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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)

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<C>        <S>
   /X/     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

                     FOR THE FISCAL YEAR ENDED JULY 1, 2000

<TABLE>
<C>        <S>
   / /     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES EXCHANGE ACT OF 1934
</TABLE>

      FOR THE TRANSITION PERIOD FROM ________________ TO ________________

                        COMMISSION FILE NUMBER: 33-80701

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

                                AAF-MCQUAY INC.
           (Exact name of the Registrant as specified in its charter)

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<S>                                               <C>
                    DELAWARE                                         41-0404230
        (State or other Jurisdiction of                           (I.R.S. Employer
         Incorporation or Organization)                         Identification No.)

       10300 ORMSBY PARK PLACE, SUITE 600
              LOUISVILLE, KENTUCKY                                     40223
    (Address of principal executive offices)                         (Zip Code)
</TABLE>

       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. Yes /X/  No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Not Applicable

    The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant at June 30, 2000 was $-0-.

    The number of shares outstanding of the registrant's only class of common
stock as of September 26, 2000 (latest practicable date) was 2,497.

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                        AAF-MCQUAY INC. AND SUBSIDIARIES
                                     INDEX

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PART I
Item 1    Business....................................................      3
Item 2    Properties..................................................     11
Item 3    Legal Proceedings...........................................     12
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...................................................     15
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..................................     53

PART III
Item 10   Directors and Executive Officers of the Registrant..........     54
Item 11   Executive Compensation......................................     56
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>

                                       2
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                                     PART I

ITEM 1. BUSINESS

GENERAL

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

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

    The Company believes its affiliation with Hong Leong, which has a
significant Asian presence, substantially improves the Company's financial and
operating flexibility and access to Asian markets. The Company has also expanded
into other new markets outside Asia, 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, applied terminal 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 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, 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, and TRU*SERVE.

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 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

                                       3
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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-,
Hallmark-Registered Trademark-, 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) applied terminal systems, and (iv) industrial
refrigeration.

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

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

    APPLIED AIR HANDLING SYSTEMS.  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 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.

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

                                       4
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    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
Parts-TM- banner. The Company provides value added customer service through
e-commerce, electronic parts catalogs and industry leading order cycle times.

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

    J&E Hall sells and services industrial refrigeration and freezing equipment
under several well known J&E Hall brand names, including J&E Hall-TM-,
Hallmark-Registered Trademark-, 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. In fiscal year 1997, the Company acquired Coulstock & Place
Engineering Co. Ltd., a motor rewind specialist providing support for the
compressor business.

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

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, Italy, Mexico, Puerto Rico and Spain. The Company has formed 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 Miami, Florida (to sell its
products throughout Latin America), Beirut, Lebanon and Dubai, UAE and markets
its products throughout Asia, including China, through manufacturing and sales
joint ventures established by OYL.

FILTRATION PRODUCTS 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 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 marketed its replacement
filters under the AmericanAirFilter-Registered Trademark- and
AAF-Registered Trademark- brand names since the 1920's. 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

                                       5
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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 one of the world's largest manufacturers and
distributors of commercial, industrial and residential air filters, which are
used to remove airborne contaminants from intake and conditioned air, for a wide
variety of applications. The Company estimates its global and North American
served market share in non-vehicular applications to be approximately 15% and
20%, respectively. The 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. The Company's APC systems are
sold primarily in Europe, Latin America and Asia and include design and
construction services. The Company markets APC equipment to a broad range of
industrial customers including the food, pharmaceutical, chemical, steel,
cement, power generation, waste incineration, chemical and pulp and paper
industries, as well as special market niches such as woodworking companies,
welding shops 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 products and systems are
designed to remove particulate contamination from air supplies to machines to
reduce the performance inhibiting effects of corrosion, erosion and fouling.
Acoustical systems are designed to protect the environment in which the machines
are installed from excessive noise generated by the machines and their ancillary
processes.

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

                                       6
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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, AND DOMESTIC OPERATIONS AND
  EXPORT SALES

    See Note 16 "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 that 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, 2000 and 1999 was $124 and $134 million,
respectively. The Company anticipates that substantially all of these orders
will be filled in the next 12 months.

    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, 2000 and 1999 was $61 and $52 million, respectively.
The Company anticipates that substantially all of these orders will be filled in
the next 12 months.

MANUFACTURING

    COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP.  The Company's
commercial HVAC&R products are manufactured in 7 factories in the United States,
Italy, the United Kingdom, and Mexico. Subsequent to June 30, 2000, the Company
announced its intention to close its HVAC&R manufacturing facility in Alabama.
The Company's plans are to consolidate the production of applied air handling
systems into one expanded operation at its Faribault, MN location for supply to
the US market. The Company anticipates that its Scottsboro, Alabama facility
will be closed by June 30, 2001. 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 3 facilities located in the United
States, Singapore and The Netherlands and then

                                       7
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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 3
locations for environmental products. See "Properties."

PURCHASING

    The principal component parts and materials purchased by the Company for use
in its equipment and systems are compressors, electric motors, filter media,
copper tubes, glass pellets and castings, all of which are readily available
through multiple sources. No single supplier has accounted for more than 10% of
the annual purchases by the Company of raw materials or component parts in any
of the past three fiscal years. The Company believes it has contracts and
commitments or readily available sources of supply sufficient to meet its
anticipated raw material or key component requirements. The Company maintains
alternate sources for key components where dependence upon a single supplier
could have an adverse impact upon production to the extent that it is
technologically and commercially feasible.

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

COMPETITION

    GENERAL.  The commercial HVAC&R and 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, and conditions of
sale and range of product offering. Certain portions of these markets are also
very fragmented, both geographically and by product line. The Company believes
its competitive position is strengthened in those international markets in which
it has both a manufacturing and a marketing presence and that it has a
competitive advantage through its affiliation with Hong Leong and OYL in gaining
access to certain markets where barriers exist for non-local companies.

    COMMERCIAL AIR CONDITIONING AND REFRIGERATION 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.

                                       8
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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 $8.7, $8.9 and $10.0 million during its 2000, 1999, and 1998
fiscal years, respectively, for research and development.

    A significant focus of the Company's research and development efforts since
1988 has been to develop and extend its range of water-cooled and air-cooled
chillers using advanced single screw compressor technology. The Company
introduced its first single screw air conditioning product in 1994 and has
continued to expand the product line and its application through fiscal 2000.
J&E Hall has been marketing industrial refrigeration products using single screw
compressor technology since 1978. The Company expects to further enhance single
screw air conditioning product technology during fiscal year 2001. Single screw
compressor technology will continue to be an important element of research and
development programs in the Commercial Air Conditioning and Refrigeration Group.

    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 recently introduced a new range of self
supporting pleated air filters; a new range of cleaners; a new extended surface
pleated filter that exceeds the standards proposed in ASHRAE 62-1989R (American
Society of Heating, Refrigeration and Air Conditioning Engineers); a variety of
replacement filters 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. In
fiscal year 2000, the Filtration Products Group issued 8 patents related to
filter media and filter design and construction.

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

EMPLOYEES

    As of June 30, 2000, the Company employed approximately 5,300 employees
worldwide, with approximately 3,400 persons employed in the United States and
1,900 employed in non-U.S. locations. The Company has a total of seven labor
union bargaining agreements, covering approximately 1,800 employees, of which
three agreements, covering 640 employees, will expire in fiscal year 2001. 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.

