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                                 UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, 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 July 3, 1999

  / /    Transition Report Pursuant to Section 13 or 15(d) of the
         Securities Exchange Act of 1934
                    For the transition period from to

Commission file number: Not Applicable

                                AAF-MCQUAY INC.

           (Exact name of the Registrant as specified in its charter)

                  DELAWARE                             41-0404230
      (State or other Jurisdiction of        (I.R.S. Employer Identification
       Incorporation or Organization)                     No.)
             215 CENTRAL AVENUE                           40208
            LOUISVILLE, KENTUCKY                       (Zip Code)
  (Address of principal executive offices)

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. __x__
    The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant at June 30, 1999 was $-0-.

    The number of shares outstanding of the registrant's only class of common
stock as of September 24, 1999 (latest practicable date) was 2,497.

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                                     INDEX
                        AAF-MCQUAY INC. AND SUBSIDIARIES

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<S>         <C>                                                                                           <C>
PART I
Item 1      Business....................................................................................          3
Item 2      Properties..................................................................................         11
Item 3      Legal Proceedings...........................................................................         13
Item 4      Submission of Matters to a Vote of Securities Holders.......................................         14

PART II
Item 5      Market for Registrant's Common Stock and Related Stockholder Matters........................        N/A
Item 6      Selected Financial Data.....................................................................         15
Item 7      Management's Discussion and Analysis of Financial Condition and Results of Operations.......         17
Item 7a     Quantitative and Qualitative Disclosures about Market Risk..................................         24
Item 8      Financial Statements and Supplemental Data..................................................         25
Item 9      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........        N/A

PART III
Item 10     Directors and Executive Officers of the Registrant..........................................         52
Item 11     Executive Compensation......................................................................         55
Item 12     Security Ownership of Certain Beneficial Owners and Management..............................         59
Item 13     Certain Relationships and Related Transactions..............................................         60

PART IV
Item 14     Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................         61
</TABLE>

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                                     PART I

ITEM 1. BUSINESS

GENERAL

    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 (then
named SnyderGeneral Corporation) 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. The Company was then renamed
AAF-McQuay Inc. 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 is a leading worldwide manufacturer and marketer of commercial
air conditioning and air filtration products and systems primarily for
commercial, institutional and industrial customers. In December 1995, the
Company entered the industrial refrigeration business through the acquisition of
J&E Hall, the United Kingdom's leading integrated provider of industrial
refrigeration and freezing equipment. The Company believes that it is the
leading global manufacturer of air filtration products for nonvehicular
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 market or region.

    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, such as 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.

    The Company's Commercial Air Conditioning and Refrigeration Group engages in
the manufacture, sale, service and distribution of HVAC&R equipment. Products
include chillers, applied air handling systems, terminal air conditioning
systems, industrial refrigerators and freezers, service and parts. The Company's
commercial air conditioning equipment is sold primarily under the
McQuay(-Registered Trademark-) brand name and 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, the
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 Commercial Air Conditioning and
Refrigeration Group is also the leading integrated supplier of industrial
refrigeration and freezing products and systems in the United Kingdom and is
among the three largest suppliers of industrial contact plate ("fast") freezers
in the world. Industrial refrigeration products and systems are sold under the
J&E Hall(TM) brand name and freezers are sold under the
Jackstone(-Registered Trademark-) brand name. In connection with its
refrigeration business, the Commercial Air Conditioning and Refrigeration Group
also manufactures a line of single screw compressors which are sold under the
HallScrew(TM) brand name. In addition to establishing an important presence in
the global industrial refrigeration industry, the acquisition of J&E Hall
provided the Company with access to J&E Hall's single screw compressor
technology which has expanded the single screw chiller product line.

    The Company's Filtration Products Group engages in the manufacture, sale and
distribution of air filtration products and systems, including air filtration
equipment, air pollution control products and systems, machinery filtration and
acoustic systems and replacement filters. The Company's products,

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including replacement filters, are sold globally under the
AmericanAirFilter(-Registered Trademark-) and AAF(-Registered Trademark-) brand
names and under private label. The Company's filtration products are sold
worldwide to commercial, institutional and industrial customers as well as to
retailers for residential use. The Filtration Products Group's largest customers
include Shinwa Corporation, Wal-Mart Stores, Inc., Ace Hardware Corp., Asea
Brown Boveri ("ABB"), Menard Cashway, TRU*SERVE, and Solar Gas Turbines.

COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP

    The Company, through the Commercial Air Conditioning and Refrigeration
Group, is a worldwide leader in the design, manufacture, sale and service of
HVAC&R equipment principally for the commercial, industrial and institutional
markets. In the United States, the Company believes that its share of the
commercial air conditioning market which it serves is approximately 10%. The
Company's products are sold primarily under the widely recognized
McQuay(-Registered Trademark-) brand name and services are marketed under the
McQuayService(SM) name. 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
and freezing equipment under the J&E Hall brand names including J&E Hall(TM),
Thermotank(-Registered Trademark-), and Jackstone(-Registered Trademark-).
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 refrigeration products have earned ISO
9001 certification and four 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) terminal air conditioning 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 (non CFC)
refrigerant.

    Under the trade name McQuayService(SM), the Company services both its own
and its competitors' products and systems and provides start-up assistance,
warranty support, full aftermarket 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.  Applied air handling systems include indoor
and roof mounted air handling units, packaged rooftop systems, self-contained
systems and coils with capacities up to 135 tons that are generally mounted on
the roof of a building, in ceilings and/or duct work, or installed on each floor
of a multi-story building. These units generally combine heating and cooling
capabilities in a single or self-contained configuration. The Company has a line
of advanced technology air handlers

                                       4
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which combine European and North American designs to meet the market's growing
demand for quiet, reliable, high quality air handlers in response to demand for
improved indoor air quality.

    TERMINAL AIR CONDITIONING SYSTEMS.  Terminal air conditioning 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 and heat pumps, unit ventilators and
mini-split systems. 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 business unit has
recently completed initial phases of product line standardization and launched
manufacturing initiatives as a key element in their marketing mix, effectively
providing significantly reduced delivery-cycles and reduced working capital.

    The Company globally serves its installed base by providing high value
support services and original specification Certified McQuay Parts(TM). The
parts business also serves the broader HVAC&R replacement market through the
distribution of PTAC equipment and replacement components under its Spectrum
PartsTM banner. The Company provides value added through e-commerce, electronic
parts catalogs and industry leading order cycle times.

    INDUSTRIAL REFRIGERATION.  The acquisition of J&E Hall 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 certain competitive advantages, including
improvements in efficiency and cost, lower service requirements and noise
reduction. The Company manufactures, sells and services industrial refrigeration
and freezing equipment under several well known J&E Hall brand names, including
J&E Hall(TM), Thermotank(-Registered Trademark-), and
Jackstone(-Registered Trademark-). 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. The principal customers
for industrial freezers are in the food industry generally and particularly the
seafood industry. The Company manufactures industrial refrigeration and freezer
products through J&E Hall's U.K. production facilities. In fiscal year 1997, the
Company acquired Coulstock & Place Engineering Co. Ltd., a motor rewind
specialist providing support for the compressor business.

COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP STRATEGIC PARTNERSHIPS

    The Company, through its Commercial Air Conditioning and Refrigeration
Group, 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, Mexico, Puerto Rico and Spain and has entered into a partnership to sell
its products throughout Latin America. The Company has also implemented a
strategy to form strategic partnerships in selected metropolitan markets to
increase its market penetration in the domestic market, having already formed
partnerships in Philadelphia, Pennsylvania, Atlanta, Georgia, and New York City,
New York. In addition, the Company has established regional sales offices in
Beirut and Dubai and markets its products throughout Asia, including China,
through manufacturing and sales joint ventures established by OYL.

FILTRATION PRODUCTS GROUP

    Within its Filtration Products Group, the Company has two principal
businesses: replacement filters and environmental products. Replacement filters
are sold to commercial and industrial building

                                       5
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owners, contractors, retailers for residential applications, hospitals and
computer chip manufacturers for clean room applications, locomotive and air
conditioning original equipment manufacturers and railroad companies. The
Company has, since the 1920's, marketed its replacement filters under the
AmericanAirFilter(-Registered Trademark-) and AAF(-Registered Trademark-) brand
names. 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. Three of the Company's facilities used to produce its air
filtration products have earned ISO 9001 certification, and six facilities have
earned ISO 9002 certification.

REPLACEMENT FILTER PRODUCTS

    The Company believes that it is the world's largest manufacturer and
distributor 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 nonvehicular applications to be approximately 15% and
20%, respectively. The Company's filters, including replacement filters, are
sold globally under the AmericanAirFilter(-Registered Trademark-) and
AAF(-Registered Trademark-) brand names and under private label. The filters are
designed to be used in all types of air filtration systems regardless of the
original manufacturer.

    The Filtration Products Group'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. 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 and restaurants. 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").  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 pollution 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

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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 GROUP STRATEGIC PARTNERSHIPS

    The Company, through its Filtration Products Group, 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, Korea, India, 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.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

    See Note 17 "Segment Information" in the Notes to the Consolidated Financial
Statements.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

    See Note 17 "Segment 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 Group or the Filtration Products
Group accounted for more than 10% of the Company's net sales of these products
over the past three fiscal years.

    COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP.  The Company
distributes its commercial HVAC&R equipment and systems in the United States and
Canada through a network of approximately 120 independent manufacturers'
representatives and joint ventures who sell on a commission basis. Replacement
parts for HVAC&R equipment are sold through a network of 80 independent parts
distributors and two 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 Group at June 30, 1999 and 1998 was $133 and $138 million,
respectively.

    FILTRATION PRODUCTS GROUP.  The Company deploys separate sales forces and
distribution channels to market its replacement filter and environmental
products. The Company employs the industry's largest commercial replacement
filter direct sales force, with approximately 160 factory sales people worldwide
to market commercial replacement filters. Residential replacement filters are
sold primarily in the United States through national retail stores, such as
Wal-Mart Stores, Inc., Ace Hardware Corp., Menard Cashway and TRU*SERVE.
Environmental products are sold through factory direct sales people, independent
distributors, agents and joint venture partners. Backlog for the Filtration
Products Group at June 30, 1999 and 1998 was $52 and $59 million, respectively.

MANUFACTURING

    COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP.  The Company's
commercial HVAC&R products are manufactured in 11 factories in the United
States, France, Italy, the United Kingdom, China, Malaysia, and Indonesia. The
Company's industrial refrigeration products are manufactured in five
manufacturing facilities in the United Kingdom. See "Properties."

    FILTRATION PRODUCTS GROUP.  In the Company's filter manufacturing business,
fiberglass filtermedia is manufactured at three facilities located in the United
States, Singapore and The Netherlands and then

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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 12 locations for replacement filters and two
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 maintains
alternate sources for key components where dependence upon a single supplier
could have an adverse impact upon production to the extent that 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 air filtration 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 air filtration business, participants generally compete on the
basis of service, price, quality, reliability, efficiency, 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 GROUP.  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 and freezer
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 and freezer products.

    FILTRATION PRODUCTS GROUP.  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.

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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 $8.9, $10.0 and $10.6 million during the years ended June 30,
1999, 1998 and 1997, 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 1999. It
expects to further enhance single screw air conditioning product technology
during fiscal year 2000. Single screw compressor technology will continue to be
an important element of research and development programs in the Commercial Air
Conditioning and Refrigeration Group. J&E Hall has been marketing industrial
refrigeration products using single screw compressor technology since 1978.

    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.

    Additionally, the Company has introduced a new range of air 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 treated with antimicrobial agents
that inhibit the growth of various microbial contaminants on the filter media;
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.

    The Company owns several registered trademarks and operates under certain
trade names that are important in the marketing of its products, including
AmericanAirFilter(-Registered Trademark-), AAF(-Registered Trademark-),
McQuay(-Registered Trademark-), HermanNelson(-Registered Trademark-),
Thermotank(-Registered Trademark-), Jackstone(-Registered Trademark-) and
Beth(-Registered Trademark-). The Company believes that its rights to use
tradenames and trademarks are adequately protected.

EMPLOYEES

    As of June 30, 1999, the Company employed approximately 5,800 employees
worldwide, with approximately 3,700 persons employed in the United States and
2,100 employed in non-U.S. locations. The Company has a total of seven labor
union bargaining agreements, covering approximately 1,800 employees, of which
two agreements, covering 800 employees, will expire in fiscal year 2000. 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

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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.

    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. The
Montreal Protocol has been amended several times since 1987, including in 1990
(the "London Amendments"), in 1992 (the "Copenhagen Amendments"), and in 1997
(the "Montreal Amendments"). Over 100 countries are signatories to the Montreal
Protocol and the London Amendments. More than 70 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
Amendments.

    Under the Montreal Protocol, as amended, consumption (defined as production
plus imports minus exports) of chlorofluorocarbons ("CFC") by participating
industrialized companies is banned, with limited exceptions, as of January 1,
1997. Additionally, the Montreal Protocol places a cap on the consumption of
hydrochlorofluorocarbons ("HCFC") beginning on January 1, 1997 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 consumption of ozone-depleting chemicals in the
United States, and authorize the EPA to establish regulatory timetables which
meet and 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, 1997 (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 beginning on January 1, 2010, (c) a ban on consumption of HCFC-142b
and HCFC-22 for use in old equipment beginning on January 1, 2020, and (d) a
phaseout of other HCFCs commencing in 2015.

    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,
1997), the Company has redesigned 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 utilizing one such substitute in some
of its equipment sold in Europe and is evaluating redesigned equipment capable
of utilizing other acceptable substitutes.

                                       10
<PAGE>
ITEM 2. PROPERTIES

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

<TABLE>
<CAPTION>
LOCATION                                 SQUARE FEET  LEASED/OWNED                PRINCIPAL FUNCTION
---------------------------------------  -----------  -------------  --------------------------------------------
<S>                                      <C>          <C>            <C>
                               COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP
Plymouth, Minnesota....................     166,000         Owned    Applied Air Handling Systems Business Unit
                                                                     administrative, testing, and research and
                                                                     development facility
Staunton, Virginia.....................     665,000         Owned    Chiller products
Faribault, Minnesota...................     244,000         Owned    Applied air handling system products
Auburn, New York.......................     417,000         Owned    Terminal air conditioning system products
Scottsboro, Alabama....................     270,000         Owned    Applied air handling system products
Cecchina, Italy........................     246,000         Owned    Chiller products
Pons, France...........................     150,000         Owned    Applied air handling systems and terminal
                                                                     air conditioning system products
Dayton, Ohio...........................     100,000        Leased    Parts distribution
Dartford, England......................     105,000         Owned    Headquarters for manufacturing of
                                                                     compressors, industrial refrigeration
                                                                     packages and contact plate freezers
Thetford, England......................      33,000        Leased    Production of air-blast, automatic plate and
                                                                     cryogenic freezers
Derby, England.........................      17,000        Leased    Spares distribution and compressor
                                                                     remanufacturing facility
Birkenhead, England....................       7,000         Owned    Compressor remanufacturing facility
Doncaster, England.....................       5,300         Owned    Motor rewinding facility
                                              7,900        Leased    Cabling facility

                                            FILTRATION PRODUCTS GROUP
Louisville, Kentucky...................     180,000         Owned    Corporate Headquarters, Global Filtration
                                                                     Products Group Headquarters and research and
                                                                     development facility
Atlanta, Georgia.......................     113,000        Leased    Replacement filters
Columbia, Missouri.....................      58,000         Owned    Replacement filters
                                             35,000        Leased    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
</TABLE>

                                       11
<PAGE>
<TABLE>
<CAPTION>
LOCATION                                 SQUARE FEET  LEASED/OWNED                PRINCIPAL FUNCTION
---------------------------------------  -----------  -------------  --------------------------------------------
<S>                                      <C>          <C>            <C>
Cramlington, England...................     160,000         Owned    Applied air handling systems and
                                                                     environmental products
Linton, England........................      27,000         Owned    Replacement filters
Amsterdam, The Netherlands.............      16,000        Leased    Administrative Office
Emmen, The Netherlands.................      97,000         Owned    Replacement filters
                                             75,000        Leased    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
Singapore..............................      41,000         Owned    Replacement filters
</TABLE>

    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.

    Substantially all of the Company's property is subject to encumbrances. See
Notes 6 and 8 to the Consolidated Financial Statements and Notes thereto.

ITEM 3. LEGAL PROCEEDINGS

ENVIRONMENTAL PROCEEDINGS

    CERCLA and other federal, state, local and foreign acts may subject the
Company to liability for the release of pollutants into the environment. CERCLA
imposes liability for the cleanup of releases of hazardous substances from a
facility on four classes of persons: the current owner and operator of the
facility, the owner and operator at the time the hazardous substances were
disposed of at the facility, waste generators that sent their wastes to the
facility, and transporters of waste who selected the facility as a disposal
site. Liability under various environmental statutes, including CERCLA, may be
imposed jointly and severally and regardless of fault.

