of February 14, 1996 with IBJ Schroder Bank and Trust Company5                                              
|4.2   |  | Form of Note (included in Exhibit 4.1)                                                                                         
|10.1  |  | Trademark License and Royalty Agreement dated December 27, 1995 with P.T. O.Y.L. Sentra Manufacturing1                         
|10.2  |  | Trademark License and Royalty Agreement dated December 27, 1995 with Shenzhan O.Y.L. Electrical Company Ltd.1                  
|10.3  |  | Trademark License and Royalty Agreement dated December 27, 1995 with O.Y.L. Manufacturing Company SDN BHD1                     
|10.4  |  | Technology Licensing Agreement dated August 8, 1995 with McQuay-Wuhan Air Conditioning & Refrigeration Company Ltd.1           
|10.5  |  | Asset Transfer Agreement dated May 29, 1995 by and among AAF Asia Pte., Ltd. and McQuay Air Conditioning (Singapore) Pte. Ltd.1
|10.6  |  | Supply and Procurement Agreement dated May 2, 1994 with EnergyLine Systems, Inc.1                                              
|10.7  |  | Stock Option Plan effective January 1, 19962                                                                                   
|10.8  |  | Revolving Credit, Term Loan and Security Agreement dated September 30, 1999 with PNC Bank, N.A.4                               
|10.9  |  | First Amendment to Revolving Credit, Term Loan and Security Agreement dated October 25, 1999, with PNC Bank, N.A.4             
|10.10 |  | Second Amendment to Revolving Credit, Term Loan and Security Agreement dated November 12, 1999, with PNC Bank, N.A.4           
|10.11 |  | Third Amendment to Revolving Credit, Term Loan and Security Agreement dated June 26, 2001, with PNC Bank, N.A.5                
|10.12 |  | Fourth Amendment to Revolving Credit, Term Loan and Security Agreement dated April 22, 2002, with PNC Bank, N.A.6              

60

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|10.13 |  | Fifth Amendment to Revolving Credit, Term Loan and Security Agreement dated July 26, 2002, with PNC Bank, N.A.7  
|----- |  | -----------------------------------------------------------------------------------------------------------------
|10.14 |  | Sixth Amendment to Revolving Credit, Term Loan and Security Agreement dated August 21, 2002, with PNC Bank, N.A.7
|21    |  | Subsidiaries                                                                                                     
|24    |  | Power of Attorney                                                                                                
|99.1  |  | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002           
|99.2  |  | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002           

---



61

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SIGNATURES

Pursuant to the requirements 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, in the City of Louisville, State of Kentucky, on September 13, 2002.

| | AAF-McQUAY INC.
| | ---------------
| | By:            

Pursuant
to the requirements of the Securities Exchange Act of 1934, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

|/s/Ho Nyuk ChoyHo Nyuk Choy
President and Chief Executive Officer
(Principal Executive Officer)                                      | September 13, 2002                          
|------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------
|/s/Bruce D. KruegerBruce D. Krueger
Vice President of Finance and Chief Financial Officer
(Principal Finance and Accounting Officer) | September 13, 2002                          
|The Board of Directors:                                                                                                              |                                             
|                                                                                                                                     | Liu Wan Min                                 
|                                                                                                                                     | Ho Nyuk Choy                                
|By:                                                                                                                                  | /s/Ho Nyuk ChoyHo Nyuk Choy
Attorney-in-Fact

---

CERTIFICATIONS

I, Ho Nyuk Choy, certify that:

1.    I
have reviewed this annual report on Form 10-K of AAF-McQuay Inc.;

2.    Based
on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

|/s/ Ho Nyuk ChoyHo Nyuk Choy
President and Chief Executive Officer
(Principal Executive Officer) |  | September 13, 2002
|------------------------------------------------------------------------------------------------ |  | ------------------

I,
Bruce D. Krueger, certify that:

1.    I have reviewed this annual report on Form 10-K of AAF-McQuay Inc.;

2.    Based
on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this annual report;

3.    Based
on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

|/s/ Bruce D. KruegerBruce D. Krueger
Vice President of Finance and Chief Financial Officer (Principal Finance and Accounting Officer) |  | September 13, 2002
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT 0F 1934 BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.

No
annual report or proxy materials have been sent to security-holders during the period covered by this report.

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Exhibit Index

|Number |  | Description                                                                                                      
|------ |  | -----------------------------------------------------------------------------------------------------------------
|10.13  |  | Fifth Amendment to Revolving Credit, Term Loan and Security Agreement dated July 26, 2002, with PNC Bank, N.A.   
|10.14  |  | Sixth Amendment to Revolving Credit, Term Loan and Security Agreement dated August 21, 2002, with PNC Bank, N.A.7
|21     |  | Subsidiaries                                                                                                     
|24     |  | Power of Attorney                                                                                                
|99.1   |  | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002           
|99.2   |  | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002           

---