                                       9
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ENVIRONMENTAL REGULATIONS

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

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

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

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

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

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

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

                                       10
<PAGE>
    Substantially all major manufacturers of HVAC&R products, including the
Company, produce HVAC&R equipment for smaller cooling capacity applications that
utilize HCFC-22. The Company (and its competitors) must develop substitute
refrigerants for use in HVAC&R products that currently use HCFC-22 prior to the
phaseout of HCFC-22. Presently, the EPA has identified several refrigerants that
it considers acceptable HCFC-22 substitutes for certain uses applicable to some
of the Company's products. The Company is conducting a comprehensive program to
introduce ozone friendly refrigerant for all products in the near future.

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:

              COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP

<TABLE>
<CAPTION>
LOCATION                           SQUARE FEET   LEASED/OWNED          PRINCIPAL FUNCTION
--------                           -----------   ------------   ---------------------------------
<S>                                <C>           <C>            <C>
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          Applied terminal system products

Scottsboro, Alabama..............    270,000     Owned          Applied air handling system
                                                                products

Cecchina, Italy..................    246,000     Owned          Chiller 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
</TABLE>

                                       11
<PAGE>
                           FILTRATION PRODUCTS GROUP

<TABLE>
<CAPTION>
LOCATION                           SQUARE FEET   LEASED/OWNED          PRINCIPAL FUNCTION
--------                           -----------   ------------   ---------------------------------
<S>                                <C>           <C>            <C>
Louisville, Kentucky.............     60,000     Leased         Global Filtration Products Group
                                                                Headquarters

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

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. The Company also leases 11,000 square feet for its
Corporate headquarters in Louisville, Kentucky.

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

                                       12
<PAGE>
    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. The facility 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.

    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 it has settled
for $200,000. 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. The Company expects no additional recoveries with respect
to this site.

    In addition, the Company has discovered contaminants in the soil and/or
groundwater at certain of its other manufacturing facilities. Based on estimates
prepared by the Company's environmental consultants, the Company currently
estimates that expenditures for remediation of all sites described above will be
approximately $15.0 million in the aggregate. The Company has settled or
exhausted its remedies against all of its insurance companies and any third
parties, and expects no additional recoveries, with respect to all but one of
these sites.

    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

                                       13
<PAGE>
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. See
Note 15 to the Consolidated Financial Statements.

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

    On April 24, 2000, OYL, the Company's sole shareholder, elected the
following persons as members of the Board of Directors of the Company to serve
until the next annual meeting of the stockholder: Quek Leng Chan, Ho Nyuk Choy,
Roger Tan Kim Hock, Liu Wan Min, and Gerald L. Boehrs.

                                       14
<PAGE>
                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

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

ITEM 6.  SELECTED FINANCIAL DATA

    The following table sets forth selected consolidated historical financial
data of the Company for the fiscal years ended June 30, 1996, 1997, 1998, 1999,
and 2000. The Company's fiscal year ends on the Saturday closest to June 30. For
clarity of presentation in the consolidated financial statements, all fiscal
years are shown to begin on July 1 and end on June 30.

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

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                            YEARS ENDED JUNE 30,
                                                            ----------------------------------------------------
                                                              1996       1997       1998       1999       2000
                                                            --------   --------   --------   --------   --------
                                                                           (DOLLARS IN THOUSANDS)
<S>                                                         <C>        <C>        <C>        <C>        <C>
INCOME STATEMENT DATA:
  Net sales...............................................  $901,395   $947,933   $965,749   $924,028   $867,704
  Cost of sales...........................................   646,561    697,294    709,639    691,222    641,346
                                                            --------   --------   --------   --------   --------
  Gross profit............................................   254,834    250,639    256,110    232,806    226,358
  Operating expenses......................................   199,550    212,741    224,833    216,669    196,662
  Restructuring expenses..................................        --         --      7,578      5,170      3,493
                                                            --------   --------   --------   --------   --------
  Operating income........................................    55,284     37,898     23,699     10,967     26,203
  Interest expense, net...................................    24,957     25,961     25,131     23,975     21,627
  Other (income) expense, net.............................    (3,219)       616     (6,454)    (5,324)     1,566
                                                            --------   --------   --------   --------   --------
  Income (loss) before income taxes and extraordinary
    item..................................................    33,546     11,321      5,022     (7,684)     3,010
  Income taxes............................................    18,099      6,283      3,791     (1,444)     2,647
  Minority interest earnings..............................        --        476        215        286        261
                                                            --------   --------   --------   --------   --------
  Income (loss) before extraordinary item.................    15,447      4,562      1,016     (6,526)       102
  Extraordinary item......................................    (1,635)(a)       --       --         --         --
                                                            --------   --------   --------   --------   --------
  Net income (loss).......................................  $ 13,812   $  4,562   $  1,016   $ (6,526)  $    102
                                                            ========   ========   ========   ========   ========
BALANCE SHEET DATA
  (end of period):
  Working capital.........................................  $ 88,868   $ 82,174   $ 59,119   $ 42,034   $ 61,144
  Total assets............................................   806,579    810,294    795,933    755,195    685,400
  Total debt..............................................   302,907    287,824    265,876    266,419    218,854
  Stockholder's equity....................................   195,539    198,193    196,661    186,428    183,508
OTHER DATA:
  EBITDA(b)...............................................  $ 82,677   $ 62,373   $ 56,884   $ 45,104   $ 54,733
  EBITDA margin...........................................       9.2%       6.6%       5.9%       4.8%       6.3%
  Depreciation and amortization...........................  $ 25,809   $ 25,567   $ 26,946   $ 29,099     30,356
  Capital expenditures....................................    14,765     15,941     23,922     19,514      7,881
  Net cash provided by (used in)
    Operating activities..................................    27,962     26,223     27,456     18,362     47,643
    Investing activities..................................   (49,668)   (21,285)    (6,789)   (19,514)     5,115
    Financing activities..................................    27,075    (15,083)   (21,948)       544    (48,981)
</TABLE>

                                       15
<PAGE>
                 FOOTNOTES TO TABLE OF SELECTED FINANCIAL DATA

    (a) 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.

    (b) 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 certain investors use it as a measure of the Company's ability to
       service its debt. EBITDA should not 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.

                                       16
<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.

2000 COMPARED TO 1999

    Consolidated net sales were $867.7 million for the fiscal year ended
June 30, 2000 compared to $924.0 million for the prior year, a decrease of
$56.3 million. The primary reason for the decrease is the sale of the Company's
commercial air conditioning operation in France in October 1999 which was the
cause of $40.8 million of the year over year decrease. Also, the Company
estimates that $16.4 million of the decrease was attributable to having one less
week of sales in the fiscal year 2000 as compared to fiscal year 1999. Excluding
these two non-recurring items, sales increased $0.9 million or 0.1% compared to
the prior year. Income from operations was $26.2 million or 3.0% of sales
compared to $11.0 million or 1.2% of net sales for the fiscal years 2000 and
1999, respectively. Gross margin increased year over year from 25.2% of net
sales to 26.1% driven by improved manufacturing productivity and material cost
reduction programs. Selling, general and administrative expenses as a percent of
net sales decreased from 22.2% to 21.4%, for the fiscal years 2000 and 1999,
respectively primarily as a result of lower warranty expenses.

COMMERCIAL AIR CONDITIONING AND REFRIGERATION GROUP

    Net sales for the Commercial Air Conditioning and Refrigeration segment were
$540.9 million in fiscal 2000 compared to $598.6 million in fiscal 1999, a
decrease of $57.7 million. The sale of the operation in France in October 1999
attributed to $40.8 million of the decrease with another estimated
$10.3 million due to one less week of sales in fiscal year 2000 as compared to
fiscal year 1999. Excluding these two non-recurring items, sales decreased 1.2%
year over year primarily due to the product rationalization program in the North
American applied terminal systems business unit and the unfavorable currency
trends on translating European sales activity.