    CERCLA imposes potential liability on the Company for remediating
contamination arising from the Company's past and present operations and from
former operations by 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, which will require remediation. The Company has
been, and in the future could be, held responsible for environmental liabilities
resulting from former operations of other entities at facilities now owned by
the Company. In addition, the Company has agreed to indemnify parties to whom it
has sold facilities for certain environmental liabilities arising from acts
occurring before the dates those facilities were transferred.

    It is possible that environmental liabilities in addition to those described
below may arise in the future. The precise costs associated with such
liabilities are difficult to predict at this time.

    In 1988, the California Department of Health Services issued a Remedial
Action Order naming the Company and others as respondents in connection with
soil and groundwater contamination in the vicinity of a manufacturing facility
located in Visalia, California, that had been owned and operated by the
Company's predecessor from 1961 to 1973. The Company entered into a settlement
agreement with the other respondents under which the Company, among other
things, agreed to be solely responsible for the remaining cleanup of the site.
Further, the Company has settled or exhausted its remedies against all of its
insurance carriers and expects no additional recoveries with respect to this
site.

                                       12
<PAGE>
    On April 20, 1989, the Company and the North Carolina Department of
Environment, Health and Natural Resources ("DEHNR") entered into an
Administrative Order of Consent (the "Order"), concerning cleanup activities at
the Company's former facility located in Wilmington, North Carolina. The Order
pertained to the remediation of two separate accidental trichloroethane spills
which occurred at this facility on November 18, 1983, and on July 24, 1987. The
Order provided that the area of residual contamination at the site is a
hazardous waste management unit subject to closure requirements under RCRA. This
Order was later vacated at the request of the Company. The Company continues its
remediation of this site in cooperation with the DEHNR without a consent order.
Pursuant to the terms of the sales agreement between the Company and the current
owner of the site, the Company is obligated to undertake remediation of the site
at its sole expense. The Company has settled or exhausted its remedies against
all of its insurance companies and expects no additional recoveries with respect
to this site.

    In March 1994, contamination was found in wetlands, soil and groundwater at
the Company's Scottsboro, Alabama, manufacturing facility. The Company purchased
the facility from Halstead Industries in 1984. The Alabama Department of
Environmental Management has required investigation and cleanup. The Company
made a claim for indemnification from Halstead Industries, which denied
responsibility. The Company filed suit against Halstead Industries and is
pursuing recoveries from Halstead through the legal system. Further, over the
past two years the Company has settled all of its claims against its insurance
companies with regard to this site for an aggregate $1,000,000.

    In addition, the Company has discovered contaminants in the soil and/or
groundwater at certain of its other manufacturing facilities. Based on
preliminary estimates prepared by the Company's environmental consultants, the
Company currently estimates that expenditures for remediation of all sites
described above will be approximately $16.0 million in the aggregate. The
Company continues to assess its insurance coverage and pursue potential recovery
of a portion of such costs from its insurers as well as third parties. See Note
12 to the Consolidated Financial Statements.

    Along with multiple other parties, the Company has been identified as a
potentially responsible party under CERCLA and analogous state laws at numerous
other sites, usually as a generator of wastes which were disposed of at the
site. While CERCLA imposes joint and several liability on responsible parties,
liability at each site is likely to be apportioned among such parties. However,
the Company does not believe that its potential liability at these sites will
have a material adverse effect on the Company's financial condition or results
of operations.

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.

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

    On April 26, 1999, the 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, Joseph B. Hunter, Gerald L. Boehrs,
Roger Tan Kim Hock, Ho Nyuk Choy, Liu Wan Min, and Michael J. Christopher.

                                       13
<PAGE>
                                    PART II

ITEM 6. SELECTED FINANCIAL DATA

    The following table sets forth selected consolidated historical financial
data of the Company for the period from May 2 to December 31, 1994, the six
months ended July 1, 1995, and the fiscal years ended June 30, 1996, 1997, 1998
and 1999. In 1995 the Company changed its fiscal year end from the Saturday
closest to December 31 to the Saturday closest to June 30 to coincide with OYL's
fiscal year. For clarity of presentation in the consolidated financial
statements, all full fiscal years are shown to begin on January 1 and end on
December 31, or to begin on July 1 and end on June 30. For the periods presented
on a basis other than a full fiscal year, actual period end dates are used.

    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 included herein.

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                      PERIOD FROM   SIX MONTHS
                                       MAY 2 TO      ENDED (A)   YEAR ENDED   YEAR ENDED   YEAR ENDED   YEAR ENDED
                                     DECEMBER 31,     JULY 1,     JUNE 30,     JUNE 30,     JUNE 30,     JUNE 30,
                                         1994          1995         1996         1997         1998         1999
                                     -------------  -----------  -----------  -----------  -----------  -----------
<S>                                  <C>            <C>          <C>          <C>          <C>          <C>
                                                                 (DOLLARS IN THOUSANDS)
INCOME STATEMENT DATA(d):
  Net sales........................    $ 484,681     $ 428,510    $ 901,395    $ 947,933    $ 965,749    $ 924,028
  Cost of sales....................      346,222       305,043      646,561      697,294      709,639      691,222
                                     -------------  -----------  -----------  -----------  -----------  -----------
  Gross profit.....................      138,459       123,467      254,834      250,639      256,110      232,806
  Operating expenses...............      116,320       101,535      199,550      212,741      224,833      216,669
  Restructuring expenses...........           --            --           --           --        7,578        5,170
                                     -------------  -----------  -----------  -----------  -----------  -----------
  Operating income (loss)..........       22,139        21,932       55,284       37,898       23,699       10,967
  Interest expense, net............       16,192        11,671       24,957       25,961       25,131       23,975
  Other (income) expense, net......          (30)       (1,442)      (3,219)         616       (6,454)      (5,324)
                                     -------------  -----------  -----------  -----------  -----------  -----------
  Income (loss) before income taxes
    and extraordinary item.........        5,977        11,703       33,546       11,321        5,022       (7,684)
  Income taxes.....................        6,348         6,444       18,099        6,283        3,791       (1,444)
  Minority interest earnings.......           --            --           --          476          215          286
                                     -------------  -----------  -----------  -----------  -----------  -----------
  Income (loss) before
    extraordinary item.............         (371)        5,259       15,447        4,562        1,016       (6,526)
  Extraordinary item...............           --            --       (1,635)(b)         --         --           --
                                     -------------  -----------  -----------  -----------  -----------  -----------
  Net income (loss)................    $    (371)    $   5,259    $  13,812    $   4,562    $   1,016    $  (6,526)
                                     -------------  -----------  -----------  -----------  -----------  -----------
                                     -------------  -----------  -----------  -----------  -----------  -----------
BALANCE SHEET DATA (end of
  period)(d):
  Working capital..................    $  28,394     $  40,830    $  88,868    $  82,174    $  59,119    $  42,034
  Total assets.....................      679,725       730,966      806,579      810,294      795,933      755,195
  Total debt.......................      260,553       270,728      302,907      287,824      265,876      266,419
  Stockholder's equity.............      170,672       186,154      195,539      198,193      196,661      186,428
OTHER DATA(d):
  EBITDA(c)........................    $  36,910     $  36,975    $  82,677    $  62,373    $  56,884    $  45,104
  EBITDA margin....................          7.6%          8.6%         9.2%         6.6%         5.9%         4.8%
  Depreciation and amortization....    $  14,741     $  13,551    $  25,809    $  25,567    $  26,946    $  29,099
  Capital expenditures.............        8,454         5,697       14,765       15,941       23,922       19,514
  Net cash provided by (used in)
  Operating activities.............       (5,542)       (8,488)      27,962       26,223       27,456       18,362
  Investing activities.............       (8,454)       (5,697)     (49,668)     (21,285)      (6,789)     (19,514)
  Financing activities.............        8,081        20,492       27,075      (15,083)     (21,948)         544
</TABLE>

                                       14
<PAGE>
                 FOOTNOTES TO TABLE OF SELECTED FINANCIAL DATA

(a)  During 1995, the Company changed the reporting of its fiscal year end from
     the Saturday closest to December 31 to the Saturday closest to June 30.
     Through December 31, 1994 certain foreign subsidiaries reported on fiscal
     periods which ended one month prior to the Company's period-end. During the
     six month period ended July 1, 1995, the closing date for the foreign
     subsidiaries was changed to reflect the Company's current closing period.
     As a result, the July 1, 1995 financial statements include the financial
     results of these foreign subsidiaries from December 1, 1994 through July 1,
     1995. The estimated impact on sales and operating income for the six month
     period ended July 1, 1995, was an increase in sales and operating income of
     $19.1 and $0.7 million, respectively.

(b) During the year ended June 30, 1996 the Company completed a refinancing of
    its debt. As part of this refinancing the Company used some of the proceeds
    from the offering to repay long-term debt. As a result, the Company recorded
    an extraordinary item of $1.6 million ($2.7 net of $1.1 million tax benefit)
    relating to unamortized debt issuance cost.

(c) EBITDA represents income (loss) before extraordinary item, cumulative effect
    of accounting change, interest expense, income tax expense, and depreciation
    and amortization. The Company has included information concerning EBITDA as
    it is relevant for debt covenant analysis and because it is used by certain
    investors as a measure of the Company's ability to service its debt. EBITDA
    should be used as an alternative to, or be construed as more meaningful
    than, operating income or cash flow from operations as an indicator of the
    operating performance of the Company.

(d) The prior year adjustment relates to errors arising from the accumulation of
    contract costs of a subsidiary company located in the United Kingdom. Upon
    discovery, the Company engaged a third party to investigate these errors.
    Based on the findings of management, the third party, and review by the
    Company auditors, it was determined that the consolidated financial
    statements as of and for the years ended June 30, 1998, 1997 and 1996, and
    for the six months ended July 1, 1995, and for the period from May 2 to
    December 31, 1994 should be restated for errors contained in those financial
    statements. The effect of the restatement was to reduce net income for the
    years ended June 30, 1998, 1997 and 1996 from $4,111 to $1,016, $6,637 to
    $4,562 and $14,900 to $13,812, respectively, and for the six months ended
    July 1, 1995 from $6,292 to 5,259, and for the period from May 2 to December
    31, 1994 from $1,245 to $(371).

                                       15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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.

1999 COMPARED TO 1998

    Consolidated net sales were $924.0 million for the fiscal year ended June
30, 1999. This represents a decrease in net sales of $41.7 million, or 4.3%,
from $965.7 million for the fiscal year ended June 30, 1998. Income from
operations was $11.0 million, or 1.2% of net sales, versus $23.7 million, or
2.5% of net sales, for fiscal years 1999 and 1998, respectively. The Company
implemented several restructuring initiatives during fiscal year 1999. These
initiatives primarily included restructuring of the European operations of the
Filtration Products segment in the first and fourth quarters and restructuring
efforts within the Commercial Air Conditioning and Refrigeration segment for the
Chiller operations in North America, Italian and United Kingdom operations in
the second half of fiscal year 1999. These restructuring efforts resulted in a
$5.2 million unfavorable impact on operating income for the fiscal year ended
June 30, 1999. Excluding the restructuring costs, income from operations was
$16.1 million or 1.7% of net sales for the year ended June 30, 1999. See Note 10
to the Consolidated Financial Statements regarding the restructuring.

COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP

    Net sales for the Commercial Air Conditioning and Refrigeration segment were
$598.6 million in fiscal year 1999, a decrease of $21.6 million, or 3.5%, from
$620.2 million in fiscal year 1998. Excluding the industrial fans business which
was sold in the first quarter of fiscal year 1998 and contributed $7.6 million
in sales in fiscal year 1998, net sales decreased 2.2% from the prior year.

    North American net sales decreased 4.4% in fiscal year 1999, or 2.7%
excluding the industrial fan business compared to fiscal year 1998. This sales
decrease resulted primarily from decreased sales in the chiller products and
terminal air conditioning systems business units. Chiller product net sales
decreased 18.5% in fiscal year 1999 versus fiscal year 1998 primarily as a
result of decreased centrifugal and screw chiller sales to export markets,
especially the Asian market. Management expects export sales to the Asian market
to remain slow due to the weak economic conditions being experienced in the
Asian region. Terminal air conditioning products net sales decreased 11.7% in
fiscal year 1999 as compared to fiscal year 1998 and is attributable primarily
to product rationalization in North America and a related market reaction as a
result of the changes in product offerings. The sales decreases in the chiller
products and terminal air conditioning products business were partially offset
by net sales increases in the applied air handling systems and service and parts
business units. Applied air handling systems net sales increased 25.9% for the
fiscal year 1999 versus fiscal year 1998. Market demand for the rooftop, self
contained and new air handling products continued to grow throughout fiscal year
1999. The service and parts business unit had net sales increases of 4.6% for
fiscal year 1999 as compared to fiscal year 1998 as a result of strong demand
for replacement parts.

    International net sales for the group increased slightly at 1.0% for fiscal
year 1999 versus fiscal year 1998. Strong chiller sales in the European markets,
increased market demand in the Middle East and increased volume from the sales
office in Dubai were partially offset by reduced sales volume in the industrial
refrigeration business in the United Kingdom. The reduced sales volume in the
industrial refrigeration business results primarily from two large contracts
completed in fiscal year 1998 not repeated in fiscal year 1999. Backlog for the
Commercial Air Conditioning and Refrigeration Group was $133.7 million as
compared to $138.5 million at June 30, 1999 and 1998, respectively Product
rationalization and a related market reaction as a result of the changes in
product offerings has primarily attributed to the decrease in backlog year over
year.

                                       16
<PAGE>
    Operating income excluding amortization and restructuring was $2.0 million,
or 0.3% of net sales, in fiscal year 1999 as compared to $23.7 million, or 3.8%
of net sales in fiscal year 1998. This decrease of $21.7 million partially
results from the unfavorable overhead absorption impact of the reduced sales
volume activity. The gross margin rate decreased 2.4 percentage points from the
prior year rate due to unfavorable manufacturing variances and unfavorable
absorption related to lower sales volume. Price increases and favorable product
mix in applied air handling products partially offset these decreases. Excluding
restructuring and amortization expenses, operating expenses as a percentage of
sales increased 1.6 percentage points in fiscal year 1999 compared to fiscal
year 1998. This increase is primarily attributable to warranty expenses related
to new product introductions and a discontinued product line in the chiller
business. Additionally, increases in commissions expenses as a result of changes
in distribution pricing for terminal and chiller products and increased
logistics expenses in the chiller business have contributed to the increase in
operating expenses.

FILTRATION PRODUCTS GROUP

    Net sales for the Filtration Products segment were $334.1 million in fiscal
year 1999, a decrease of $24.7 million, or 6.9%, from $358.8 million in fiscal
year 1998. Domestic and international markets experienced net sales decreases
due the reorganization of the environmental products business and soft market
conditions throughout the international regions.

    Domestic operations net sales decreased 6.3% in fiscal year 1999 versus
fiscal year 1998. The decreases in net sales primarily result from the
restructuring of the environmental product group to focus on core product lines,
a weakened clean room market and reduced volume in the automotive market. These
decreases were partially offset by increased sales volume in the air filtration
retail business as a result of favorable weather conditions. International net
sales for fiscal year 1999 decreased 7.1% from fiscal year 1998 net sales
volume. European net sales decreased 3.3% as a result of reduced air pollution
projects in fiscal year 1999 partially offset by increased air filtration
products volume in the European markets. Asian net sales decreased 17.7% from
the prior year due to the weakened economic market conditions being experienced
in the Asian region. Additionally, two large MFAS projects in Singapore during
the fourth quarter of fiscal year 1998 were not repeated during fiscal year
1999. Latin American net sales decreased 31.6% year over year primarily as a
result of the slowdown in the Mexican economy during fiscal year 1999.
Management believes that the slowed sales activity experienced in the
international markets in fiscal year 1999 will continue as the Asian and Mexican
economies remain weak.

    Operating income excluding amortization and restructuring was $23.2 million
in fiscal year 1999, an increase of $4.1 million, or 21.4%, from $19.1 million
for the fiscal year 1998. Operating income excluding amortization and
restructuring as a percent of sales increased from 5.3% in 1998 to 7.0% in 1999.
Gross margins increased to 27.8% from 27.7% as a percentage of sales for the
fiscal years 1999 and 1998, respectively. Operating expenses excluding
amortization and restructuring decreased 13.1% in fiscal year 1999 from fiscal
year 1998. This decrease results from the reorganization of the environmental
products business in fiscal year 1998, the restructuring efforts of the
Filtration Products group in fiscal year 1999 and reduced sales volume.