    North American net sales decreased approximately 1.9% excluding the
estimated impact of one less week of sales in fiscal 2000 reporting period
compared to fiscal 1999. This decrease was primarily due to the applied terminal
systems business unit where sales decreased 11.1% as a result of the market
reaction to the product rationalization program introduced during fiscal year
1999. Chiller product net sales for fiscal 2000 decreased 8.5% from fiscal 1999.
This decrease was primarily the result of the restructuring of the chiller
business unit implemented in the prior year. The sales decreases in the chiller
products and applied terminal systems business units were partially offset by
net sales increases in the applied air handling and parts business units. The
parts business unit increased sales by 17.0% year over year as a result of
strong demand for replacement parts while sales increased 4.6% in the applied
air handling business unit due to strong demand for air handling and self
contained units.

    International net sales in fiscal year 2000 decreased 0.2%, excluding the
impact of the sale of the operation in France and the estimated impact of one
less week of sales, from fiscal 1999 primarily due to the ongoing restructuring
in the industrial refrigeration business in the United Kingdom where the Company
has begun exiting from certain non-core business and the impact of unfavorable
currency trends on translating European sales activity. Excluding the industrial
refrigeration business and unfavorable currency impact of approximately
$4.9 million, net sales in fiscal 2000 increased 23.6% from fiscal 1999
primarily due to strong chiller demand in Italy and the United Kingdom and
further penetration into Middle East markets.

    Backlog for the Commercial Air Conditioning and Refrigeration Group was
$124 million as compared to $134 million at June 30, 2000 and 1999,
respectively. The decrease in backlog was

                                       17
<PAGE>
primarily attributable to the sale of the commercial air conditioning operation
in France and also the market reaction to the applied terminal systems product
rationalization program introduced in fiscal 1999.

    Operating income excluding amortization and restructuring was
$13.0 million, or 2.4% of net sales, in fiscal 2000 as compared to
$2.0 million, or 0.3% of net sales, in fiscal 1999. The gross margin rate
increased by 1.0 percentage point from the prior year rate primarily due to
improved manufacturing productivity in the North American plants. Selling,
general and administrative expenses as a percent of sales decreased
1.5 percentage points with the majority of the improvement resulting from lower
warranty expenses in North America related to favorable experience compared to
the prior year.

FILTRATION PRODUCTS GROUP

    Net Sales for the Filtration Products segment were $328.6 million in fiscal
2000, a decrease of $5.5 million from the net sales of $334.1 million in fiscal
1999. Excluding the estimated impact of the additional week in fiscal 1999, net
sales increased approximately 0.2% year over year.

    Domestic operations net sales increased 1.5% in fiscal 2000 compared to
fiscal 1999. The growth was primarily attributable to a strengthened clean room
market. International sales volume decreased 0.8% from fiscal 1999 due to sales
volumes increases in Latin America and Asia offset by unfavorable European
results. Latin American sales increased 96.4% compared to fiscal 1999 as the
result of certain large air pollution control system projects during fiscal
2000, while Asia net sales increased 4.9% versus the prior year primarily due to
improving market conditions. Net sales for Europe decreased 6.5% primarily due
to the impact of the unfavorable currency trends on translating European sales
activity which represented an estimated $12.2 million decrease in net sales.
Excluding the unfavorable currency impact, net sales for Europe increased 1.7%.

    Operating income excluding amortization and restructuring was $28.0 million
in fiscal year 2000, an increase of $4.8 million or 20.6%, from $23.2 million
for fiscal year 1999. Operating income excluding amortization and restructuring
as a percent of sales increased from 7.0% in fiscal 1999 to 8.5% in fiscal 2000.
Gross margins increased to 29.0% from 27.8% as a percentage of net sales for the
fiscal years 2000 and 1999, respectively. The increase in gross margin
percentage was primarily attributable to material cost reduction programs in the
replacement filter products business globally. Selling, general and
administrative expenses as a percentage of sales decreased 0.5 percentage points
in fiscal year 2000 from fiscal year 1999, primarily due to continued management
focus in reducing overhead expenses throughout the Company.

NON-OPERATING EXPENSES

    Interest expense was $21.6 million for fiscal year 2000 compared to
$24.0 million for fiscal year 1999. The decrease in interest expense is
primarily due to the reduced borrowing levels from the favorable net cash from
operating and investing activities during fiscal 2000. During fiscal years 2000
and 1999, the Company had net other (income) expense of $1.6 million and $(5.3)
million, respectively. The increase in expense in fiscal year 2000 is primarily
related to events that occurred in the first quarters of fiscal years 2000 and
1999. In the first quarter of fiscal year 2000, the Company accrued a
$1.3 million loss related to the sale of the commercial air conditioning
operation in France, which was completed in October 1999. In the first quarter
of fiscal year 1999, the Company recognized $2.9 million in other income as a
result of favorable developments in the IRS audit and the tax indemnification
settlement with former shareholders of the Company. The Company also recorded a
$1.5 million gain related to the termination of a pension plan in Canada. The
remaining components of other income and expenses primarily result from foreign
currency and equity affiliate transactions.

    The provision for income taxes was $2.6 million and the effective tax rate
was 87.9% for fiscal year 2000 compared to a benefit of $1.4 million and an
effective tax rate of (18.8)% for fiscal year 1999.

                                       18
<PAGE>
The effective tax rate differs from the statutory rate primarily due to the
effect of nondeductible goodwill amortization and foreign losses not benefited.

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 9
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
applied terminal 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 condition being experienced in the Asian region.
Applied terminal systems net sales decreased 11.7% in fiscal year 1999 as
compared to fiscal year 1998 and are 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 applied terminal systems business units 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 $134 million as compared
to $139 million at June 30, 1999 and 1998, respectively. Product rationalization
and a related market reaction, as a result of the changes in product offerings,
primarily attributed to the decrease in backlog year over year.

    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

                                       19
<PAGE>
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
commission 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
product volume in the European markets. Asian net sales decreased 17.7% from the
prior year due to the weakened economic market condition 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.

    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 Company as described in Note 14. 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

                                       20
<PAGE>
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.

SALE OF BUSINESSES AND RESTRUCTURING

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

    In October 1999, the Company sold its commercial air conditioning and
refrigeration business in France for $13.0 million. 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.

    The Company also seeks to identify opportunities to improve its cost
structure on an on-going basis. These opportunities may involve the elimination
of certain positions or the closure of manufacturing facilities. As more fully
described in Note 9 to the Consolidated Financial Statements, the Company
recognized restructuring charges of $3.5, $5.2, and $7.6 million during fiscal
years 2000, 1999, and 1998, respectively. These restructuring charges relate to
actions that have been implemented in both the Commercial Air Conditioning and
Refrigeration and Filtration Products groups.

    The Company approved and commenced additional restructuring actions in its
Commercial Air Conditioning and Refrigeration Group and Filtration Products
Group after June 30, 2000. During the first quarter of fiscal 2001, the Company
announced its intention to close its manufacturing facility in Scottsboro,
Alabama. Related to this closure, the Company plans to record a restructuring
reserve of approximately $2.0 million in the first quarter of fiscal year 2001.
This charge represents primarily severance accruals related to the elimination
of approximately 330 employees. In addition, in the first quarter of fiscal 2001
the Company will recognize severance accruals approximating $1.1 million related
to the elimination of approximately 20 employees in the Commercial Air
Conditioning and Refrigeration Group in the United Kingdom and approximately 10
employees in the Filtration Products Group in Germany.

    The Company continues to identify and evaluate other opportunities to
improve its cost structure and may recognize additional restructuring charges in
fiscal 2001.

LIQUIDITY AND CAPITAL RESOURCES

    Cash generated from operating activities and supplemented when necessary by
short-term credit facilities provides the Company's liquidity needs. For the
year ended June 30, 2000, net cash provided by operating activities was
$47.6 million as compared to a generation of $18.4 million for the year ended
June 30, 1999. For the fiscal year ended June 30, 2000 net cash provided by
investing activities was $5.1 million which is comprised of proceeds from the
sale of the Company's commercial air conditioning business in France for
$13.0 million, reduced by capital expenditures of $7.9 million. Capital spending
for the fiscal year ended June 30, 2000 was reduced from the prior years due to
the completion in September 1999 of the information technology enhancement
project, which began in 1998. See "Year 2000" for further discussion.

                                       21
<PAGE>
    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 fees compared to the previous Bank Credit Agreement. At June 30, 2000,
the Company had borrowed $31.9 million under the New Revolving Credit Facility,
$6.0 million in letters of credit were issued and outstanding, and the Company
had remaining borrowing availability of $52.1 million.

    Total net payments on long term debt for the year ended June 30, 2000 was
$17.9 million which is a result of new borrowing under the New Term Loan of
$30.0 million, repayment of the balance on the previous Bank Term Loan of
$37.3 million, and other long term debt payments of $10.6 million. Cash of
$29.7 million was used to reduce borrowings under short term borrowing
arrangements during the year ended June 30, 2000. Total debt of the Company was
reduced from $266.4 million at June 30, 1999 to $218.9 million at June 30, 2000.

    The Company had secured certain letter of credit facilities totaling
$13.5 million that were supported by letters of credit from OYL, the Company's
parent, with $10.0 million in outstanding usage at June 30, 1999. The
commitments made under these facilities expired in March 2000. The related
letter of credit requirements were transferred over to the New Bank Revolving
Credit Facility.

    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 $24.1 and $25.3 million at June 30, 2000
and 1999, 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.

    In October 1999, the Company sold its commercial air conditioning and
refrigeration business in France for $13.0 million with the proceeds being used
to reduce debt. 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.

    Planned capital expenditures are approximately $15 million for the year
ending June 30, 2001 and approximately $14 million for the year ending June 30,
2002.

    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 15 to the Consolidated Financial Statements.

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

    Management believes, based upon current levels of operations and forecasted
earnings, that cash flows from operations, together with borrowings under the
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.

                                       22
<PAGE>
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 experienced no significant disruptions in critical information
technology and non-information technology systems related to the Year 2000 and
believes it successfully responded to the Year 2000 date change. The Company
incurred charges of approximately $27 million during the 1996 through 1999 time
period in connection with remediating its systems. This spending was almost
entirely for new ERP systems that resolved Year 2000 issues and increased the
Company's system capabilities. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its critical computer applications throughout the year 2000 to ensure
that any latent Year 2000 matters that may arise are addressed promptly.

SEASONALITY

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

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

EURO CONVERSION

    Management has 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

                                       23
<PAGE>
regulations, the weakening Asian and Latin American 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, 2000, 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 $0.5 million for the year ending June 30, 2000. 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.

    In January 2000, the Company entered into an interest rate swap transaction
whereby the Company receives a fixed rate and pays a floating rate on the basis
of 3-month LIBOR. The January 2000 swap has a three-year term and a notional
amount of $30 million and effectively converts a portion of the Company's fixed
rate borrowings to a floating rate. Total short-term and long-term debt
outstanding at June 30, 2000 was $218.9 million, consisting of $111.6 million in
variable rate borrowing and $107.3 million in fixed rate borrowing, after
factoring in the $30.0 million swap. At this level of variable rate borrowing, a
hypothetical 10% increase in interest rates would decrease pre-tax current year
earnings by approximately $1.0 million for the year ended June 30, 2000. At
June 30, 2000, the fair value of the Company's fixed rate debt outstanding was
estimated at $94.8 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.

                                       24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE IN THIS REPORT
                                                              -------------------
<S>                                                           <C>
Financial Statements

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

Consolidated Balance Sheets--as of June 30, 2000 and 1999...          27

Consolidated Statements of Operations--Years ended June 30,
  2000, 1999 and 1998.......................................          28

Consolidated Statements of Cash Flows--Years ended June 30,
  2000, 1999 and 1998.......................................          29

Consolidated Statements of Stockholder's Equity--Years ended
  June 30, 2000, 1999 and 1998..............................          30

Consolidated Statements of Comprehensive Income--Years ended
  June 30, 2000, 1999 and 1998..............................          31

Schedule II--Report of the Independent Auditors Valuation
  and Qualifying Accounts and Reserves--Years ended June 30,
  2000, 1999 and 1998.......................................          53
</TABLE>

                                       25
<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, 2000 and 1999, and the related
consolidated statements of operations, cash flows, stockholder's equity and
comprehensive income for each of the three years in the period ended June 30,
2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

    In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
AAF-McQuay Inc. and subsidiaries at June 30, 2000 and 1999, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 2000, in conformity with accounting principles
generally accepted in the United States.

                                          [LOGO]

Baltimore, Maryland
August 10, 2000

                                       26
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                   JUNE 30,
                                                              -------------------
                                                                2000       1999
                                                              --------   --------
<S>                                                           <C>        <C>
                           ASSETS
Current assets:
  Cash and cash equivalents.................................  $ 11,522   $  9,168
  Accounts receivable.......................................   204,523    227,844
  Inventories...............................................   103,835    118,163
  Other current assets......................................     8,216      6,754
                                                              --------   --------
    Total current assets....................................   328,096    361,929

Property, plant and equipment, net..........................   124,998    145,086
Cost in excess of net assets acquired and other identifiable
  intangibles, net..........................................   214,311    228,906
Other assets and deferred charges...........................    17,995     19,274
                                                              --------   --------
    Total assets............................................  $685,400   $755,195
                                                              ========   ========
            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term borrowings.....................................  $ 57,859   $ 87,602
  Current maturities of long-term debt......................     7,319     14,495
  Accounts payable, trade...................................   105,637    115,986
  Accrued warranty..........................................    18,743     18,604
  Accrued employee compensation.............................    29,784     34,834
  Other accrued liabilities.................................    47,610     48,374
                                                              --------   --------
    Total current liabilities...............................   266,952    319,895

Long-term debt..............................................   153,676    164,322
Deferred income taxes.......................................    34,911     34,676
Other liabilities...........................................    46,353     49,874
                                                              --------   --------
    Total liabilities.......................................   501,892    568,767

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.........................................    17,864     17,762
  Accumulated other comprehensive income (loss).............   (14,521)   (11,499)
                                                              --------   --------
    Total stockholder's equity..............................   183,508    186,428
                                                              --------   --------
Total liabilities and stockholder's equity..................  $685,400   $755,195
                                                              ========   ========
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       27
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   YEARS ENDED JUNE 30,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net sales...................................................  $867,704   $924,028   $965,749
Cost of sales...............................................   641,346    691,222    709,639
                                                              --------   --------   --------
Gross profit................................................   226,358    232,806    256,110