NON-OPERATING EXPENSES

    Interest expense was $24.0 million for the fiscal year ended June 30, 1999
versus $25.1 million for the fiscal year ended June 30, 1998. The decrease in
interest expense results from reduced borrowing levels with proceeds from the
sale of the industrial fans business in the first half of fiscal year 1998 and
the capitalization of interest on the information technology enhancement
project. During fiscal years 1999 and 1998, the Company had net other income of
$5.3 and $6.5 million, respectively. In the first quarter of fiscal year 1999,
the Company recorded $2.9 million in other income as a result of favorable
developments in the IRS audit and tax indemnification settlement with former
shareholders of the

                                       17
<PAGE>
Company as described in Note 15. Additionally, a $1.5 million gain related to
the termination of a pension plan in Canada was recorded in the first quarter of
fiscal year 1999. Also, the Company recognized $0.8 million in expenses in the
third quarter of fiscal year 1999 related to the potential sale of the Company.
In fiscal year 1998, the Company recognized a gain of $6.6 million on the sale
of the industrial fan business during the second quarter. Other expenses, which
result from foreign currency and equity affiliate transactions, were not
material for fiscal years 1999 or 1998.

    The provision for income taxes was a benefit of $1.4 million and the
effective tax rate was (18.8)% for the fiscal year ended June 30, 1999 compared
to an income tax provision of $3.8 million and an effective tax rate of 75.5%
for the fiscal year ended June 30, 1998. The effective tax rate differs from the
statutory rate primarily due to the effect of nondeductible goodwill
amortization and foreign losses not benefited.

1998 COMPARED TO 1997

    Consolidated net sales were $965.7 million for the fiscal year ended June
30, 1998. This represents an increase in net sales of $17.8 million, or 1.9%,
from $947.9 million for the fiscal year ended June 30, 1997. Income from
operations was $23.7 million or 2.5% of net sales versus $37.9 million or 4.0%
of net sales for fiscal years 1998 and 1997, respectively. The Company
implemented a restructuring initiative during the fourth quarter of fiscal year
1998 primarily related to the Filtration Products Group. This initiative
resulted in a $7.6 million unfavorable impact on operating income for the year
ended June 30, 1998. Excluding the restructuring costs, income from operations
was $31.3 million or 3.2% of net sales for the year ended June 30, 1998. See
Note 10 to the Consolidated Financial Statements regarding the restructuring.

COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP

    Net sales for the Commercial Air Conditioning and Refrigeration segment were
$620.2 million in fiscal year 1998, an increase of $23.0 million, or 3.9%, from
$597.2 million in fiscal year 1997. This increase was attained despite the sale
of the industrial fan business in October of 1997 which contributed sales of
$7.6 and $20.1 million in fiscal years 1998 and 1997, respectively. Net sales
increased 6.2% year over year without the industrial fan business.

    North American net sales increased 2.8% in fiscal year 1998, or 6.0%
excluding the industrial fan business, compared to the prior year. This sales
increase resulted primarily from increased sales in the applied air handling
systems and terminal air conditioning systems business units. Applied air
handling systems net sales increased 16.6% for the fiscal year 1998 versus
fiscal year 1997. Market demand for air handling rooftop products and new air
handling products continues to grow resulting in increased sales of $12.5
million for fiscal year 1998 versus the prior year. Terminal products net sales
increased 2.3% for fiscal year 1998 due to increased market demand and price
increases. A new sales office established by the Company during the first
quarter of fiscal year 1998 contributed $4.6 million in net sales for the year.
Chiller products net sales increased slightly for fiscal year 1998 versus fiscal
year 1997 as acceptance and demand for air cooled screw chiller products grew
offsetting the decline in centrifugal chillers caused by a general market
decline for this product. In addition, this increase in chiller product net
sales was offset by reduced exports from the groups domestic operations to the
Asian market during the second half of the year. The Company believes that net
sales to the Asian region will continue to slow as a result of the weak economic
conditions being experienced in the region.

    International net sales for the group increased 2.2% for fiscal year 1998
versus fiscal year 1997. Strong chiller sales in the United Kingdom and Italy,
increased market demand in the Middle East and two large refrigeration contracts
contributed to increased net sales for the year. This increase was offset by
decreased net sales in France resulting from non-recurring projects in fiscal
year 1997 and a group

                                       18
<PAGE>
unfavorable currency translation of $11.2 million attributable to the
strengthening of the U.S. dollar. Backlog for the Commercial Air Conditioning
and Refrigeration Group was $138.5 million as compared to $157.9 million at June
30, 1998 and 1997, respectively.

    Operating income excluding amortization was $23.7 million in fiscal year
1998, an increase of 1.8% from $23.3 million in fiscal year 1997. Operating
income excluding amortization as a percent of sales decreased from 3.9% to 3.8%.
The gross margin rate increased 1.6 percentage points from the prior year rate
due to increased prices in the chiller, air handling and terminal product
markets. The improvement in European operations and reduced activity in the low
margin absorption chiller market also contributed to the increase in the gross
margin rate year over year. Selling, General & Administrative expense ("SG&A")
as a percentage of sales increased 1.6 percentage points in fiscal year 1998
compared to fiscal year 1997. Commission increases due to changes in
distribution pricing and warranty expense increases resulting from new product
introduction in the chiller business unit have contributed to the increase in
SG&A. Additionally, general and administrative expenses have increased year over
year as costs associated with upgrading software systems to improve business
performance have been incurred.

FILTRATION PRODUCTS GROUP

    Net sales for the Filtration Products segment were $358.8 million in fiscal
1998, a decrease of $6.8 million, or 1.9%, from $365.7 million for the fiscal
year ended June 30, 1997. Excluding a group unfavorable currency impact of $15.6
million, net sales increased 2.4% in fiscal year 1998 compared to the prior
year. Domestic operations net sales decreases due to soft market conditions were
partially offset by volume increases in the international markets of
environmental products, primarily in Europe.

    Domestic operations net sales decreased 8.7% in fiscal year 1998 versus
fiscal year 1997. Environmental product sales decreased due to soft market
conditions and the uncertainties resulting from the workers strike at the Reed
facility in Louisville, Kentucky and the Company's announcement to close the
plant in the fourth quarter of fiscal year 1998. Management subsequently
implemented a restructuring program to reduce costs. Additionally, a weak
cleanroom filter market and loss of market share in the transportation market
contributed to the air filtration products decrease.

    International sales for fiscal year 1998 increased 5.1% from fiscal year
1997 despite an unfavorable currency translation of $15.6 million. European net
sales increased 6.2% due to market demand increases for environmental products
and the acquisition of a European engineering company in the third quarter of
fiscal year 1997. Despite the weak economic conditions in the Asian market
during the second half of the year, net sales increased 3.6% due to growth in
the first half of the year and two MFAS projects in Singapore during the fourth
quarter of fiscal year 1998. Management believes that the slowed sales activity
experienced in the second half of fiscal year 1998 will continue as the Asian
economy remains weak.

    Operating income excluding amortization and restructuring was $19.1 million
in fiscal year 1998, a decrease of $7.7 million, or 28.6%, from $26.8 million
for the fiscal year 1997. Operating income excluding amortization and
restructuring as a percent of sales decreased from 7.3% to 5.3%. Gross margins
decreased to 27.7% from 29.3% as a percentage of sales for the fiscal years
ended June 30, 1998 and June 30, 1997, respectively. Product mix and competitive
price strategies aimed at gaining market share in both the air filtration and
environmental products markets contributed to the percentage point decrease in
gross margin year over year. SG&A excluding amortization and restructuring
decreased slightly in fiscal year 1998 from fiscal year 1997. Reductions in
selling expenses resulting from cost control measures implemented Company-wide
were offset by information technology expenses associated with upgrading
software to enhance business performance and the acquisition of an engineering
company in the third quarter of fiscal year 1997.

                                       19
<PAGE>
NON-OPERATING EXPENSES

    Interest expense was $25.1 million for the fiscal year ended June 30, 1998
versus $26.0 million for the fiscal year ended June 30, 1997. The decrease in
interest expense results from reduced borrowing levels throughout fiscal year
1998. Fiscal year 1998 included net other income of $6.5 million versus fiscal
year 1997 which had net other expense of $0.6 million. This increase resulted
from the gain of $6.6 million on the sale of the industrial fan business during
the second quarter of fiscal year 1998. Other expenses, which result from
foreign currency and equity affiliate transactions, were not material for fiscal
years 1998 or 1997.

    Income tax expense was $3.8 million and the effective tax rate was 75.5% for
the fiscal year ended June 30, 1998 compared to income tax expense of $6.3
million and an effective tax rate of 55.5% for the fiscal year ended June 30,
1997. The effective income tax rate increased primarily due to the effect of
nondeductible goodwill amortization and foreign losses not benefited against
reduced earnings for the year.

LIQUIDITY AND CAPITAL RESOURCES

    The Company's liquidity needs are provided by cash generated from operating
activities and supplemented when necessary by short-term credit facilities. For
the year ended June 30, 1999, net cash provided by operating activities was
$18.4 million as compared to a generation of $27.5 million for the year ended
June 30, 1998. For the fiscal year ended June 30, 1999 net cash used by
investing activities consisted of capital expenditures of $19.5 million of which
$12 million related to the implementation of new computer systems. See "Year
2000" for further discussion. Net cash provided by financing activities was $0.5
million, comprised of $26.8 million in payments on long-term debt offset by
$27.3 million in net additional borrowings under short-term borrowing
arrangements.

    The Company has secured certain letter of credit facilities totaling $13.5
million that are supported by letters of credit from OYL, the Company's parent,
which had $10.0 million in outstanding usage at June 30, 1999. The commitments
made under these facilities expire in March 2000, but may be extended annually
for successive one year periods with the consent of OYL and the banks providing
the facilities.

    J&E Hall Limited, a wholly-owned, U.K. based subsidiary of the Company, has
a short-term credit facility supported by a letter of credit from OYL.
Borrowings under this facility totaled $25.3 and $22.6 million at June 30, 1999
and 1998, respectively. This arrangement expires in September 2000, but may be
extended annually for successive one year periods with the consent of OYL and
the banks providing the facilities.

    During fiscal year 1998, the Company entered into an agreement to sell the
net assets of the industrial fan business. The sale transaction was completed
during the second quarter of fiscal year 1998 with sales proceeds of $17.1
million being used to reduce debt. 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.

    Planned capital expenditures are approximately $12 million for the year
ending June 30, 2000 and approximately $14 million for the year ending June 30,
2001.

    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 16 to the Consolidated Financial Statements.

                                       20
<PAGE>
    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.

    As of June 30, 1999, remaining borrowing availability under the $80 million
Revolving Credit portion of the Bank Agreement was $29.0 million. On September
30, 1999, the Company refinanced its Bank Credit Agreement with a New Term Loan
of $30 million and a new Revolving Credit Facility of $90 million ("New Bank
Credit Agreement"). The New Bank Credit Agreement has a three-year term, was
used to retire all obligations under the previous Bank Agreement and is designed
to provide added flexibility and borrowing availability. The New Bank Credit
Agreement also provides favorable interest rates and other fees compared to the
previous Bank Credit Agreement. At the closing date for the New Bank Credit
Agreement, remaining borrowing availability under the new Revolving Credit
portion of the New Bank Credit Agreement was $32 million.

    Management believes, based upon current levels of operations and forecasted
earnings, that cash flow from operations, together with borrowings under the New
Bank Credit Agreement 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. Nevertheless, the Company will remain leveraged to a significant extent
and its debt service obligations will continue to be substantial. If the
Company's sources of funds were to fail to satisfy the Company's requirements,
the Company may 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) would be
expected to be more costly and burdensome than the debt agreements currently in
place.

YEAR 2000

    The Company established a formal Year 2000 program during fiscal year ending
June 30, 1998, which began with a worldwide assessment and development of a
central data base containing an inventory of the risk elements associated with
the Year 2000 issue for each of the Company's operations. The Company also
appointed an overall project coordinator and established an executive review
process. Prior to establishing a formal Year 2000 management process, the
Company had already decided to replace substantially all of its old systems with
new state-of-the-art Enterprise Resource Planning (ERP) systems. The Company
currently estimates expenditures for the new systems will aggregate
approximately $27.0 million (having incurred approximately $26.0 million as of
June 30, 1999). Expenditures for additional remedial actions beyond those
required to install new systems will be managed by the individual business units
and recognized in operating expenses. The Company's management believes that
modernizing its information systems is critical for the Company's stable and
efficient growth, and it is the basis of the Company's strategy for resolving
its Year 2000 issues.

    During May 1998, the Company began its review of the products it
manufactures and sells, and though testing is not complete, the Company believes
that its products, including the control systems provided by the Company, will
be Year 2000 compliant. The Company has also identified third parties upon whom
the Company is dependent for products or services, and commenced actions during
fiscal year ending June 30, 1998, to ensure those products and services are
compliant and will not be interrupted as a result of Year 2000.

                                       21
<PAGE>
    The scheduled Year 2000 activities and current status are summarized in the
chart below:

<TABLE>
<CAPTION>
ACTIVITY                                                        STATUS          STARTING             ENDING
<S>                                                          <C>           <C>                 <C>
Assessment and inventory...................................    Complete    September 1997      January 1998
Coordinator and Executive review process...................    Complete    February 1998       May 1998
Industrial Refrigeration ERP...............................    Complete    January 1997        April 1998
Filtration Products ERP....................................    Complete    April 1997          July 1999
Commercial Air Conditioning ERP............................    Complete    September 1997      September 1999
Product compliance.........................................    Complete    May 1998            March 1999
Materials suppliers........................................   In Process   June 1998           October 1999
Other IT issues including third parties....................   In-Process   September 1998      October 1999
Equipment and facilities...................................   In Process   September 1998      October 1999
</TABLE>

    The Year 2000 activities are currently on schedule, and the Company
anticipates successful implementation of the scheduled ERP projects and systems
upgrades. The financial systems of the ERP project have been implemented and
used during the last three quarters of fiscal year 1999 in the Commercial Air
Conditioning businesses. Additionally, the manufacturing and order entry systems
have been implemented in all of the domestic plants as of September 1999. The
financial, bill of material and cost systems of the ERP project have been
implemented and used throughout fiscal year 1999 in the Filtration Products
businesses.

    Failure by the Company to complete successfully the planned ERP projects and
systems upgrades or a failure by the Company's third party suppliers and/or
service providers to produce or deliver critical components or to transport
services could cause disruption in the Company's ability to manufacture and/or
deliver timely its products to its customers, which could result in increased
expenses, reduced billings and potential litigation. The precise costs
associated with such risks are difficult to predict at this time. The Company
currently does not have a contingency plan in place in the event it does not
complete all phases of the Year 2000 program. The Company plans to continue to
evaluate the status of completion of its Year 2000 program and determine whether
a contingency plan is necessary. The Company believes the Year 2000 activities
are adequate to address the Year 2000 risks faced by the Company; however, there
can be no assurance that the Year 2000 procedures and activities, even if
completed, will be adequate to address the Company's Year 2000 risk.

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.

                                       22
<PAGE>
EURO CONVERSION

    Management has initiated an internal analysis of and planning for the effect
the Euro will have on the operating and financial condition of the Company. The
Euro is not expected to have a material effect on the Company's operating
results or competitive position. The Company's financial systems are Euro
compliant and opportunities will continue to be investigated for European-wide
system infrastructures.

FORWARD-LOOKING STATEMENTS

    When used in this report by management of the Company, from time to time,
the words "believes," "anticipates," and "expects" and similar expressions are
intended to identify forward-looking statements that involve certain risks and
uncertainties. 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, general economic conditions, environmental laws and regulations, the
weakening Asian markets, unforeseen competitive pressures, warranty expenses,
market acceptance of new products, unseasonably cool spring or summer weather, a
slow down in the chiller market, the inability to meet debt covenants,
unforeseen difficulties in maintaining mutually beneficial relationships with
strategic initiatives partners, the Year 2000 issue, 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 thereof. The
Company undertakes no obligation to publicly release the results of any events
or circumstances after the date hereof to reflect the occurrence of
unanticipated events.

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, 1999, 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, 1999. 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.

    While the Company is exposed to changes in interest rates as a result of its
outstanding debt, the Company does not currently utilize any derivative
financial instruments related to its interest rate exposure. Total short-term
and long-term debt outstanding at June 30, 1999 was $266.4 million, consisting
of $124.9 million in variable rate borrowing and $141.5 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
$1.1 million at June 30, 1999. At June 30, 1999, the fair value of the Company's
fixed rate debt outstanding was estimated at $135.2 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.