Operating expenses:
  Selling, general and administrative.......................   185,512    205,299    213,176
  Amortization of intangible assets.........................    11,150     11,370     11,657
  Restructuring charges.....................................     3,493      5,170      7,578
                                                              --------   --------   --------
                                                               200,155    221,839    232,411
                                                              --------   --------   --------
Income from operations......................................    26,203     10,967     23,699
Interest expense, net.......................................    21,627     23,975     25,131
Other (income) expense, net.................................     1,566     (5,324)    (6,454)
                                                              --------   --------   --------
Income (loss) before income taxes...........................     3,010     (7,684)     5,022
Provision for income taxes..................................     2,647     (1,444)     3,791
Minority interest in earnings...............................       261        286        215
                                                              --------   --------   --------
Net income (loss)...........................................  $    102   $ (6,526)  $  1,016
                                                              ========   ========   ========
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       28
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   YEARS ENDED JUNE 30,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net income (loss).........................................  $    102   $ (6,526)  $  1,016
  Adjustments to reconcile to cash from operating
    activities:
  Restructuring charges.....................................     3,493      5,170      7,578
  Depreciation and amortization.............................    30,356     29,099     26,946
  Foreign currency transaction (gains) losses...............        25       (738)       385
  Loss (gain) on the sale of business.......................     1,331         --     (6,626)
  Deferred income taxes.....................................       943     (4,417)    (3,861)
  Changes in operating assets and liabilities:
    Accounts receivable.....................................     6,823     10,769     (5,208)
    Inventories.............................................     9,225      5,685        344
    Other assets/liabilities, net...........................    (2,178)    (3,236)       244
    Accounts payable and other accrued liabilities..........    (2,477)   (17,444)     6,638
                                                              --------   --------   --------
Net cash from operating activities..........................    47,643     18,362     27,456

Cash flows from investing activities:
  Capital expenditures......................................    (7,881)   (19,514)   (23,922)
  Proceeds from the sale of business........................    12,996         --     17,133
                                                              --------   --------   --------
Net cash from investing activities..........................     5,115    (19,514)    (6,789)

Cash flows from financing activities:
  Net borrowings (repayments) under short-term borrowing
    borrowing arrangements..................................   (29,743)    27,340      1,559
  Payments on long-term debt................................   (47,851)   (26,796)   (23,507)
  Proceeds from issuance of long-term debt..................    30,000         --         --
  Payment of debt issuance costs............................    (1,387)        --         --
                                                              --------   --------   --------
Net cash from financing activities..........................   (48,981)       544    (21,948)

Effect of exchange rate changes on cash.....................    (1,423)        79        151
                                                              --------   --------   --------
Net increase (decrease) in cash and cash equivalents........     2,354       (529)    (1,130)
Cash and cash equivalents at beginning of period............     9,168      9,697     10,827
                                                              --------   --------   --------
Cash and cash equivalents at end of period..................  $ 11,522   $  9,168   $  9,697
                                                              ========   ========   ========
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       29
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' 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, 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
Net income..................................      --            --        102            --         102
Currency translation adjustment.............      --            --         --        (3,022)     (3,022)
                                                ----      --------    -------      --------    --------
Balance, June 30, 2000......................    $250      $179,915    $17,864      $(14,521)   $183,508
                                                ====      ========    =======      ========    ========
</TABLE>

                                       30
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   YEARS ENDED JUNE 30,
                                                              ------------------------------
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net income (loss)...........................................  $   102    $ (6,526)  $ 1,016
Other comprehensive income (loss):..........................
  Foreign currency translation adjustments..................   (3,851)     (3,707)   (2,548)

Write off of accumulated foreign currency translation
  adjustments due to sale of business.......................      829          --        --
                                                              -------    --------   -------
Comprehensive income (loss).................................  $(2,920)   $(10,233)  $(1,532)
                                                              =======    ========   =======
</TABLE>

                                       31
<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").

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    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, 2000, 1999 and 1998.
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, 2000 and
1999. Cost is determined by the last-in, first-out (LIFO) method for U.S.
inventories, (59% in 2000 and 57% in 1999), and the first-in, first-out (FIFO)
method for the Company's foreign subsidiaries (41% in 2000 and 43% in 1999).

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

    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.

                                       32
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    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.

    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

    The Company uses derivative financial instruments, 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 payments due and amounts receivable
under interest rate swap agreements is 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.

    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 $25,000, $(738,000) and $385,000,
for the fiscal years ended June 30, 2000, 1999 and 1998, respectively.

                                       33
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    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 $8.7, $8.9, and
$10.0 million, for the fiscal years ended June 30, 2000, 1999 and 1998,
respectively, and are included in selling, general and administrative expenses
in the accompanying Consolidated Statements of Operations.

    STOCK-BASED COMPENSATION

    As described in Note 12, the Company has elected to follow the accounting
provisions of Accounting Principles Board Opinion ("APB") No. 25 for stock-based
compensation and to furnish the pro forma disclosures required under Statement
of Financial Accounting Standards ("SFAS") 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 1998, the Financial Accounting Standards Board issued Statement
No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND FOR HEDGING ACTIVITIES, as
amended, which is required to be adopted in years beginning after June 15, 2000.
Because of the Company's minimum use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company.

    In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 provides guidance on the recognition, presentation and disclosure
of revenue in financial statements. All registrants are

                                       34
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expected to apply the accounting and disclosures described in SAB 101. The
Securities and Exchange Commission is expected to issue additional
implementation guidance. The Company has not completed its evaluation of the
impact that SAB 101 will have on its earnings or financial position. The Company
is required to adopt SAB 101 in the fourth quarter of fiscal 2001.

3. ACCOUNTS RECEIVABLE

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

<TABLE>
<CAPTION>
                                                            2000       1999
                                                          --------   --------
<S>                                                       <C>        <C>
Accounts receivable, trade..............................  $200,408   $219,990
Accounts receivable, other..............................    11,083     14,911
                                                          --------   --------
                                                           211,491    234,901
Less allowance for doubtful receivables.................     6,968      7,057
                                                          --------   --------
                                                          $204,523   $227,844
                                                          ========   ========
</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.

4. INVENTORIES

    Inventories consist of the following (dollars in thousands):

<TABLE>
<CAPTION>
                                                            2000       1999
                                                          --------   --------
<S>                                                       <C>        <C>
FIFO cost:
Raw materials...........................................  $ 42,278   $ 39,838
Work-in-process.........................................    19,313     25,884
Finished goods..........................................    42,325     51,063
                                                          --------   --------
                                                           103,916    116,815
LIFO adjustment.........................................       (81)     1,348
                                                          --------   --------
                                                          $103,835   $118,163
                                                          ========   ========
</TABLE>

                                       35
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>
                                                            2000       1999
                                                          --------   --------
<S>                                                       <C>        <C>
Land....................................................  $  8,845   $  9,756
Buildings...............................................    57,627     61,475
Machinery and equipment.................................   134,517    137,073
                                                          --------   --------
                                                           200,989    208,304
Less accumulated depreciation and amortization..........    75,991     63,218
                                                          --------   --------
                                                          $124,998   $145,086
                                                          ========   ========
</TABLE>

    At June 30, 2000, substantially all property, plant and equipment are
encumbered by various debt obligations of the Company.

6. INTANGIBLE ASSETS

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

<TABLE>
<CAPTION>
                                                            2000       1999
                                                          --------   --------
<S>                                                       <C>        <C>
Cost in excess of net assets acquired...................  $144,142   $145,105
Other intangibles:
  Technology............................................    14,129     14,213
  Trademarks............................................    58,874     61,161
  Drawings..............................................    54,000     54,000
  Workforce.............................................    17,046     18,417
                                                          --------   --------
  Total other intangibles...............................   144,049    147,791
  Less accumulated amortization.........................    73,880     63,990
                                                          --------   --------
                                                          $214,311   $228,906
                                                          ========   ========
</TABLE>

7. 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 previous 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.