                                       23
<PAGE>
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                        PAGE IN THIS
FINANCIAL STATEMENTS                                                                                       REPORT
-----------------------------------------------------------------------------------------------------  ---------------
<S>                                                                                                    <C>

Report of the Independent Auditors...................................................................            26

Consolidated Balance Sheets--
  at June 30, 1999 and 1998..........................................................................            27

Consolidated Statements of Operations--
  Years ended June 30, 1999, 1998 and 1997...........................................................            28

Consolidated Statements of Cash Flows--
  Years ended June 30, 1999, 1998 and 1997...........................................................            29

Consolidated Statements of Stockholder's Equity--
  Years ended June 30, 1999, 1998 and 1997...........................................................            30

Consolidated Statements of Comprehensive Income (Loss)--
  Years ended June 30, 1999, 1998 and 1997...........................................................            31

Schedule II--Report of the Independent Auditors
  Valuation and Qualifying Accounts and Reserves--
  Years ended June 30, 1999, 1998 and 1997...........................................................            50
</TABLE>

                                       24
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholder
AAF-McQuay Inc.

    We have audited the accompanying consolidated balance sheets of AAF-McQuay
Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated
statements of operations, cash flows, stockholder's equity and comprehensive
income (loss) for each of the three years in the period ended June 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

    We conducted our audits in accordance with generally accepted auditing
standards. 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, 1999 and 1998, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1999, in conformity with generally accepted accounting
principles.

                                                  [ERNST & YOUNG LLP]

Baltimore, Maryland
September 30, 1999

                                       25
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                   JUNE 30,
                                                                                            ----------------------
<S>                                                                                         <C>         <C>
                                                                                               1999        1998
                                                                                            ----------  ----------
                                                      ASSETS
Current assets:
  Cash and cash equivalents...............................................................  $    9,168  $    9,697
  Accounts receivable.....................................................................     227,844     238,613
  Inventories.............................................................................     118,163     123,848
  Other current assets....................................................................       6,754       8,423
                                                                                            ----------  ----------
    Total current assets..................................................................     361,929     380,581

Property, plant and equipment, net........................................................     145,086     145,305
Cost in excess of net assets acquired and other identifiable intangibles, net.............     228,906     250,650
Other assets and deferred charges.........................................................      19,274      19,397
                                                                                            ----------  ----------
    Total assets..........................................................................  $  755,195  $  795,933
                                                                                            ----------  ----------
                                                                                            ----------  ----------

                                       LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
  Short-term borrowings...................................................................  $   87,602  $   60,262
  Current maturities of long-term debt....................................................      14,495      28,531
  Accounts payable, trade.................................................................     115,986     131,761
  Accrued warranty........................................................................      18,604      14,947
  Accrued employee compensation...........................................................      34,834      35,918
  Other accrued liabilities...............................................................      48,374      50,043
                                                                                            ----------  ----------
    Total current liabilities.............................................................     319,895     321,462

Long-term debt............................................................................     164,322     177,083
Deferred income taxes.....................................................................      34,676      48,750
Other liabilities.........................................................................      49,874      51,977
                                                                                            ----------  ----------
    Total liabilities.....................................................................     568,767     599,272

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)..........................................................................         250         250
  Additional paid-in capital..............................................................     179,915     179,915
  Retained earnings.......................................................................      17,762      24,288
  Accumulated other comprehensive income (loss)...........................................     (11,499)     (7,792)
                                                                                            ----------  ----------
    Total stockholder's equity............................................................     186,428     196,661
                                                                                            ----------  ----------
Total liabilities and stockholder's equity................................................  $  755,195  $  795,933
                                                                                            ----------  ----------
                                                                                            ----------  ----------
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       26
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                      YEARS ENDED JUNE 30,
                                                                               ----------------------------------
<S>                                                                            <C>         <C>         <C>
                                                                                  1999        1998        1997
                                                                               ----------  ----------  ----------
Net sales....................................................................  $  924,028  $  965,749  $  947,933
Cost of sales................................................................     691,222     709,639     697,294
                                                                               ----------  ----------  ----------
Gross profit.................................................................     232,806     256,110     250,639

Operating expenses:
    Selling, general and administrative......................................     205,299     213,176     201,157
    Amortization of intangible assets........................................      11,370      11,657      11,584
    Restructuring charges....................................................       5,170       7,578          --
                                                                               ----------  ----------  ----------
                                                                                  221,839     232,411     212,741
                                                                               ----------  ----------  ----------
Income from operations.......................................................      10,967      23,699      37,898

Interest expense, net........................................................      23,975      25,131      25,961
Other (income) expense, net..................................................      (5,324)     (6,454)        616
                                                                               ----------  ----------  ----------
Income (loss) before income taxes............................................      (7,684)      5,022      11,321
Provision for income taxes...................................................      (1,444)      3,791       6,283
Minority interest in earnings................................................         286         215         476
                                                                               ----------  ----------  ----------
Net income (loss)............................................................  $   (6,526) $    1,016  $    4,562
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       27
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                       YEARS ENDED JUNE 30,
                                                                                ----------------------------------
<S>                                                                             <C>         <C>         <C>
                                                                                   1999        1998        1997
                                                                                ----------  ----------  ----------
Cash flows from operating activities
  Net income (loss)...........................................................  $   (6,526) $    1,016  $    4,562
  Adjustments to reconcile to cash
    from operating activities:
  Restructuring charges.......................................................       5,170       7,578          --
  Depreciation and amortization...............................................      29,099      26,946      25,567
  Foreign currency transaction (gains) losses.................................        (738)        385         413
  Gain on the sale of business................................................          --      (6,626)         --
  Deferred income taxes.......................................................      (4,417)     (3,861)      1,022
  Changes in operating assets and liabilities:
    Accounts receivable.......................................................      10,769      (5,208)    (11,981)
    Inventories...............................................................       5,685         344      (9,661)
    Other assets/liabilities, net.............................................      (3,236)        244      (6,339)
    Accounts payable and other accrued liabilities............................     (17,444)      6,638      22,640
                                                                                ----------  ----------  ----------
Net cash from operating activities............................................      18,362      27,456      26,223
                                                                                ----------  ----------  ----------

Cash flows from investing activities:
  Capital expenditures........................................................     (19,514)    (23,922)    (15,941)
  Acquisitions of businesses..................................................          --          --      (5,344)
  Proceeds from the sale of business..........................................          --      17,133          --
                                                                                ----------  ----------  ----------
Net cash from investing activities............................................     (19,514)     (6,789)    (21,285)

Cash flows from financing activities:
Net borrowing (repayment) under short-term borrowing
  arrangements................................................................      27,340       1,559      (6,835)
  Payments on long-term debt..................................................     (26,796)    (23,507)    (10,248)
  Proceeds from issuance of long-term debt....................................          --          --       2,000
                                                                                ----------  ----------  ----------
Net cash from financing activities............................................         544     (21,948)    (15,083)

Effect of exchange rate changes on cash.......................................          79         151         148
                                                                                ----------  ----------  ----------
Net increase (decrease) in cash and cash equivalents..........................        (529)     (1,130)     (9,997)
Cash and cash equivalents at beginning of period..............................       9,697      10,827      20,824
                                                                                ----------  ----------  ----------

Cash and cash equivalents at end of period....................................  $    9,168  $    9,697  $   10,827
                                                                                ----------  ----------  ----------
                                                                                ----------  ----------  ----------
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       28
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                               FOREIGN
                                                                      ADDITIONAL              CURRENCY
                                                           COMMON      PAID-IN    RETAINED   TRANSLATION
                                                            STOCK      CAPITAL    EARNINGS   ADJUSTMENT     TOTAL
                                                         -----------  ----------  ---------  -----------  ----------
<S>                                                      <C>          <C>         <C>        <C>          <C>
Balance, July 1, 1996, as restated.....................   $     250   $  179,915  $  18,710   $  (3,336)  $  195,539
Net income.............................................          --           --      4,562          --        4,562
Currency translation adjustment........................          --           --         --      (1,908)      (1,908)
                                                              -----   ----------  ---------  -----------  ----------
Balance, June 30, 1997.................................         250      179,915     23,272      (5,244)     198,193
                                                              -----   ----------  ---------  -----------  ----------
Net income.............................................          --           --      1,016          --        1,016
Currency translation adjustment........................          --           --         --      (2,548)      (2,548)
                                                              -----   ----------  ---------  -----------  ----------
Balance, June 30, 1998.................................         250      179,915     24,288      (7,792)     196,661
                                                              -----   ----------  ---------  -----------  ----------
Net income (loss)......................................          --           --     (6,526)         --       (6,526)
Currency translation adjustment........................          --           --         --      (3,707)      (3,707)
                                                              -----   ----------  ---------  -----------  ----------
Balance, June 30, 1999.................................   $     250   $  179,915  $  17,762   $ (11,499)  $  186,428
                                                              -----   ----------  ---------  -----------  ----------
                                                              -----   ----------  ---------  -----------  ----------
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       29
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                         YEARS ENDED JUNE 30,
                                                                                   --------------------------------
                                                                                      1999       1998       1997
                                                                                   ----------  ---------  ---------
<S>                                                                                <C>         <C>        <C>
Net income (loss)................................................................  $   (6,526) $   1,016  $   4,562
Other comprehensive income (loss):
  Foreign currency translation adjustments.......................................      (3,707)    (2,548)    (1,908)
                                                                                   ----------  ---------  ---------
Comprehensive income (loss)......................................................  $  (10,233) $  (1,532) $   2,654
                                                                                   ----------  ---------  ---------
                                                                                   ----------  ---------  ---------
</TABLE>

                See Notes to Consolidated Financial Statements.

                                       30
<PAGE>
                        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"). In December 1995, AAF-McQuay Group, Inc. contributed
all of its ownership interest in AAF-McQuay Holdings, Inc. to the Company.
AAF-McQuay Holdings, Inc. holds minority investments in certain companies.

    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. In December 1995, the
Company entered the industrial refrigeration business through the acquisition of
J&E Hall, a United Kingdom's integrated provider of industrial refrigeration and
freezing equipment. The Company maintains production facilities in nine
countries and its products are sold in over 80 countries.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    BASIS OF PRESENTATION

    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 financial statements reflect the financial
results of the Company for the fiscal years ended June 30, 1999, 1998 and 1997.
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 generally
accepted accounting principles 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.

    CASH AND CASH EQUIVALENTS

    The Company invests cash in excess of operating requirements in short-term
time deposits, money market instruments, or commercial paper. These investments
have original maturities of less than three months and are considered cash
equivalents for financial reporting purposes.

    INVENTORIES

    Inventories are valued at the lower of cost or market at June 30, 1999 and
1998. Cost is determined by the last-in, first-out (LIFO) method for U.S.
inventories, (57% in 1999 and 1998), and the first-in, first-out (FIFO) method
for the Company's foreign subsidiaries (43% in 1999 and 1998).

    PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<S>                                                            <C>
                                                               20 to 40
Buildings....................................................  years
Machinery and Equipment......................................  3 to 12 years
</TABLE>

                                       31
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    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.

    COST OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE

    In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED FOR OR
OBTAINED FOR INTERNAL USE. SOP 98-1 requires that qualifying computer software
costs incurred during the application development stage be capitalized and
amortized over the software's estimated useful life. The Company adopted the SOP
98-1 requirements effective July 1, 1997. Software costs are amortized on a
straight line basis over periods of three to five years.

    INTANGIBLE ASSETS

    The excess of cost over fair values of net assets acquired are being
amortized on a straight-line basis over forty years. Other identifiable
intangibles acquired include trademarks and tradenames; technical drawings and
technology; and assembled work force, which are being amortized on a
straight-line basis over forty, fifteen and ten years, respectively. Effective
April 1, 1997, the Company changed its estimate for the useful life of goodwill,
tradenames and trademarks from 25 to 40 years to better reflect the estimated
periods over which economic benefits will be realized.

    On a periodic basis, the Company evaluates the carrying value of its
intangible assets 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 by the estimated shortfall of
cash flows.

    DERIVATIVE FINANCIAL INSTRUMENTS

    Derivative financial instruments are used by the Company principally in the
management of its interest rate and foreign currency exposures. The Company does
not enter into speculative derivative transactions.

    The differential between interest rate cap premiums due and amounts
receivable under interest rate cap agreements are recognized as yield
adjustments to interest expense over the term of the related debt.

    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.

    FOREIGN CURRENCIES

    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.

                                       32
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    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 the results of operations. The Company recognized net
foreign currency transaction (gains) losses of $(738,000), $385,000, and
$425,000 for the fiscal years ended June 30, 1999, 1998 and 1997, respectively.

    REVENUE RECOGNITION

    Revenues and costs are generally recognized as products are shipped 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. Unbilled revenue recognized on long-term contracts is included in
accounts receivable in the accompanying Consolidated Balance Sheets.

    PRODUCT WARRANTIES

    Product warranties are provided 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

    Research and development costs were approximately $8.9, $10.0, and $10.6
million, for the fiscal years ended June 30, 1999, 1998 and 1997, respectively,
and are included in selling, general and administrative expenses in the
accompanying Consolidated Statements of Operations.

    STOCK-BASED COMPENSATION

    As described in Note 13, the Company has elected to follow the accounting
provisions of Accounting Principles Board Opinion No. 25 for stock-based
compensation and to furnish the pro forma disclosures required under Statement
of Financial Accounting Standards No. 123.

    INCOME TAXES

    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.

    RECENT ACCOUNTING PRONOUNCEMENTS

    In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which established standards for reporting
information about operating segments. The Company adopted this standard
effective June 30, 1999. Segment information for 1998 and 1997 has been restated
in conformity with the provisions of SFAS No. 131.

                                       33
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    In February 1998, the FASB issued Statement No. 132, EMPLOYERS' DISCLOSURES
ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS. Statement 132 addresses
disclosure issues only and does not change the measurement or recognition
provisions specified in other various Statements. The Company adopted this
standard effective June 30, 1999.

    In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND FOR HEDGING ACTIVITIES, which requires that an entity record all
derivatives in the statement of financial position at their fair value. It also
requires changes in the fair value of derivatives to be recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction. The Company is required to adopt this standard for the
fiscal year beginning July 1, 2000. The Company continues to evaluate the
adoption of this new pronouncement.

3. PRIOR YEAR ADJUSTMENT

    The prior year adjustment relates to errors arising from the accumulation of
contract costs of a subsidiary company located in the United Kingdom. Upon
discovery, the Company engaged a third party to investigate these errors. Based
on the findings of management, the third party, and review by the Company
auditors, it was determined that the consolidated financial statements as of and
for the years ended June 30, 1998 and 1997 should be restated for the errors
contained in those financial statements. The effect of the restatement has
resulted in the reduction of retained earnings of $3,094 (net of tax of $929)
and $5,807 (net of tax of $1,744) for the financial year ended June 30, 1998 and
for the financial years ended June 30, 1997 and prior, respectively.

4. ACCOUNTS RECEIVABLE

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

<TABLE>
<CAPTION>
                                                                           1999        1998
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Accounts receivable, trade                                              $  219,990  $  237,343
Accounts receivable, other............................................      14,911       8,631
                                                                        ----------  ----------
                                                                           234,901     245,974
Less allowance for doubtful receivables...............................       7,057       7,361
                                                                        ----------  ----------
                                                                        $  227,844  $  238,613
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

    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 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.

                                       34
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. INVENTORIES

    Inventories consist of the following (dollars in thousands):

<TABLE>
<CAPTION>
                                                                           1999        1998
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
FIFO cost:
Raw materials.........................................................  $   39,838  $   46,513
Work-in-process.......................................................      25,884      32,548
Finished goods........................................................      51,063      40,961
                                                                        ----------  ----------
                                                                           116,815     120,022
LIFO adjustment.......................................................       1,348       3,826
                                                                        ----------  ----------
                                                                        $  118,163  $  123,848
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

6. PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                                           1999        1998
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Land                                                                    $    8,245  $    9,635
Buildings.............................................................      60,618      60,396
Machinery and equipment...............................................     139,441     123,502
                                                                        ----------  ----------
                                                                           208,304     193,533
Less accumulated depreciation and amortization........................      63,218      48,228
                                                                        ----------  ----------
                                                                        $  145,086  $  145,305
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

    At June 30, 1999, substantially all property, plant and equipment are
encumbered by various debt obligations of the Company.

7. INTANGIBLE ASSETS

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

<TABLE>
<CAPTION>
                                                                           1999        1998
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Cost in excess of net assets acquired.................................  $  145,105  $  155,463
Other intangibles:
  Technology..........................................................      14,213      14,260
  Trademarks..........................................................      61,161      61,161
  Drawings............................................................      54,000      54,000
  Workforce...........................................................      18,417      18,417
                                                                        ----------  ----------
  Total other intangibles.............................................     147,791     147,838
  Less accumulated amortization.......................................      63,990      52,651
                                                                        ----------  ----------
                                                                        $  228,906  $  250,650
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

                                       35
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. DEBT

    The Company had a Bank Agreement at June 30, 1999 that consisted of a
Revolving Credit, Letter of Credit, and Term Loan Agreement. The Revolving
Credit portion of the Bank Agreement ("Revolver") provided for maximum aggregate
short-term borrowings of $80 million and up to $25 million for letters of
credit. However, the combined amount of short-term borrowings plus letters of
credit could not exceed $80 million. Use of the Revolver was subject to the
Company's availability (as defined in the Bank Agreement) and was based on the
Company's level of domestic receivables and inventories. At June 30, 1999,
borrowings of $51 million were outstanding under this facility, no letters of
credit were issued and outstanding and the Company had approximately $29.0
million in additional borrowing availability. The Company was required to pay a
commitment fee of 0.50% on the unused portion of the Revolver.

    Interest on Revolver advances under the Bank Agreement was generally payable
quarterly based, at the Company's option, on (1) the higher of the bank prime
rate or a rate based upon 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 were determined by an interest rate matrix which is based on certain
quarterly financial ratios as described in the Bank Agreement. As of June 30,
1999, the Company's interest rate premiums were LIBOR + 3.00% or prime + 2.00%
based on the applicable financial ratios. The interest rate premiums were
subject to a 0.25% increase or may decrease by as much as 1.00%, depending on
the applicable quarterly financial ratios. At June 30, 1999, the Company's
borrowing rate under the Bank Agreement, was approximately 8.50%. The average
effective interest rate under the Bank Agreement for the fiscal year ended June
30, 1999 was approximately 8%.

    In September 1999, the Company refinanced the Bank Agreement with a New Bank
Credit Agreement. The New Bank Credit Agreement was issued for a three year term
and includes a $30 million term loan (New Term Loan) and a $90 million revolving
credit commitment (New Revolver).

    Under the New Bank Credit Agreement, the interest rate premiums are fixed
for the first year at Libor + 2.25% or prime + 0.00% for the New Revolver and
Libor + 2.50% or prime + 0.25% for the New Term Loan. A commitment fee of 0.375%
is required on the unused portion of the New Revolver.

    At June 30, 1999 certain of the Company's foreign subsidiaries had available
lines of credit with foreign banks of approximately $64 million which may be
drawn as needed at an average interest rate of approximately 7.0%. Outstanding
borrowings against international lines of credit amounted to approximately $36.6
and $35.3 million at June 30, 1999 and 1998, respectively. In addition, certain
of the Company's foreign subsidiaries have non-borrowing bank facilities
(letters of credit, guarantees, performance bonds, etc.) totaling $28.1 million
as of June 30, 1999 and $18.0 million as of June 30, 1998 of which approximately
$16.8 million was used at June 30, 1999 and $15.0 million was used at June 30,
1998.

    The Company also has available letter of credit facilities totaling $13.5
million which are supported by a letter of credit from OYL. Approximately $10.0
million in letters of credit were outstanding under this facility at June 30,
1999. The commitments made under these facilities expire in March of 2000, but
may be extended annually for successive one year periods with the consent of OYL
and the banks providing the facilities.

                                       36
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. DEBT (CONTINUED)
    The weighted average effective interest rate on short-term borrowings was
8.5% and 7.2% at June 30, 1999 and 1998, respectively.

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

<TABLE>
<CAPTION>
                                                                           1999        1998
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Senior Term Loans.....................................................  $   37,287  $   49,422
Promissory Note due May 2, 1999, bearing interest at 6%, and secured
  by a letter of credit...............................................          --      11,500
Senior Unsecured Notes due February 15, 2003, bearing interest at
  8.875%..............................................................     125,000     125,000
Other issues..........................................................      16,530      19,692
                                                                        ----------  ----------
                                                                           178,817     205,614
Less: Current maturities..............................................     (14,495)    (28,531)
                                                                        ----------  ----------
                                                                        $  164,322  $  177,083
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

    The term loan portion of the Bank Agreement consisted of Senior Term Loans
that were a direct obligation of the Company. These term loans were 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.
The Senior Term Loans were payable in quarterly installments of varying amounts
through March 2001. Interest were generally payable quarterly based on the same
interest rate structure as the Revolver. The Senior Term Loans were repaid in
full on September 30, 1999 with funds provided by the New Bank Credit Facility.
The New Term Loan under the New Bank Credit Agreement issued in September 1999
is structured similarly to the Senior Term Loans mentioned above. The repayment
schedule for the New Term Loan calls for equal monthly installments of $425,000
beginning November 1, 1999 with a final payment of $15.1 million due at maturity
(September 30, 2002).

    The New 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 New Bank Credit Agreement contains
financial covenants relating to net worth and fixed charge coverage. The Company
is in compliance with the New Bank Credit Agreement.

    The Bank Agreement contained provisions requiring accelerated payments. The
generation of cash resulting from, among other things, the sale of any material
asset, collection of any special receipt (as defined) or any excess cash flow
(as defined) required certain accelerated payments. Accelerated payments of $7.4
million were required during the fiscal year ended June 30, 1998. No accelerated
payments were required for the year ended June 30, 1999 or 1997.

    The $11.5 million, 6% Promissory Note was issued in connection with the May
2, 1994 acquisition of the Company and made payable to a bank, as paying agent
for the benefit of certain former stockholders of the Company. In July 1998, the
Company negotiated a settlement of the indemnification agreement with certain
former stockholders of the Company. As a result, the indemnification agreement
was terminated and the Company made a payment of $10.5 million plus accrued
interest, which satisfied all obligations under the $11.5 million Promissory
Note.

                                       37
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. DEBT (CONTINUED)
    In February 1996, the Company issued the 8.875% Senior Unsecured Notes
("Senior Notes") with the proceeds being used to reduce indebtedness under the
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.

    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 term loans are secured by certain assets
of the issuing foreign subsidiary and contain various repayment terms ranging
from 5 to 15 years. The outstanding balance of these foreign term loans was $7.0
and $9.3 million at June 30, 1999 and 1998, respectively.

    The Company paid cash interest of $23.1, $24.0, and $24.8 million for the
fiscal years ended June 30, 1999, 1998 and 1997, respectively.

    Maturities of long-term debt during each of the next five fiscal years
subsequent to June 30, 1999 are as follows (dollars in millions): 2000, $14.5;
2001, $7.7; 2002, $6.4; 2003, $141.9; 2004 $0.9.

9. 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 rising interest rates on its variable rate debt through the use of
interest rate derivative instruments. There were no interest rate derivative
transactions completed during the fiscal years ended June 30, 1998 and June 30,
1997. During the second quarter of fiscal year 1999, the Company entered into an
interest rate swap with a $50 million notional amount with an expiration date of
October 2001 to protect against possible interest rate increases. Under the
terms of the swap, the Company paid a fixed rate of 4.58% and received a
floating rate (3 month Libor). The swap was terminated in March 1999 and the
Company received a cash payment of $550,000 as early termination compensation
which is being amortized as a reduction to interest expense over the remaining
original life of the swap.

    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, 1999 and 1998 was approximately $40.1
and $36.1 million, respectively. The U.S. dollar equivalent notional amount of
these foreign exchange forward contracts by applicable foreign currency at June
30, 1999 and 1998 was as follows: Canadian dollars, $5.8 and $4.2 million;
Singapore dollars $5.9 and $2.3 million; German marks $2.6 and $2.5 million;
Italian lira $3.7 and $5.1 million; French francs $10.7 and $11.7 million; Dutch
guilders $3.2 and $4.5 million; British pounds $5.1 and $0.8 million; and
various other currencies $3.1 and $5.0 million.

                                       38
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

    FASB Statement 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. The carrying amount of all other
long-term debt approximates fair value. The carrying amount of the Company's
long-term debt at June 30, 1999 of $178.8 million would need to be discounted
down to $172.5 million in order to approximate fair value. The aggregate
carrying value of the Company's long-term debt at June 30, 1998 was $205.6
million and 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 counterparties' credit standing. At
June 30, 1999 and 1998, the net carrying amount of these contracts approximates
their fair value.

10. RESTRUCTURING

    The Company has implemented several restructuring plans throughout fiscal
year 1999 in both the Commercial Air Conditioning and Refrigeration and
Filtration Products groups. Restructuring reserves of $5.2 million were
recorded. The Commercial Air Conditioning and Refrigeration business segment
commenced restructuring efforts of the United Kingdom and Italian operations in
the third quarter, recording approximately $1.0 million representing primarily
severance accruals. Additionally, the chiller business unit was reorganized in
the fourth quarter resulting in a restructuring charge of approximately $1.0
million for severance accruals. These combined efforts resulted in the
elimination of approximately 120 employees. The Filtration Products business
segment restructured the German operations in the first quarter and additional
European operations and domestic operations in the fourth quarter of fiscal year
1999. Total restructuring charges of $3.2 million were recorded. Components of
the $3.2 million related primarily to severance accruals related to the
elimination of approximately 40 positions.

    In the fourth quarter of 1998, the Company commenced a restructuring of its
Filtration Products segment and recorded a restructuring charge of $7.3 million.
In addition a $360,000 charge was recorded in the first quarter of 1998
primarily related to severance. Components of the $7.3 million restructuring
charge include fixed asset write downs, the closure of the Reed manufacturing
facility in Louisville, Kentucky, and severance accruals. The plant closure and
fixed asset write downs to fair value resulted in a charge of $3.4 million.
Approximately 250 positions were eliminated with a corresponding severance
accrual of $2.5 million recorded. The remaining restructuring charges are
primarily attributable to the expenses related to the attempted sale of the
environmental products division. Subsequently, the Company decided to retain
this division and implemented the restructuring plan to reduce costs and
strengthen competitive positions. At June 30, 1999, the Company has utilized
substantially all of the $7.3 million reserve recorded in fiscal year 1998
related to the reorganization of the environmental products division.

                                       39
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. PROVISION FOR INCOME TAXES

    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 purposes. Significant components of
the Company's deferred tax assets and liabilities at June 30, 1999 and 1998 are
as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                                           1999        1998
                                                                        ----------  ----------
<S>                                                                     <C>         <C>
Deferred tax assets:
Net operating loss carryforwards......................................  $   11,162  $   10,019
Tax over book fixed assets basis......................................         705         718
Accrual for pension and retirement benefits...........................       4,417       4,582
Accrual for other expenses............................................      23,104      22,097
Tax credit carryforwards..............................................         528         770
Other.................................................................       1,879       2,730
                                                                        ----------  ----------
Total deferred tax assets.............................................      41,795      40,916
Valuation allowance...................................................     (14,403)    (17,284)
                                                                        ----------  ----------
Net deferred tax assets...............................................  $   27,392  $   23,632
                                                                        ----------  ----------
                                                                        ----------  ----------
</TABLE>

<TABLE>
<S>                                                       <C>        <C>
Deferred tax liabilities:
Unrepatriated earnings of foreign subsidiaries..........  $   2,238  $   2,972
Book over tax fixed assets basis........................     19,656     18,959
Book over tax intangible asset basis....................     29,297     34,704
Book over tax inventory basis...........................      6,340      8,983
Other...................................................      4,537      6,764
                                                          ---------  ---------
Total deferred tax liabilities..........................     62,068     72,382
                                                          ---------  ---------
Net deferred tax liabilities............................  $  34,676  $  48,750
                                                          ---------  ---------
                                                          ---------  ---------
</TABLE>

    Deferred tax assets for net operating loss carryforwards and other items at
June 30, 1999 and 1998 includes approximately $13 and $15 million, respectively,
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 year
1999, the deferred tax asset valuation allowance and goodwill was reduced by
$3.9 million associated with the utilization of deferred tax assets related to
periods prior to the acquisition by OYL.

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

<TABLE>
<CAPTION>
                                                                   1999       1998       1997
                                                                 ---------  ---------  ---------
<S>                                                              <C>        <C>        <C>
Federal taxes--current                                           $  (2,398) $   2,485  $     986
Federal taxes--deferred........................................       (568)    (2,705)     1,095
State taxes....................................................       (331)      (100)       297
Foreign taxes--current.........................................      1,853      3,312      2,969
Foreign taxes--deferred........................................         --        799        936
                                                                 ---------  ---------  ---------
Total..........................................................  $  (1,444) $   3,791  $   6,283
                                                                 ---------  ---------  ---------
                                                                 ---------  ---------  ---------
</TABLE>

                                       40
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. PROVISION FOR INCOME TAXES (CONTINUED)

    During the fiscal years ended June 30, 1999, 1998 and 1997, the Company paid
income taxes of approximately $0.6, $9.5, and $5.9 million, respectively. A
reconciliation between the Company's reported tax provision and the tax
provision computed based on the U.S. statutory rate is as follows (dollars in
thousands):

<TABLE>
<CAPTION>
                                                                    1999       1998       1997
                                                                  ---------  ---------  ---------
<S>                                                               <C>        <C>        <C>
Statutory U.S. Federal income tax provision.....................  $  (2,690) $   1,758  $   3,962
Nondeductible goodwill Amortization.............................      1,116      1,216      1,224
Foreign tax credits not utilized................................         --         --        337
State taxes, net of federal benefit.............................       (331)       200        297
Other...........................................................        461        617        463
                                                                  ---------  ---------  ---------
Reported tax provision..........................................  $  (1,444) $   3,791  $   6,283
                                                                  ---------  ---------  ---------
                                                                  ---------  ---------  ---------
</TABLE>

    At June 30, 1999, the Company has net operating loss and tax credit
carryforwards of approximately $23.9 and $1.5 million, respectively, in the
United States and various foreign countries. Approximately $3.3 million of the
net operating loss carryforwards and $1.0 million of the tax credit
carryforwards expire in fiscal years 1999 through 2012. The remaining net
operating loss carryforwards can be carried forward indefinitely.

12. EMPLOYEE BENEFIT PLANS

    The Company has defined benefit pensions plans in effect for substantially
all of the Company's domestic hourly employees and 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
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. EMPLOYEE BENEFIT PLANS (CONTINUED)
    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 Sheet, in thousands of dollars:

<TABLE>
<CAPTION>
                                                                                                              OTHER
                                                             PENSION BENEFITS      PENSION BENEFITS       POSTRETIREMENT
                                                               PLANS IN THE       PLANS OUTSIDE THE          BENEFITS
                                                              UNITED STATES         UNITED STATES           ALL PLANS
                                                           --------------------  --------------------  --------------------
                                                             1999       1998       1999       1998       1999       1998
                                                           ---------  ---------  ---------  ---------  ---------  ---------
<S>                                                        <C>        <C>        <C>        <C>        <C>        <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................  $  27,667  $  25,350  $  82,419  $  61,396  $   5,929  $   5,295
Service cost.............................................        206        301      2,564      1,994        209        196
Interest cost............................................      1,547      1,934      4,226      4,649        334        408
Plan participants' contributions.........................         --         --      1,052      1,260         --         --
Actuarial (gains)/losses.................................        (51)     2,251      9,677     14,855       (221)       481
Benefits paid............................................     (2,045)    (2,169)    (2,034)    (2,315)      (372)      (451)
Curtailments (gain)/loss.................................        (18)        --         --         --         --         --
Effects of currency exchange rates.......................         --         --     (4,525)       580         --         --
                                                           ---------  ---------  ---------  ---------  ---------  ---------
Benefit obligation at end of year........................  $  27,306  $  27,667  $  93,379  $  82,419  $   5,879  $   5,929
                                                           ---------  ---------  ---------  ---------  ---------  ---------
                                                           ---------  ---------  ---------  ---------  ---------  ---------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year...........  $  26,812  $  24,436  $  86,093  $  66,335         --         --
Actual return on plan assets.............................      1,587      3,785      4,359     17,546         --         --
Benefits paid............................................     (2,045)    (2,169)    (2,058)    (2,315)      (372)      (451)
Employer contributions...................................        317        760      2,207      2,443        372        451
Contributions by plan participants.......................         --         --      1,051      1,261         --         --
Effects of currency exchange rates.......................         --         --     (4,478)       823         --         --
                                                           ---------  ---------  ---------  ---------  ---------  ---------
Fair value of plan assets at end of year.................     26,671     26,812     87,174     86,093  $      --  $      --
                                                           ---------  ---------  ---------  ---------  ---------  ---------
Funded status............................................       (634)      (855)    (6,205)     3,673     (5,879)    (5,929)
Unrecognized net actuarial (gain)/loss...................     (4,044)    (4,417)    13,889      3,263       (710)      (515)
                                                           ---------  ---------  ---------  ---------  ---------  ---------
Prepaid (accrued) benefit cost...........................  $  (4,678) $  (5,272) $   7,684  $   6,936  $  (6,589) $  (6,444)
                                                           ---------  ---------  ---------  ---------  ---------  ---------
                                                           ---------  ---------  ---------  ---------  ---------  ---------
AMOUNTS RECOGNIZED IN THE
  CONSOLIDATED BALANCE SHEET
Prepaid benefit cost.....................................  $      34  $     361  $   8,949  $   8,242  $      --  $      --
Accrued benefit cost.....................................     (5,412)    (5,633)    (1,265)    (1,306)    (6,589)    (6,444)
                                                           ---------  ---------  ---------  ---------  ---------  ---------
                                                                                                       $  (6,589)
Net amount recognized....................................  $  (4,678) $  (5,272) $   7,684  $   6,936                44)
                                                           ---------  ---------  ---------  ---------  ---------  ---------
                                                           ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>

    The aggregate accumulated benefit obligation for defined benefit pension
plans with an accumulated benefit obligation in excess of plan assets was $48.2
and $45.0 million as of June 30, 1999 and 1998, respectively. The aggregate
projected benefit obligation for defined benefit pension plans with a projected
benefit obligation in excess of plan assets was $59.5 and $54.7 million as of
June 30, 1999 and 1998, 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 $38.4 and $36.0
million as of June 30, 1999 and 1998, respectively.