    In September 1999, the Company refinanced the previous 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

                                       36
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. DEBT (CONTINUED)
Revolver"). Interest on advances is generally payable quarterly, at the
Company's option on 1.) the higher of the domestic base rate (prime) or a rate
based on the Federal Funds Rate plus a specified premium or 2.) the average rate
at which Eurodollar deposits are offered to prime banks in the London interbank
market ("LIBOR") plus a specified premium. The interest rate premiums are
determined by an interest rate matrix, which is based on a certain financial
ratio as described in the New Bank Credit Agreement. As of June 30, 2000, the
Company's interest rate premiums were LIBOR + 2.25% or prime + 0.0% for New
Revolver borrowings and LIBOR +2.50% or prime + 0.25% for New Term Loan
borrowings. The interest rate premiums are subject to a 0.25% increase or
decrease depending on the applicable ratio. At June 30, 2000, the Company's
borrowing rate under the New Revolver was approximately 8.85%. The average
effective interest rate under the New Revolver for the fiscal year ended
June 30, 2000 was approximately 8.6%. A commitment fee of 0.375% is required on
the unused portion of the New Revolver. At June 30, 2000, the Company had
borrowed $31.9 million under the New Revolving Credit Facility, $6.0 million in
letters of credit were issued and outstanding, and the Company had remaining
borrowing availability of $52.1 million.

    At June 30, 2000, certain of the Company's foreign subsidiaries had
available lines of credit with foreign banks of approximately $49 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 $26.0 and $36.6 million at June 30, 2000 and 1999, respectively.
In addition, certain of the Company's foreign subsidiaries have non-borrowing
bank facilities (letters of credit, guarantees, performance bonds, etc.)
totaling $22.3 million as of June 30, 2000 and $28.1 million as of June 30, 1999
of which approximately $15.6 million was used at June 30, 2000 and
$16.8 million was used at June 30, 1999.

    The Company also had available letter of credit facilities totaling
$13.5 million, which were 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 expired
in March of 2000 and the related letter of credit requirements were transferred
to the New Bank Credit Facility.

    The weighted average effective interest rate on short-term borrowings was
8.9% and 8.5% at June 30, 2000 and 1999, respectively.

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

<TABLE>
<CAPTION>
                                                            2000       1999
                                                          --------   --------
<S>                                                       <C>        <C>
Senior Term Loans.......................................  $ 23,075   $ 37,287
Senior Unsecured Notes due February 15, 2003, bearing
  interest at 8.875%....................................   125,000    125,000
Other issues............................................    12,920     16,530
                                                          --------   --------
                                                           160,995    178,817
Less: Current maturities................................    (7,319)   (14,495)
                                                          --------   --------
                                                          $153,676   $164,322
                                                          ========   ========
</TABLE>

    The term loan portion of the New Bank Agreement consists of a New Term Loan
that is a direct obligation of the Company. This term loan is secured by
substantially all the domestic assets of the

                                       37
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. DEBT (CONTINUED)
Company and its domestic subsidiaries and a portion of the capital stock of
certain foreign subsidiaries. Interest is generally payable quarterly. The
repayment schedule for the New Term Loan calls for equal monthly installments of
$425,000 beginning November 1, 1999. As of June 30, 2000, the repayment schedule
calls for 27 monthly payments of $425,000 with a final payment of $11.6 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 term loan portion of the Bank Agreement and New Bank Agreement each
contain provisions requiring accelerated payments as a result of asset sales
above a prescribed minimum. Accelerated payments of $3.5 million and
$7.4 million were required during the fiscal year ended June 30, 2000 and
June 30, 1998, respectively. No accelerated payments were required for the year
ended June 30, 1999.

    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 4 to 14 years.

    The Company paid cash interest of $20.7, $23.1, and $24.0 million for the
fiscal years ended June 30, 2000, 1999 and 1998, respectively.

    Maturities of long-term debt during each of the next five fiscal years
subsequent to June 30, 2000 are as follows (dollars in millions): 2001, $7.3;
2002, $6.3; 2003, $139.0; 2004, $1.0; 2005, $1.0.

8. FINANCIAL INSTRUMENTS

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

    INTEREST RATE RISK MANAGEMENT:  The Company may, at times, seek to limit the
impacts of rising interest rates on its variable rate debt through the use of
interest rate derivative instruments. In January 2000, the Company entered into
an interest rate swap transaction whereby the Company receives a fixed rate of
7.04% and pays a floating rate on the basis of 3-month LIBOR. The

                                       38
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. FINANCIAL INSTRUMENTS (CONTINUED)
January 2000 swap has a three-year term and a notional amount of $30 million and
effectively converts a portion of the Company's fixed rate borrowings to a
floating rate. 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.

    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, 2000 and 1999 was approximately $20.3
and $40.1 million, respectively. The U.S. dollar equivalent notional amount of
these foreign exchange forward contracts by applicable foreign currency at
June 30, 2000 and 1999 was as follows: Canadian dollars, $5.9 and $5.8 million;
Singapore dollars $0.9 and $5.9 million; German marks $1.1 and $2.6 million;
Italian lira $0.8 and $3.7 million; French francs $0.1 and $10.7 million; Dutch
guilders $0.8 and $3.2 million; British pounds $9.2 and $5.1 million; and
various other currencies $1.5 and $3.1 million.

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

    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, 2000 of $161.0 million would need to be discounted
down to $148.5 million in order to approximate fair value. The aggregate
carrying value of the Company's long-term debt at June 30, 1999 was
$178.8 million and would need to be discounted down to $172.5 to approximate
fair value. The fair values of the Company's foreign exchange forward contracts
are based on current settlement values and fees currently charged to enter into
similar agreements, taking into account the remaining terms of the agreements
and the counter parties' credit standing. At June 30, 2000 and 1999, the net
carrying amount of these contracts approximates their fair value. The fair
market value of the interest rate swap entered into January 2000 was $(106,000)
at June 30, 2000.

                                       39
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. RESTRUCTURING

    During fiscal year 2000, the Company continued its restructuring efforts in
both the Commercial Air Conditioning and Refrigeration and Filtration Products
groups. Restructuring reserves of $3.5 million were recorded. The Commercial Air
Conditioning and Refrigeration business segment continued the restructuring of
the United Kingdom operations in the third and fourth quarters of fiscal 2000,
recording approximately $2.7 million primarily representing severance accruals.
Additionally, the Filtration Products business segment restructured the United
Kingdom operations in the fourth quarter resulting in a restructuring charge of
approximately $0.8 million for severance accruals. These combined efforts
resulted in the elimination of approximately 140 employees in the United
Kingdom. At June 30, 2000, the Company had utilized $1.6 million of the reserve
related to these restructuring plans. These restructuring efforts are expected
to be completed by the end of fiscal 2001.

    The Company 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. At June 30, 2000, the Company has utilized
substantially all of the $5.2 million reserve recorded in fiscal year 1999
related to these restructuring plans.

    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 utilized
substantially all of the $7.3 million reserve recorded in fiscal year 1998
related to the reorganization of the environmental products division.