                                       42
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. EMPLOYEE BENEFIT PLANS (CONTINUED)
    The net periodic benefit cost related to the defined benefit pension plans
included the following components, in thousands of dollars:

<TABLE>
<CAPTION>
                                          PENSION BENEFITS PLANS           PENSION BENEFITS PLANS
                                           IN THE UNITED STATES           OUTSIDE THE UNITED STATES
                                      -------------------------------  -------------------------------
<S>                                   <C>        <C>        <C>        <C>        <C>        <C>
                                        1999       1998       1997       1999       1998       1997
                                      ---------  ---------  ---------  ---------  ---------  ---------
Service cost........................  $     241  $     301  $     309  $   3,210  $   1,919  $   2,816
Interest cost.......................      1,848      1,936      1,912      5,117      4,729      3,769
Expected return on plan assets......     (2,321)    (2,137)    (3,031)    (7,173)    (5,663)    (5,101)
Net amortization/deferral...........       (103)      (190)       977        163         84        839
Settlement..........................        (18)        --         --         --         --         --
                                      ---------  ---------  ---------  ---------  ---------  ---------
Net periodic benefit cost...........  $    (353) $     (90) $     167  $   1,317  $   1,069  $   2,323
                                      ---------  ---------  ---------  ---------  ---------  ---------
                                      ---------  ---------  ---------  ---------  ---------  ---------
</TABLE>

<TABLE>
<S>                         <C>        <C>        <C>        <C>
ASSUMPTIONS AS OF JUNE 30:
Discount rate.............       7.00%      7.00%      8.00% Ranging from 5.00% to 8.50%
Expected return on plan
  assets..................       9.00%      9.00%      9.00% Ranging from 7.00% to 9.00%
Rate of compensation
  increase................        N/A        N/A        N/A  Ranging from 4.00% to 5.00%
</TABLE>

    The net periodic benefit cost related to the defined benefit health care
plans included the following components:

<TABLE>
<CAPTION>
                                                                    1999       1998       1997
                                                                  ---------  ---------  ---------
<S>                                                               <C>        <C>        <C>
Service cost....................................................  $     256  $     196  $     218
Interest cost...................................................        400        406        410
Net amortization/deferral.......................................        (29)       (42)       (11)
Net periodic benefit cost.......................................        627        560        617
Weighted average discount rate as of June 30....................       7.00%      6.50%      7.50%
</TABLE>

    The health care cost trend rate used to determine the health care benefit
obligation was 8.50% for 1999. This rate decreases gradually for three years to
the ultimate medical trend rate of 5.50% in 2001, 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, in thousands of dollars:

<TABLE>
<CAPTION>
                                                                            INCREASE     DECREASE
                                                                           -----------  -----------
<S>                                                                        <C>          <C>
Effect on total service and interest cost components.....................   $      62    $     (54)
Effect on postretirement benefit obligation..............................         452         (401)
</TABLE>

    The Company has a defined contribution plan that primarily covers domestic
salaried employees. Company contributions to the plan are based on employee
compensation. The Company expensed $1,267,000, $1,111,000, and $1,071,000 under
this plan during the fiscal years ended June 30, 1999, 1998 and 1997,
respectively.

                                       43
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

12. EMPLOYEE BENEFIT PLANS (CONTINUED)
    The Company also sponsors a 401(k) defined contribution plan that primarily
covers domestic salaried employees. Participants may contribute a percentage of
their compensation to the plan. Contributions are matched by the Company with
certain limitations. During the fiscal years ended June 30, 1999, 1998 and 1997,
the Company expensed $1,176,000, $1,066,000, and $1,111,000, respectively,
related to this plan.

13. 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 APBO
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 exerciseable 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 the stock options will
vest and thus can be exercised at 33 1/3% 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.

    The grants made during fiscal years 1999 and 1998 received variable
accounting treatment under APB No. 25. Accordingly, the Company recognized
income (expense) of $1.1 and ($1.1) million, respectively. The Company
anticipates the granting of additional options under the stock option plan
during fiscal year 2000. The related impact to the Statement of Operations, if
any, will be based on an independent valuation of the Company at fiscal year
ends.

    As of June 30, 1999 and 1998, there were stock options for 40.5 and 38.3
shares of AAF-McQuay Group, Inc. issued and outstanding under the plan.
Transactions are summarized as follows:

<TABLE>
<CAPTION>
                                                                                  WEIGHTED AVERAGE
                                                                 STOCK OPTIONS     EXERCISE PRICE
                                                               -----------------  ----------------
<S>                                                            <C>                <C>
Outstanding at June 30, 1997.................................              0                 --
Granted, immediately vested..................................           22.7         $  194,411
Granted, vested over three years.............................           15.6            203,214
                                                                         ---           --------
Outstanding at June 30, 1998.................................           38.3         $  197,997
Granted, vested over three years.............................            5.3            203,214
Forfeited....................................................            3.6            203,214
                                                                         ---           --------
Outstanding at June 30, 1999.................................           40.0         $  198,219

Shares exercisable at June 30, 1998..........................           22.7         $  194,411
Shares exercisable at June 30, 1999..........................           27.3         $  195,880
</TABLE>

    In electing to follow APBO 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

                                       44
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. STOCK-BASED COMPENSATION (CONTINUED)
expense been measured under the fair value recognition provisions of SFAS No.
123. The weighted-average fair values at date of grant for options granted in
1999 and 1998 was $43,468 and 74,094, respectively, and was estimated using the
Black-Scholes option valuation model with the following weighted average
assumptions:

<TABLE>
<CAPTION>
                                                                                    1999        1998
                                                                                  ---------     -----
<S>                                                                               <C>        <C>
Expected life in years..........................................................       10.0         7.0
Interest Rate...................................................................        6.0%        6.0%
Dividend Yield..................................................................          0%          0%
</TABLE>

    The Company's pro forma net income (loss) for the years ended June 30, 1999
and 1998 would be ($7.3) 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.

14. 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):

<TABLE>
<CAPTION>
YEAR
-------------------------------------------------------------------------------------
<S>                                                                                    <C>
2000.................................................................................  $   6,346
2001.................................................................................      4,557
2002.................................................................................      3,178
2003.................................................................................      2,046
2004.................................................................................      1,570
Thereafter...........................................................................      7,402
</TABLE>

    Rental expense associated with third party operating leases was
approximately $6.5, $8.9, and $11.4 million for the fiscal years ended June 30,
1999, 1998 and 1997, 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 certain of its data processing operations
are managed by a third party. Monthly charges during the fiscal years ended June
30, 1999, 1998 and 1997 averaged approximately $767,000, $902,000, and $945,800,
respectively, under this contract. This contract extends through December 31,
2005.

                                       45
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

15. INDEMNIFICATION AGREEMENT

    The purchase agreement between OYL and the former owners of the Company
contained certain indemnifications relating to specified contingencies that
existed as of the acquisition date relating to certain environmental, tax and
litigation matters. On July 8, 1998, the Company and the former owners entered
into a settlement agreement in resolution of certain disputes which were pending
before the American Arbitration Association in Dallas, Texas, concerning the
interpretation of the indemnification obligation. As a result of the settlement
agreement, the Company paid $10.5 million of the $11.5 million promissory note
due to the former shareholders, discussed in Note 8 of the Consolidated
Financial Statements, and the parties agreed to discharge claims and
entitlements under the indemnification provisions in the purchase agreement. The
residual balance of the promissory note was reclassified to other liabilities
for specified contingencies that existed as of the acquisition date.

    In addition, as a result of the indemnification settlement agreement and the
IRS settlement, the Company expected to receive payments of approximately $5
million and to incur approximately $2.1 million in obligations relating to the
IRS settlement. The Company has now received substantially all payments due
under the settlement and funded substantially all obligations.

16. CONTINGENCIES

    ENVIRONMENTAL MATTERS

    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. Therefore, it is possible that environmental
liabilities in addition to those described below may arise in the future. 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.

    In 1988, a lawsuit was filed in federal court against the Company concerning
the alleged release of trichloroethylene at a former Visalia, California
manufacturing facility (Visalia). In November 1990, the Company entered into a
settlement agreement with all known potentially responsible parties at Visalia
whereby the Company agreed to be solely responsible for the costs of the
remaining cleanup. Also, the Company was named as a potentially responsible
party arising from accidental trichloroethane spills at a facility in
Wilmington, North Carolina. In addition, the Company discovered contaminants in
the soil and/or groundwater at its three manufacturing facilities in Faribault,
Minnesota, Scottsboro, Alabama, Staunton, Virginia and certain other
manufacturing sites. The level of contamination exceeds mandated levels and will
require remediation.

    Based upon estimates prepared by environmental consultants, at June 30, 1999
the Company estimates that related probable remediation costs will be
approximately $16.0 million. The Company believes that these costs have been
adequately reserved for on the balance sheet. The Company is pursuing potential
recovery of a portion of such costs from third parties. No amounts have been
recorded in the accompanying Consolidated Balance Sheets relating to these
potential recoveries.

                                       46
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

16. CONTINGENCIES (CONTINUED)
    LITIGATION

    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.

    The Company does not believe that the potential liability from the ultimate
outcome of environmental and litigation matters will have a material adverse
effect on it.

17. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION

    The Company serves the global commercial heating, ventilation, air
conditioning and refrigeration ("HVAC&R") industry with two industry segments:
Commercial Air Conditioning and Refrigeration, the manufacture, sale and
distribution of heating, ventilating, air conditioning, industrial refrigeration
and freezing 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, 1999, 1998 and 1997:

<TABLE>
<CAPTION>
CLASSIFIED BY INDUSTRY:                                                           1999        1998        1997
-----------------------------------------------------------------------------  ----------  ----------  ----------
<S>                                                                            <C>         <C>         <C>
                                                                                     (DOLLARS IN THOUSANDS)
Net Sales:
  Commercial Air Conditioning and Refrigeration..............................  $  598,646  $  620,248  $  597,216
  Filtration Products........................................................     334,129     358,843     365,692
  Eliminations...............................................................      (8,747)    (13,342)    (14,975)
                                                                               ----------  ----------  ----------
      Total..................................................................  $  924,028  $  965,749  $  947,933
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
Operating Income (Loss):
  Commercial Air Conditioning and Refrigeration..............................  $   (6,643) $   16,846  $   13,920
  Filtration Products........................................................      15,367       6,564      19,923
  Corporate..................................................................       2,243         289       4,055
                                                                               ----------  ----------  ----------
      Total..................................................................  $   10,967  $   23,699  $   37,898
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
Total Assets:
  Commercial Air Conditioning and Refrigeration..............................  $  461,619  $  475,837  $  467,606
  Filtration Products........................................................     287,636     313,205     333,224
  Corporate..................................................................       5,940       6,891       9,464
                                                                               ----------  ----------  ----------
      Total..................................................................  $  755,195  $  795,933  $  810,294
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
</TABLE>

                                       47
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION (CONTINUED)

<TABLE>
<CAPTION>
CLASSIFIED BY INDUSTRY:                                                           1999        1998        1997
-----------------------------------------------------------------------------  ----------  ----------  ----------
                                                                                     (DOLLARS IN THOUSANDS)
<S>                                                                            <C>         <C>         <C>
Depreciation/Amortization:
  Commercial Air Conditioning and Refrigeration..............................  $   18,685  $   15,753  $   15,191
  Filtration Products........................................................      10,311      11,081      10,282
  Corporate..................................................................         103         112          94
                                                                               ----------  ----------  ----------
      Total..................................................................  $   29,099  $   26,946  $   25,567
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
Capital Expenditures:
  Commercial Air Conditioning and Refrigeration..............................  $   16,731  $   19,233  $    9,006
  Filtration Products........................................................       2,783       4,594       6,871
  Corporate..................................................................          --          95          64
                                                                               ----------  ----------  ----------
      Total..................................................................  $   19,514  $   23,922  $   15,941
                                                                               ----------  ----------  ----------
                                                                               ----------  ----------  ----------
</TABLE>

    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 $2.2, $0.3 and $4.1 million noted
above represent the over allocation of expenses for fiscal years 1999, 1998 and
1997, respectively. Assets at the corporate level consist of cash, receivables,
property and other assets.

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

<TABLE>
<CAPTION>
                                                                 1999       1998       1997
                                                               ---------  ---------  ---------
<S>                                                            <C>        <C>        <C>
                                                                   (DOLLARS IN THOUSANDS)
Operating Income from Business Segments......................  $   8,724  $  23,410  $  33,843
Over allocation of corporate expenses........................      2,243        289      4,055
Interest expense, net........................................     23,975     25,131     25,961
Other (income) expense.......................................     (5,324)    (6,454)       616
                                                               ---------  ---------  ---------
Income (loss) before income taxes............................  ($  7,684) $   5,022  $  11,321
                                                               ---------  ---------  ---------
                                                               ---------  ---------  ---------
</TABLE>

<TABLE>
<CAPTION>
CLASSIFIED BY GEOGRAPHIC REGION                               1999        1998        1997
---------------------------------------------------------  ----------  ----------  ----------
<S>                                                        <C>         <C>         <C>
                                                                 (DOLLARS IN THOUSANDS)
Net Sales:
  U.S....................................................  $  544,661  $  559,127  $  561,895
  Europe.................................................     322,653     329,488     314,483
  Other..................................................      56,714      77,134      71,555
                                                           ----------  ----------  ----------
      Total..............................................  $  924,028  $  965,749  $  947,933
                                                           ----------  ----------  ----------
                                                           ----------  ----------  ----------
</TABLE>

    Transfers between geographic areas are not significant. Prior year amounts
have been restated to reflect intercompany sales transactions between the
segments.

                                       48
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

17. BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION (CONTINUED)
    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:

<TABLE>
<CAPTION>
                                                              1999        1998        1997
                                                           ----------  ----------  ----------
<S>                                                        <C>         <C>         <C>
                                                                 (DOLLARS IN THOUSANDS)
  U.S....................................................  $  104,815  $  101,595  $  106,427
  Europe.................................................      36,798      40,301      39,873
  Other..................................................       3,473       3,409       3,914
                                                           ----------  ----------  ----------
      Total..............................................  $  145,086  $  145,305  $  150,214
                                                           ----------  ----------  ----------
                                                           ----------  ----------  ----------
</TABLE>

18. 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, 1999, 1998 and 1997, pursuant to this policy, the Company and
various of its subsidiaries sold an aggregate of approximately $6.7, $13.0, and
$16.3 million, respectively of the Company's products to various OYL entities in
the ordinary course of business. Additionally during fiscal years 1999, 1998 and
1997, the Company purchased approximately $1.2, $2.3 and $3.3 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.

    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
$166,000, $227,000 and $207,000 pursuant to the OMC Agreement, $105,000,
$124,000 and $81,000 pursuant to the Shenzhen Agreement, and $8,000, $18,000 and
$27,000 pursuant to the PT OYL Agreement for the years ended June 30, 1999, 1998
and 1997 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, Wuhan-McQuay has accrued royalties of
$147,500 through June 30, 1999. 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.

    OYL has issued a standby letter of credit in the amount of L17.0 million
which supports a wholly-owned subsidiary. OYL had issued a $6.0 million letter
of credit supporting a revolving line of credit

                                       49
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

18. RELATED PARTY TRANSACTIONS (CONTINUED)
facility for the Company's subsidiary in Canada which was terminated in October
1998. No fees were paid to OYL in connection with either letter of credit.

    The Company also has available letter of credit facilities totaling $13.5
and $25 million at June 30, 1999 and 1998, respectively, that are supported by
letters of credit from OYL which were fully utilized at June 30, 1999 and 1998.
The commitments made under these new facilities expire in March 2000, but may be
extended annually for successive one year periods with the consent of OYL and
the banks providing the facilities. No fees were paid to OYL in connection with
the letter of credit facilities.

19. 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 fifteen (15) joint ventures to which the Company sold
$27.6, $35.6 and $12.6 million in sales for fiscal years 1999, 1998 and 1997,
respectively. The Company currently has loans outstanding to three of the joint
ventures for a total original principal sum of approximately $2.9 million and
has commitments outstanding to provide an additional $1.2 million to the
partnerships. Summary financial information for the affiliated companies (20% to
50% owned) accounted for by the equity method is as follows:

<TABLE>
<CAPTION>
                                                                 1999       1998       1997
                                                               ---------  ---------  ---------
<S>                                                            <C>        <C>        <C>
                                                                   (DOLLARS IN
                                                                    THOUSANDS)
Current assets...............................................  $  36,413  $  33,009  $  25,052
Property, plant and equipment and other assets...............      7,576      6,284      3,823
Current liabilities..........................................     28,845     27,804     20,695
Long-term debt...............................................      2,667      1,626        549
Net sales....................................................     62,676     28,463     26,562
Gross profit.................................................     14,502      6,934      5,420
Net income (loss)............................................       (477)       192        487
</TABLE>

    Investments in affiliates of $4.8 and $4.4 million are included in Other
assets and deferred charges in the Consolidated Balance Sheets at June 30, 1999
and 1998, respectively.

20. OTHER INCOME (EXPENSE)

    During fiscal years ended June 30, 1999, 1998 and 1997, the Company had net
other income (expense) of $5.3, $6.5, and $(.6) million, respectively. In fiscal
year 1999, the Company recorded $2.9 million in other income as a result of
favorable developments in the IRS audit and tax indemnification settlement with
former shareholders of the Company as described in Note 15. Additionally, during
the fiscal year ended June 30, 1999 the Company recognized a $1.5 million gain
related to the termination of a pension plan in Canada and $0.8 million in
expense related to the potential sale of the Company. In fiscal year 1998, the
Company recognized a gain of $6.6 million on the sale of the industrial fan
business. Other expenses, which result from foreign currency and equity
affiliate transactions, are also included in other income (expense) for the
fiscal years ended June 30, 1999, 1998 and 1997.

                                       50
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

21. YEAR-END ADJUSTMENTS (UNAUDITED)

    The Company made certain year-end adjustments in fiscal 1999 resulting from
changes in estimates that were material to the results of the fourth quarter.
These adjustments related to the valuation of the Company's domestic inventory.
These adjustments, after applicable income tax reductions, reduced net income by
approximately $2.2 million.

                                       51
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

Boards of Directors and Stockholder
AAF-McQuay Inc.

    We have audited the consolidated financial statements of AAF-McQuay Inc. and
subsidiaries as of June 30, 1999 and June 30, 1998, and for each of the three
years in the period ended June 30, 1999 and have issued our report thereon dated
September 30, 1999 (included elsewhere in this Annual Report on Form 10-K). Our
audits also included the financial statement schedule listed in Item 14(a) of
this Annual Report on Form 10-K. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.

    In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

                                           [ERNEST & YOUNG LLP]

Baltimore, Maryland
September 30, 1999

                                       52
<PAGE>
         SCHEDULE II.   VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

                                AAF-MCQUAY INC.

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        COL. C
                                                   COL. B             ADDITIONS
                                                 BALANCE AT   --------------------------                 COL. E
                                                  BEGINNING   CHARGED TO    CHARGED TO                 BALANCE AT
COL. A                                               OF        COSTS AND       OTHER        COL. D       END OF
DESCRIPTION                                        PERIOD      EXPENSES      ACCOUNTS     DEDUCTIONS     PERIOD
-----------------------------------------------  -----------  -----------  -------------  -----------  -----------
<S>                                              <C>          <C>          <C>            <C>          <C>
YEAR ENDED JUNE 30, 1999
Allowance for doubtful receivables.............   $   7,361          698                       1,002(a)  $   7,057
Accrued warranty expense.......................      25,813       23,227                      20,413(b)     28,627
YEAR ENDED JUNE 30, 1998
Allowance for doubtful receivables.............   $   7,629    $   1,702                   $   1,970(a)  $   7,361
Accrued warranty expense.......................      22,212       16,326           (12)       12,713(b)     25,813
YEAR ENDED JUNE 30, 1997
Allowance for doubtful receivables.............   $   6,313    $   2,985     $      18     $   1,687(a)  $   7,629
Accrued warranty expense.......................      22,312       17,065           (12)       17,153(b)     22,212
</TABLE>

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

(a) Uncollectible accounts written off net of recoveries.

(b) Warranty claims honored during the year.

                                       53
<PAGE>
                                    PART III

ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT

INTRODUCTION

<TABLE>
<CAPTION>
NAME                                                       AGE                            POSITION
-----------------------------------------------------      ---      -----------------------------------------------------
<S>                                                    <C>          <C>

Joseph B. Hunter.....................................          62   President and Chief Executive Officer and Director

Gerald L. Boehrs.....................................          58   Executive Vice President and Chief Operating Officer
                                                                    of Filtration Products Group and Director

Michael J. Christopher...............................          55   Executive Vice President and Director

Andrew R. Morrison...................................          48   Chief Financial Officer and Secretary

Bruce D. Krueger.....................................          37   Controller and Assistant Secretary

Gary R. Boyd.........................................          47   Vice President of Human Resources

Dixie L. Randle......................................          46   General Counsel and Assistant Secretary

Ronald J. Pederson...................................          41   Treasurer

Ho Nyuk Choy.........................................          45   Director

Tan Sri Quek Leng Chan...............................          56   Director

Liu Wan Min..........................................          55   Director

Roger Tan Kim Hock...................................          52   Director
</TABLE>

                                       54
<PAGE>
JOSEPH B. HUNTER has served as Chief Executive Officer of the Company since May
1994. Prior to joining the Company, Mr. Hunter served for 21 years in various
executive capacities for York International Corporation and for his last 13
years with York as President of its International Business Group until March
1994.

GERALD L. BOEHRS has served as Executive Vice President of the Company since May
1994 and currently is the Chief Operating Officer of the Filtration Products
Group. He served as the Chief Operating Officer of the Commercial Air
Conditioning Group from May 1996 through April 1998 and Chief Operating Officer
of the Filtration Products Group from May 1994 to May 1996. From 1992 to 1994,
Mr. Boehrs served as Executive Vice President and General Manager of the
Filtration Products Group. From 1989 to 1992, he served as Vice President,
Technical Support. From 1987 until 1989, Mr. Boehrs headed the Company's
residential HVAC&R business.

MICHAEL J. CHRISTOPHER has served as the Executive Vice President of the Company
since June 1997 and is currently the head of new distribution and joint
ventures. Mr. Christopher has served as Chief Operations Officer of the
Filtration Products Group from June 1996 through mid 1998, Vice President,
Planning of the Company from June 1994 to June 1996 and served as the Chief
Financial Officer from March of 1995 though November 1996. From 1984 to 1994,
Mr. Christopher served in various financial and operating positions at York
International Corporation, most recently in the International Group and prior to
that as Vice President, Finance of its Applied Systems Group.

ANDREW R. MORRISON has served as Chief Financial Officer and Secretary of the
Company since July 1997 and served as the Treasurer from December 1995 until
July 1997. From 1992 until 1995, Mr. Morrison served as Assistant Treasurer of
PHH Corporation, a provider of vehicle management, relocation, real estate and
mortgage banking services. From 1989 to 1992, Mr. Morrison served as Director of
Corporate Finance of British Petroleum plc.

BRUCE D. KRUEGER has served as Vice President and Corporate Controller of the
Company since October of 1997. He joined the Company as Vice President and
Global Controller of the replacement filter products division of AAF in January
of 1996 and has worked 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.

GARY R. BOYD has 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.

DIXIE L. RANDLE has served as the General Counsel and Assistant Secretary of the
Company since July 1997. From July 1994 until June 1997, Ms. Randle served as
Division General Counsel of the Commercial Air Conditioning Group, and from May
1993 to July 1994, as Senior Attorney for the Group. Prior to 1993, she served
on the in-house counsel staff of the Lehndorff Group of Companies, a commercial
real estate investment and property management group.

RONALD J. PEDERSON has 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 of 1988 forward.

HO NYUK CHOY has served as Group Managing Director of OYL since 1993. From 1989
to 1993, Mr. Ho served in various management positions with OYL. Mr. Ho is a
Director of McQuay Asia (Hong Kong) Limited and Hume.

TAN SRI QUEK LENG CHAN has served as Executive Chairman of Hume since 1990. He
has served as Group Chief Executive Officer of Hong Leong since 1968. Mr. Quek
currently serves as Executive

                                       55
<PAGE>
Chairman of Hong Leong Credit Berhad, Hong Leong Bank Berhad, Hong Leong
Industries Berhad, Malaysian Pacific Industries Bhd, Hong Leong Properties
Berhad, Tasek Cement BHD, C.I. Holdings Berhad and Camerlin Group Berhad and as
Chairman of Nanyang Press (Malaya) Berhad and HLG Capital Berhad. Mr. Quek is a
Director of OYL and Southern Steel Berhad.

LIU WAN MIN 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 has served as the Group Managing Director of Nanyang Press Bhd, a Hong Leong
Group Company.

ROGER TAN KIM HOCK has served as President and Chief Executive Officer of Hume
since 1993. From 1988 to 1993, he served as Chief Executive Officer of HLG
Securities Sdn Bhd. From 1985 through 1988 he served as the Managing Director of
Hong Leong Industries Berhad and from 1976 through 1985, he served as the
General Manager of Hong Leong Property Sdn Bhd. Mr. Tan serves as a Director of
Hume.

Each of the Directors of the Company has been a Director since May 2, 1994,
except for Michael J. Christopher who was elected June 20, 1995. 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. There are no family relationships among the Directors or
executive officers of the Company.

                                       56
<PAGE>
ITEM 11.    EXECUTIVE COMPENSATION

    SUMMARY COMPENSATION TABLE

    The following table sets forth information concerning compensation paid or
accrued by the Company to the Chief Executive Officer and each of the next four
most highly compensated executive officers of the Company, for services rendered
in all capacities to the Company and its subsidiaries during the years ended
June 30, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
                                                        ANNUAL COMPENSATION                                    LONG TERM
                                         -------------------------------------------------    SECURITIES       INCENTIVE
                                                                             OTHER ANNUAL     UNDERLYING         PLAN
NAME                                       YEAR      SALARY $    BONUS $     COMPENSATION    OPTIONS/SARS      PAYOUTS $
---------------------------------------  ---------  ----------  ----------  --------------  ---------------  -------------
<S>                                      <C>        <C>         <C>         <C>             <C>              <C>
                                                                                 $(A)            #(J)
                                                                            --------------  ---------------
Joseph B. Hunter.......................       1999     446,376     140,000            --              --              --
  President and Chief Executive Officer       1998     413,243     225,500            --           22.70              --
                                              1997     402,120     140,000            --              --              --
Gerald L. Boehrs.......................       1999     221,410      56,244            --              --              --
  Executive Vice President                    1998     212,521     125,107(c)       54,940(d)         2.12            --
                                              1997     207,022          --            --              --              --
Michael J. Christopher.................       1999     219,628          --            --              --              --
  Executive Vice President                    1998     205,286      78,409            --            1.92              --
                                              1997     198,638          --            --              --              --
Andrew R. Morrison.....................       1999     211,916      95,964(e)       58,795(f)         0.43            --
  Chief Financial Officer and Secretary       1998     179,124      61,069            --            1.34              --
                                              1997     141,516          --            --              --              --
Bruce D. Krueger.......................       1999     176,539      98,379(g)       61,676(h)           --            --
  Corporate Controller and Assistant          1998     136,146      45,236        43,292(i)         0.97              --
  Secretary                                   1997     102,211       6,620            --              --              --

<CAPTION>

                                            ALL OTHER
NAME                                      COMPENSATION $
---------------------------------------  ----------------
<S>                                      <C>

Joseph B. Hunter.......................         16,267(b)
  President and Chief Executive Officer         14,988(b)
                                                 6,763(b)
Gerald L. Boehrs.......................          9,572(b)
  Executive Vice President                       7,977(b)
                                                 6,889(b)
Michael J. Christopher.................          8,149(b)
  Executive Vice President                       8,266(b)
                                                 6,537(b)
Andrew R. Morrison.....................          8,639(b)
  Chief Financial Officer and Secretary          6,889(b)
                                                    --
Bruce D. Krueger.......................          7,811(b)
  Corporate Controller and Assistant             6,800(b)
  Secretary                                      5,777(b)
</TABLE>

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

(a) Unless otherwise indicated, the aggregate dollar cost to the Company of
    perquisites and other personal benefits received by the executives did not
    exceed the lesser of $50,000 or 10% of the total amounts reported in the
    Salary and Bonus columns.

(b) Represents contributions by the Company to the Company's 401(k) plan.

(c) Included in this bonus is a relocation bonus of $65,342 given to Mr. Boehrs
    for his relocation from Minneapolis to Louisville as he assumed the Chief
    Operating Officer of Filtration Products Group position.

(d) Represents reimbursement for relocation and moving expense and includes
    repayment on a promissory note. Mr. Boehrs was reimbursed $44,855 for
    relocation expenses including temporary living expenses and closing cost.
    The reimbursement for moving expenses totaled $10,085.

(e) Included in this bonus is a relocation bonus of $92,429 given to Mr.
    Morrison for his relocation from Baltimore to Louisville.

(f) Represents reimbursement for relocation and moving expense. Mr. Morrison was
    reimbursed $53,516 for relocation expenses including temporary living
    expenses and closing cost. The reimbursement for moving expenses totaled
    $5,279.

(g) Included in this bonus is a relocation bonus of $81,005 given to Mr. Krueger
    for his relocation from Baltimore to Louisville.

                                       57
<PAGE>
(h) Represents reimbursement for relocation and moving expense. Mr. Krueger was
    reimbursed $49,243 for relocation expenses including temporary living
    expenses and closing cost associated with his move from Baltimore to
    Louisville. The reimbursement for moving expenses totaled $12,443.

(i) Represents reimbursement for relocation and moving expense. Mr. Krueger was
    reimbursed $33,292 for relocation expenses including temporary living
    expenses and closing cost associated with his move from Louisville to
    Baltimore. The reimbursement for moving expenses totaled $10,000.

(j) Represents granted stock options for shares of AAF-McQuay Group, Inc.
    shares.

    STOCK OPTION PLAN

    In 1997, 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. The Company granted options under the stock option plan during fiscal year
1999. The related impact to the Statement of Operations was based on an
independent valuation of the Company at or near the grant date.

    The following table sets forth certain information concerning options
granted during fiscal year 1999:
<TABLE>
<CAPTION>
                                             INDIVIDUAL GRANTS
                                     ----------------------------------                  POTENTIAL REALIZABLE VALUE AT
                                        NUMBER OF        PERCENT OF                      ASSUMED ANNUAL RATES OF STOCK
                                       SECURITIES       TOTAL OPTIONS                    PRICE APPRECIATION FOR OPTION
                                       UNDERLYING        GRANTED TO      EXERCISE   ---------------------------------------
                                         OPTIONS        EMPLOYEES IN       PRICE    EXPIRATION
               NAME                    GRANTED (#)       FISCAL 1999      ($/SH)       DATE        0% ($)        5% ($)
-----------------------------------  ---------------  -----------------  ---------  -----------  -----------     ------
<S>                                  <C>              <C>                <C>        <C>          <C>          <C>
Andrew R. Morrison.................
  Chief Financial Officer..........          0.43               8.1%       203,214      9/8/08           --             0

<CAPTION>

               NAME                    10% ($)
-----------------------------------  -----------
<S>                                  <C>
Andrew R. Morrison.................
  Chief Financial Officer..........       1,069
</TABLE>

    A summary of the granted options and their respective fiscal year end values
for the Chief Executive Officer and each of the next four most highly
compensated executive officers is as follows:

<TABLE>
<CAPTION>
                                                                  SHARES        NUMBER OF                     VALUE OF
                                                                ACQUIRED ON    UNEXERCISED    EXERCISE      "EXERCISABLE"
                                                                 EXERCISE        OPTIONS       PRICE           OPTIONS
                                                               -------------  -------------  ----------  -------------------
<S>                                                            <C>            <C>            <C>         <C>
Joseph B. Hunter.............................................         none           7.05    $  188,889               0
  President and Chief Executive Officer                                             15.65       196,890
Gerald L. Boehrs.............................................         none           2.12       203,214               0
  Executive Vice President
Michael J. Christopher.......................................         none           1.92       203,214               0
  Executive Vice President
Andrew R. Morrison...........................................         none           1.78       203,214               0
  Chief Financial Officer and Secretary
Bruce D. Krueger.............................................         none           0.97       203,214               0
  Corporate Controller and Assistant Secretary
</TABLE>

    EMPLOYMENT AGREEMENTS

    As of the OYL Acquisition date, AAF-McQuay Group Inc., the Company's parent,
entered into an employment agreement with Mr. Hunter which expired May 2, 1999.
This agreement has been extended on an annual basis.