                                       40
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. 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, 2000 and 1999 are
as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                            2000       1999
                                                          --------   --------
<S>                                                       <C>        <C>
Deferred tax assets:
Net operating loss carryforwards........................  $ 14,644   $ 11,162
Tax over book fixed assets basis........................     1,012        705
Accrual for pension and retirement benefits.............     4,476      4,417
Accrual for other expenses..............................    22,769     23,104
Tax credit carryforwards................................     2,458        528
Other...................................................     3,095      1,879
                                                          --------   --------
Total deferred tax assets...............................    48,454     41,795
Valuation allowance.....................................   (19,865)   (14,403)
                                                          --------   --------
Net deferred tax assets.................................  $ 28,589   $ 27,392
                                                          ========   ========
</TABLE>

<TABLE>
<S>                                                       <C>        <C>
Deferred tax liabilities:
Unrepatriated earnings of foreign subsidiaries..........  $  2,755   $  2,238
Book over tax fixed assets basis........................    16,611     19,656
Book over tax intangible asset basis....................    30,708     29,297
Book over tax inventory basis...........................     7,453      6,340
Other...................................................     5,973      4,537
                                                          --------   --------
Total deferred tax liabilities..........................    63,500     62,068
                                                          --------   --------
Net deferred tax liabilities............................  $ 34,911   $ 34,676
                                                          ========   ========
</TABLE>

    Deferred tax assets for net operating loss carryforwards and other items at
June 30, 2000 and 1999 includes approximately $10.0 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 2000, the deferred tax
asset valuation allowance increased by approximately $5.5 million. The increase
is principally attributable to the recognition of tax asset valuation allowances
associated with tax loss carryforwards and tax credit carryforwards generated
during the fiscal year. 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.

                                       41
<PAGE>
                        AAF-MCQUAY INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. PROVISION FOR INCOME TAXES (CONTINUED)
    Significant components of the provision for income taxes are as follows
(dollars in thousands):

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Federal taxes-current.......................................  $ 2,278    $(2,398)   $ 2,485
Federal taxes-deferred......................................     (168)      (568)    (2,705)
State taxes.................................................      377       (331)      (100)
Foreign taxes-current.......................................    3,428      1,853      3,312
Foreign taxes-deferred......................................   (3,268)        --        799
                                                              -------    -------    -------
Total.......................................................  $ 2,647    $(1,444)   $ 3,791
                                                              =======    =======    =======
</TABLE>

    During the fiscal years ended June 30, 2000, 1999 and 1998, the Company paid
income taxes (net of tax refunds) of approximately $(1.8), $0.6, and
$9.5 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>
                                                                2000       1999       1998
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Statutory U.S. Federal income tax provision.................  $ 1,054    $(2,690)   $ 1,758
Nondeductible goodwill
  Amortization..............................................    1,095      1,116      1,216
State taxes, net of federal benefit.........................      377       (331)       200
Other.......................................................      121        461        617
                                                              -------    -------    -------
Reported tax provision......................................  $ 2,647    $(1,444)   $ 3,791
                                                              =======    =======    =======
</TABLE>

    At June 30, 2000, the Company has net operating loss and tax credit
carryforwards of approximately $41.0 and $1.9 million, respectively, in the
United States and various foreign countries. Approximately $15 million of the
net operating loss carryforwards and $1.9 million of the tax credit
carryforwards expire in fiscal years 2000 through 2012. The remaining net
operating loss carryforwards can be carried forward indefinitely.

11. 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.

                                       42
<PAGE>
11. 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>
                                          PENSION BENEFITS      PENSION BENEFITS            OTHER
                                            PLANS IN THE        PLANS OUTSIDE THE      POSTRETIREMENT
                                            UNITED STATES         UNITED STATES      BENEFITS ALL PLANS
                                         -------------------   -------------------   -------------------
                                           2000       1999       2000       1999       2000       1999
                                         --------   --------   --------   --------   --------   --------
<S>                                      <C>        <C>        <C>        <C>        <C>        <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
  year.................................  $27,306    $27,667    $93,379    $82,419    $ 5,879    $ 5,929
Service cost...........................      241        206      3,516      2,564        217        209
Interest cost..........................    1,831      1,547      5,181      4,226        395        334
Plan participants' contributions.......       --         --      1,097      1,052         --         --
Actuarial (gains)/losses...............   (1,491)       (51)    (2,404)     9,677        343       (221)
Benefits paid..........................   (2,574)    (2,045)    (2,908)    (2,034)      (496)      (372)
Curtailments (gain)/loss...............      (44)       (18)        --         --         --         --
Settlements............................       --         --      6,302         --         --         --
Sale of Business.......................       --         --       (660)        --         --         --
Effects of currency exchange rates.....       --         --     (4,517)    (4,525)        --         --
                                         -------    -------    -------    -------    -------    -------
Benefit obligation at end of year......  $25,269    $27,306    $98,986    $93,379    $ 6,338    $ 5,879
                                         =======    =======    =======    =======    =======    =======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
  of year..............................  $26,671    $26,812    $87,174    $86,093    $    --    $    --
Actual return on plan assets...........    4,284      1,587      9,948      4,359         --         --
Benefits paid..........................   (2,574)    (2,045)    (2,908)    (2,058)      (496)      (372)
Employer contributions.................      342        317      2,561      2,207        496        372
Contributions by plan participants.....       --         --      1,097      1,051         --         --
Effects of currency exchange rates.....       --         --     (4,174)    (4,478)        --         --
                                         -------    -------    -------    -------    -------    -------
Fair value of plan assets at end of
  year.................................   28,723     26,671     93,698     87,174         --         --
                                         -------    -------    -------    -------    -------    -------
Funded status..........................    3,454       (634)    (5,288)    (6,205)    (6,338)    (5,879)
Unrecognized net actuarial
  (gain)/loss..........................   (7,135)    (4,044)    13,837     13,889       (362)      (710)
                                         -------    -------    -------    -------    -------    -------
Prepaid (accrued) benefit cost.........  $(3,681)   $(4,678)   $ 8,549    $ 7,684    $(6,700)   $(6,589)
                                         =======    =======    =======    =======    =======    =======
AMOUNTS RECOGNIZED IN THE CONSOLIDATED
  BALANCE SHEET
Prepaid benefit cost...................  $ 1,320    $   734    $ 9,589    $ 8,949    $    --    $    --
Accrued benefit cost...................   (5,001)    (5,412)    (1,040)    (1,265)    (6,700)    (6,589)
                                         -------    -------    -------    -------    -------    -------
Net amount recognized..................  $(3,681)   $(4,678)   $ 8,549    $ 7,684    $(6,700)   $(6,589)
                                         =======    =======    =======    =======    =======    =======
</TABLE>

    The aggregate accumulated benefit obligation for defined benefit pension
plans with an accumulated benefit obligation in excess of plan assets was $10.6
and $12.1 million as of June 30, 2000 and 1999, respectively. The aggregate
projected benefit obligation for defined benefit pension plans with a projected
benefit obligation in excess of plan assets was $50.9and $59.5 million as of
June 30, 2000 and 1999, 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 $55.5 and
$44.6 million as of June 30, 2000 and 1999, respectively.