                                       58
<PAGE>
    On or about March 8, 1999, the Company entered into an Employment Agreement
with Mr. Morrison pursuant to which Mr. Morrison agreed to relocate to
Louisville, Kentucky, and continue his duties as CFO and Corporate Secretary for
at least two (2) years at a current base salary of not less than $217,800 and a
relocation bonus, plus reimbursement of moving and related expenses. The
agreement provides that if prior to the expiration of the two-year period, Mr.
Morrison's employment is terminated not for cause, the Company shall pay Mr.
Morrison his then current salary for the greater of the time remaining in the
two-year period or six months.

    On or about April 1, 1999, the Company entered into an Employment Agreement
with Mr. Krueger pursuant to which Mr. Krueger agreed to relocate to Louisville,
Kentucky, and continue his duties as Corporate Controller for at least two (2)
years at a current base salary of not less than $172,500 and a relocation bonus,
plus reimbursement of moving and related expenses. The agreement provides that
if prior to the expiration of the two-year period, Mr. Krueger's employment is
terminated not for cause, the Company shall pay Mr. Krueger his then current
salary for the greater of the time remaining in the two-year period or six
months.

    EMPLOYEE BENEFIT PLANS

    EQUITY PARTICIPATION PLAN.  Effective January 1, 1991 the Company
established an Executive Employment and Compensation Plan (the "Equity
Participation Plan") and entered into Executive Employment and Compensation
Agreements with certain executive officers of the Company including Mr. Boehrs
(referred to herein as a "NEPI Holder"). Under the Equity Participation Plan,
the Company agreed to provide each such officer a contingent net equity
participation interest (a "NEPI Interest") in the Company under certain
circumstances, with Mr. Boehrs at 0.4%.

    Pursuant to the Equity Participation Plan, as modified effective May 2, 1994
and in connection with the OYL Acquisition, 10% of each NEPI Holder's NEPI
Interest is designated a Reserve Amount and 90% of each NEPI Holder's NEPI
Interest has been paid or is payable by the Company to the NEPI Holder pursuant
to the following formula: one-third on May 2, 1994; one-third on May 2, 1995;
and one-third on May 2, 1997. On April 29, 1994 the Company established and
funded an irrevocable trust for the purpose of making such NEPI Interest
payments to NEPI Holders in due course. On May 2, 1996, the final distributions
were made from the trust. On July 8, 1998, the reserve was paid out to the NEPI
Holders in conjunction with the settlement of the indemnification agreement.

    RETIREMENT PLAN.  Effective April 3, 1982, the Company adopted the
Predecessor Company Retirement Plan (the "Retirement Plan"), which was amended
as of January 1, 1991 and further amended as of May 1, 1991 and December 31,
1991. The Retirement Plan has been maintained for the benefit of certain
salaried and hourly employees of the Company. Effective January 1, 1989,
benefits for most salaried participants in the Retirement Plan were frozen as of
December 31, 1988.

    Normal retirement age under the Retirement Plan is age 65. A participant's
annual rate of pension commencing after retirement is determined based on a
number of factors, including that participant's earnings, years of service and
contributions.

    The annual benefit amount, commencing at normal retirement age and payable
as a single life annuity, under the Retirement Plan for Mr. Boehrs is
approximately $1,777.

    SENIOR EXECUTIVE SEVERANCE PLAN.  Effective April 26, 1994 the Company
established a Senior Executive Severance Plan (the "Severance Plan") and,
pursuant thereto, entered into senior executive severance agreements with
certain executive officers of the Company including Mr. Boehrs. Pursuant to the
Severance Plan and the applicable agreements, upon involuntary termination
without good cause of such executive officer, the executive officer will be
entitled to receive his base salary as then in effect for a maximum period of 12
months and cash in respect of certain retirement benefits. Pursuant to such
agreements, involuntary termination "without good cause" is defined to include
(i) any

                                       59
<PAGE>
termination that does not result from material dishonesty, significant fraud,
willful negligence or gross and material malfeasance detrimental to the Company
or (ii) any requirement that the executive be based or perform services at a new
location, a material change in the position, duties, authority or
responsibilities of the executive or any decrease in the executive's
compensation.

    SALARY CONTINUATION PLAN.  Effective January 1, 1990, the Company
established an Executive Salary Continuation Plan (the "Salary Continuation
Plan") for certain executive officers and key employees of the Company which
provides for compensation in the event of retirement or death.

    In the event a participant retires after he attains the age of 65 the
Company is required to pay to the participant a specified amount ($50,000 per
year in the case of Mr. Boehrs) until the earlier of (i) the date of death of
the participant or (ii) the first day of the month following the ninth
anniversary of the date of retirement of the participant. The Salary
Continuation Plan further provides for adjustments in the event of early
retirement. In the event the participant becomes totally disabled or is
terminated involuntarily without good cause, the participant will remain
eligible for the benefits. In the event of the death of a participant while
actively employed by the Company, the Company will make such payments to the
designated beneficiary of the participant. Effective May 22, 1997, Mr. Boehrs is
fully vested in all rights upon his termination of employment with the Company,
whether voluntary or involuntary, with or without good cause, or due to
disability or death, as if Mr. Boehrs had attained the age of 65 at the time of
termination, whether or not he has in fact reached that age.

    COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

    Mr. Hunter 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.

                                       60
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                             PRINCIPAL STOCKHOLDERS

    The following table sets forth information as of September 24, 1999 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), and by
the Company's directors and current executive officers and such directors and
executive officers as a group.

                   COMMON STOCK, PAR VALUE $100.00 PER SHARE

<TABLE>
<CAPTION>
NAME                                                                         NUMBER OF SHARES      PERCENT OUTSTANDING
--------------------------------------------------------------------------  -------------------  -----------------------
<S>                                                                         <C>                  <C>
AAF-McQuay Group Inc.(a)..................................................           2,947                    100
Legg Mason Tower, Suite 2800
  111 South Calvert Street
  Baltimore, Maryland 21202
Joseph B. Hunter(b).......................................................            22.7                      *
Gerald L. Boehrs(b).......................................................            0.71                      *
Michael J. Christopher(b).................................................            0.64                      *
Andrew R. Morrison(b).....................................................            0.59                      *
Bruce D. Krueger(b).......................................................            0.32                      *
All current directors and executive officers as a group (7 persons)(a)....           25.46                      *
</TABLE>

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

*   Represents less than 1.0% of the aggregate shares of Common Stock
    outstanding.

(a) AAF-McQuay Group Inc. is a wholly-owned subsidiary of AMG Holdings N.V., a
    Netherlands corporation (Hoekenrode 6-8, 1102BR Amsterdam Zuidoost, The
    Netherlands). AMG Holdings N.V. is a wholly-owned subsidiary of AMG Holdings
    B.V., a Netherlands corporation (Hoekenrode 6-8, 1102BR Amsterdam Zuidoost,
    The Netherlands). AMG Holdings B.V. is a wholly-owned subsidiary of OYL
    (Jalan Pengapit 15/19, 40000 Shah Alam, Selangor Darul Ehsan, Malaysia). OYL
    is publicly traded on the Kuala Lumpur Stock Exchange. Approximately 62.5%
    of the outstanding stock of OYL is owned by Hume, a company also publicly
    traded on the Kuala Lumpur Stock Exchange. Approximately 45.2% of the
    outstanding stock of Hume is owned by Hong Leong (Hong Leong Group, Level
    10, Wisma Hong Leong, 18 Janlan Perak, 50450 Kuala Lumpur, Malaysia). Tan
    Sri Quek Leng Chan is a Director of the Company, a Director and the Chairman
    of AAF-McQuay Group Inc., the Executive Chairman of Hume and a controlling
    shareholder of Hong Leong.

(b) Includes shares issuable upon exercise of options that are exercisable
    within 60 days.

SECURITY OWNERSHIP OF MANAGEMENT IN PARENTS OF THE COMPANY

    The following tables set forth information as of June 30, 1998 for OYL and
Hume pertaining to the beneficial ownership of shares of the respective
company's equity securities by the Company's directors and current executive
officers and such directors and executive officers as a group.

                                       61
<PAGE>
                OYL ORDINARY SHARES, PAR VALUE RM 1.00 PER SHARE

<TABLE>
<CAPTION>
NAME                                                                        NUMBER OF SHARES    PERCENT OUTSTANDING
--------------------------------------------------------------------------  -----------------  ---------------------
<S>                                                                         <C>                <C>
Tan Sri Quek Leng Chan....................................................        84,868,828(a)            62.7
Liu Wan Min...............................................................         6,218,200               4.7
Ho Nyuk Choy..............................................................            44,000               *
Joseph B. Hunter..........................................................            33,500               *
Michael J. Christopher....................................................            10,000               *
All current directors and executive officers as a group (13 persons)......        91,174,528              67.5
</TABLE>

             HUME ORDINARY STOCK UNITS, PAR VALUE RM 1.00 PER UNIT

<TABLE>
<CAPTION>
NAME                                                                     NUMBER OF SHARES    PERCENT OUTSTANDING
-----------------------------------------------------------------------  -----------------  ---------------------
<S>                                                                      <C>                <C>
Tan Sri Quek Leng Chan.................................................       123,631,455(b)            49.9
All current directors and executive officers as a group (13 persons)...       123,631,455              49.9
</TABLE>

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

*   Less than one percent (1%).

(a) Includes 84,868,828 shares held by Hume, a company publicly traded on the
    Kuala Lumpur Stock Exchange. Approximately 49.9% of the outstanding stock of
    Hume is owned by Hong Leong (Hong Leong Group, Level 8, Wisma Hong Leong, 18
    Janlan Perak, 50450 Kuala Lumpur, Malaysia). Tan Sri Quek Leng Chan is the
    Executive Chairman of Hume and a controlling shareholder of Hong Leong.

(b) Includes 123,531,455 shares held by Hong Leong.

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, 1999, 1998 and 1997, pursuant to this policy, the Company and
various of its subsidiaries sold an aggregate of approximately $6.7, $13.0, and
$16.3 million, respectively of the Company's products to various OYL entities in
the ordinary course of business. Additionally during fiscal years 1999, 1998 and
1997, the Company purchased approximately $1.2, $2.3 and $3.3 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.

    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
$166,000, $227,000 and $207,000 pursuant to the OMC Agreement, $105,000,
$124,000 and $81,000 pursuant to the Shenzhen Agreement, and $8,000, $18,000 and
$27,000 pursuant to the PT OYL Agreement for the years ended June 30, 1999, 1998
and 1997 respectively. Each of OMC, Shenzhen, and PT OYL are subsidiaries of
OYL.

                                       62
<PAGE>
    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 Peoples Republic of China in exchange for a royalty of 2%-3% of net
sales. Pursuant to such agreement, Wuhan-McQuay has accrued royalties of
$147,500 through June 30, 1999. 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.

    OYL has issued a standby letter of credit in the amount of L17.0 million
which supports a wholly-owned subsidiary. OYL had issued a $6.0 million letter
of credit supporting a revolving line of credit facility for the Company's
subsidiary in Canada which was terminated in October 1998. No fees were paid to
OYL in connection with either letter of credit.

    The Company also has available letter of credit facilities totaling $13.5
and $25 million at June 30, 1999 and 1998, respectively, that are supported by
letters of credit from OYL which were fully utilized at June 30, 1999 and 1998.
The commitments made under these new facilities expire in March 2000, but may be
extended annually for successive one year periods with the consent of OYL and
the banks providing the facilities. No fees were paid to OYL in connection with
the letter of credit facilities.

                                    PART IV

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

(a) Financial Statements

<TABLE>
<S>                                                                     <C>
1. Financial Statements
    Report of the Independent Auditors

    Consolidated Balance Sheets--
    at June 30, 1999 and 1998

    Consolidated Statements of Operations--
    Years ended June 30, 1999, 1998 and 1997

    Consolidated Statements of Cash Flows--
    Years ended June 30, 1999, 1998 and 1997

    Consolidated Statements of Stockholder's Equity--
    Years ended June 30, 1999, 1998 and 1997

    Consolidated Statements of Comprehensive Income (Loss)--
    Years ended June 30, 1999, 1998 and 1997

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.
</TABLE>

(b) Exhibits

<TABLE>
<C>        <S>
      3.1  Articles of Incorporation(1)

      3.2  By-Laws(1)

      4.1  Indenture dated as of February 14, 1996 with IBJ Schroder Bank and Trust Company(2)

      4.2  Form of Note (included in Exhibit 4.1)
</TABLE>

                                       63
<PAGE>
<TABLE>
<C>        <S>
     10.1  Executive Employment and Compensation Agreement dated January 1, 1991 with Gerald L.
           Boehrs(1)

     10.2  NEPI Modification Agreement dated May 2,1994 with Gerald I. Boehrs(1)

     10.3  NEPI Relinquishment and Release Agreement dated May 2, 1994 with Gerald L. Boehrs(1)

     10.4  NEPI Indemnification Modification Agreement dated May 2, 1994 with Gerald L.
           Boehrs(1)

     10.5  Senior Executive Severance Agreement dated April 26, 1994 with Gerald L. Boehrs(1)

     10.6  Executive Salary Continuation Agreement dated July 25, 1990 with Gerald L. Boehrs(1)

     10.7  Trademark License and Royalty Agreement dated December 27, 1995 with P.T. O.Y.L.
           Sentra Manufacturing(1)

     10.8  Trademark License and Royalty Agreement dated December 27, 1995 with Shenzhan O.Y.L.
           Electrical Company Ltd.(1)

     10.9  Trademark License and Royalty Agreement dated December 27, 1995 with O.Y.L.
           Manufacturing Company SDN BHD(1)

    10.10  Technology Licensing Agreement dated August 8, 1995 with McQuay-Wuhan Air
           Conditioning & Refrigeration Company Ltd.(1)

    10.11  Asset Transfer Agreement dated May 29, 1995 by and among AAF Asia Pte., Ltd. and
           McQuay Air Conditioning (Singapore) Pte. Ltd.(1)

    10.12  Supply and Procurement Agreement dated May 2, 1994 with EnergyLine Systems, Inc.(1)

    10.13  Stock Option Plan effective January 1, 1996(4)

    10.14  Employment Agreement dated March 8, 1999 with Andrew R. Morrison.

    10.15  Employment Agreement dated April 1, 1999 with Bruce D. Krueger.

    10.16  Revolving Credit, Term Loan and Security Agreement dated September 30, 1999 with PNC
           Bank, N.A.(6)

     21    Subsidiaries(5)

     24    Power of Attorney(5)

     27    Financial Data Schedule(5)
</TABLE>

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

(1) Incorporated by reference to Pre-Effective Amendment Number 1 to the
    Company's Registration Statement (File No. 33-80701) on Form S-1 as filed
    with the Securities and Exchange Commission (the "Commission") on January
    26, 1996.

(2) Incorporated by reference to the Company's Current Report on Form 8-K as
    filed with the Commission on April 26, 1996.

(3) Incorporated by reference to the Company's Form 10-K as filed with the
    Commission on September 17, 1996.

(4) Incorporated by reference to the Company's Form 10-Q as filed with the
    Commission on May 9, 1997.

(5) Filed herewith.

(6) To be filed by amendment.

(c) Reports on Form 8-K.

    The Company did not file any reports on Form 8-K for the three month period
ended June 30, 1999.

                                       64
<PAGE>
                                   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 30, 1999.

                                AAF-MCQUAY INC.

                                By:             /s/ JOSEPH B. HUNTER
                                     -----------------------------------------
                                                  Joseph B. Hunter
                                       PRESIDENT AND CHIEF EXECUTIVE OFFICER

    Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
          SIGNATURE                       TITLE                    DATE
------------------------------  --------------------------  -------------------
<C>                             <S>                         <C>

     /s/ JOSEPH B. HUNTER
------------------------------  Principal Executive         September 30, 1999
       Joseph B. Hunter           Officer

    /s/ ANDREW R. MORRISON      Chief Financial Officer
------------------------------    (Principal Financial      September 30, 1999
      Andrew R. Morrison          Officer)

     /s/ BRUCE D. KRUEGER       Controller
------------------------------    (Principal Accounting     September 30, 1999
       Bruce D. Krueger           Officer)
</TABLE>

The Board of Directors:

<TABLE>
<S>                                    <C>
Joseph B. Hunter                       Michael J.Christopher
Liu Wan Min                            Quek Leng Chan
Ho Nyuk Choy                           Roger Tan Kim Hock
Gerald L. Boehrs
</TABLE>

<TABLE>
<S>                             <C>                         <C>
By:  /s/ JOSEPH B. HUNTER
------------------------------
Joseph B. Hunter                                            September 30, 1999
Attorney-in-Fact
</TABLE>

    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.

                                       65
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
     NUMBER    DESCRIPTION
-------------  --------------------------------------------------------------------------------------------------------
<C>            <S>

         21    Subsidiaries

         24    Power of Attorney

         27    Financial Data Schedule
</TABLE>

                                       66