                                       43
<PAGE>
11. 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
                                       ------------------------------   ------------------------------------
                                         2000       1999       1998       2000          1999          1998
                                       --------   --------   --------   --------      --------      --------
<S>                                    <C>        <C>        <C>        <C>           <C>           <C>
Service cost.........................  $   240    $   241    $   301    $ 3,682       $ 3,210       $ 1,919
Interest cost........................    1,825      1,848      1,936      5,293         5,117         4,729
Expected return on plan assets.......   (2,317)    (2,321)    (2,137)    (7,226)       (7,173)       (5,663)
Net amortization/deferral............      (76)      (103)      (190)       392           163            84
Curtailment..........................      (44)       (18)        --         --            --            --
                                       -------    -------    -------    -------       -------       -------
Net periodic benefit cost............  $  (370)   $  (353)   $   (90)   $ 2,141       $ 1,317       $ 1,069
                                       =======    =======    =======    =======       =======       =======
ASSUMPTIONS AS OF JUNE 30:
Discount rate........................     7.75%      7.00%      7.00%   Ranging from 5.50% to 6.00%
Expected return on plan assets.......     9.00%      9.00%      9.00%   Ranging from 7.00% to 8.50%
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>
                                                            2000       1999       1998
                                                          --------   --------   --------
<S>                                                       <C>        <C>        <C>
Service cost............................................    $204       $256       $196
Interest cost...........................................     393        400        406
Net amortization/deferral...............................     (18)       (29)       (42)
                                                            ----       ----       ----
Net periodic benefit cost...............................    $579       $627       $ 60
                                                            ====       ====       ====
Weighted average discount rate as of June 30............    7.75%      7.00%      6.50%
</TABLE>

    The health care cost trend rate used to determine the health care benefit
obligation was 9.00% for 2000. This rate decreases gradually for nine years to
the ultimate medical trend rate of 5.00% in 2008, and remains at that level
thereafter. The trend rate is a significant factor in determining the amounts
reported. A one-percentage-point change in these assumed health care cost trend
rates would have the following effects, 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................     458       (409)
</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 $1,183,000, $1,267,000 and $1,111,000 under
this plan during the fiscal years ended June 30, 2000, 1999, and 1998,
respectively.

    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. The Company with certain limitations matches
contributions. During the fiscal years ended June 30, 2000, 1999, and 1998, the
Company expensed $1,155,000, $1,173,000, and $1,066,000, respectively, related
to this plan.

                                       44
<PAGE>
12.  STOCK-BASED COMPENSATION

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

    Under the stock option plan, options to purchase common stock may be granted
until 2007. Options may be granted at fair market value at the date of the grant
or at fair market value at the date of grant discounted for a lack of
marketability and are exercisable up to 10 years after the date of grant unless
terminated sooner or in the event of a public offering of the Company's shares,
two years following the later of the public offering or the date the grantee
becomes vested in that portion of the option. Generally 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. No grants were made
in fiscal year 2000. The Company anticipates the granting of additional options
under the stock option plan during fiscal year 2001. 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, 2000, 1999 and 1998, there were stock options for 10.3, 40.0
and 38.3 shares of AAF-McQuay Group, Inc. issued and outstanding under the plan.
Transactions are summarized as follows:

<TABLE>
<CAPTION>
                                                        STOCK     WEIGHTED AVERAGE
                                                       OPTIONS     EXERCISE PRICE
                                                       --------   ----------------
<S>                                                    <C>        <C>
Outstanding at June 30, 1997.........................      --               --
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
Forfeited............................................    29.7          196,204
                                                         ----         --------
Outstanding at June 30, 2000.........................    10.3         $203,214
Shares exercisable at June 30, 1998..................    22.7         $194,411
Shares exercisable at June 30, 1999..................    27.3         $195,880
Shares exercisable at June 30, 2000..................     7.0         $203,214
</TABLE>

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

                                       45
<PAGE>
12.  STOCK-BASED COMPENSATION (CONTINUED)
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, 2000,
1999, and 1998 would be $0.1, ($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.

13.  LEASES AND COMMITMENTS

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

<TABLE>
<CAPTION>
YEAR
----
<S>                                                           <C>
2001........................................................  $ 9,790
2002........................................................    7,336
2003........................................................    4,683
2004........................................................    3,633
2005........................................................    2,807
Thereafter..................................................   13,923
</TABLE>

    Rental expense associated with third party operating leases was
approximately $7.7, $7.1, and $8.9 million for the fiscal years ended June 30,
2000, 1999 and 1998, respectively. It is expected that, in the normal course of
business, leases that expire will be renewed or replaced by leases on other
property and equipment.

    The Company has a contract whereby a third party manages certain of its data
processing operations. Monthly charges during the fiscal years ended June 30,
2000, 1999 and 1998 averaged approximately $838,000, $767,000, and $902,000,
respectively, under this contract. This contract extends through December 31,
2005.

14.  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 a $11.5 million
promissory note due to the former shareholders; 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.

                                       46
<PAGE>
15.  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, 2000
the Company estimates that related probable remediation costs will be
approximately $15.0 million. The Company believes that these costs have been
adequately reserved for on the balance sheet. The Company has settled or
exhausted its remedies against all of its insurance companies and any third
parties, and expects no additional recoveries, with respect to all but the
Staunton, Virginia site. No amounts have been recorded in the accompanying
Consolidated Balance Sheets relating to any potential recoveries.

    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.

                                       47
<PAGE>
16.  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, 2000, 1999 and 1998:

<TABLE>
<CAPTION>
CLASSIFIED BY INDUSTRY:                                         2000       1999       1998
-----------------------                                       --------   --------   --------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Net Sales:
  Commercial Air Conditioning and Refrigeration.............  $540,898   $598,646   $620,248
  Filtration Products.......................................   328,586    334,129    358,843
  Eliminations..............................................    (1,780)    (8,747)   (13,342)
                                                              --------   --------   --------
    Total...................................................  $867,704   $924,028   $965,749
                                                              ========   ========   ========
Operating Income (Loss):
  Commercial Air Conditioning and Refrigeration.............  $  3,705   $ (6,643)  $ 16,846
  Filtration Products.......................................    22,885     15,367      6,564
  Corporate.................................................      (387)     2,243        289
                                                              --------   --------   --------
    Total...................................................  $ 26,203   $ 10,967   $ 23,699
                                                              ========   ========   ========
Total Assets:
  Commercial Air Conditioning and Refrigeration.............  $404,546   $461,619   $475,837
  Filtration Products.......................................   278,847    287,636    313,205
  Corporate.................................................     2,007      5,940      6,891
                                                              --------   --------   --------
    Total...................................................  $685,400   $755,195   $795,933
                                                              ========   ========   ========
Depreciation/Amortization:
  Commercial Air Conditioning and Refrigeration.............  $ 20,595   $ 18,685   $ 15,753
  Filtration Products.......................................     9,728     10,311     11,081
  Corporate.................................................        33        103        112
                                                              --------   --------   --------
    Total...................................................  $ 30,356   $ 29,099   $ 26,946
                                                              ========   ========   ========
Capital Expenditures:
  Commercial Air Conditioning and Refrigeration.............  $  4,125   $ 16,731   $ 19,233
  Filtration Products.......................................     3,693      2,783      4,594
  Corporate.................................................        63         --         95
                                                              --------   --------   --------
    Total...................................................  $  7,881   $ 19,514   $ 23,922
                                                              ========   ========   ========
</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 $(0.4), $2.2, and $0.3 million
noted above represent the over (under) allocation of expenses for fiscal years
2000, 1999 and 1998, respectively. Assets at the corporate level consist of
cash, receivables, property and other assets.

                                       48
<PAGE>
16.  BUSINESS SEGMENTS AND GEOGRAPHIC INFORMATION (CONTINUED)

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

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Operating Income from Business Segments.....................  $26,590    $ 8,724    $23,410
Over (under) allocation of corporate expenses...............     (387)     2,243        289
Interest expense, net.......................................   21,627     23,975     25,131
Other (income) expense......................................    1,566     (5,324)    (6,454)
                                                              -------    -------    -------
Income (loss) before income taxes...........................  $ 3,010    $(7,684)   $ 5,022
                                                              =======    =======    =======
</TABLE>

<TABLE>
<CAPTION>
CLASSIFIED BY GEOGRAPHIC REGION                                 2000       1999       1998
-------------------------------                               --------   --------   --------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Net Sales:
  U.S.......................................................  $537,372   $544,661   $559,127
  Europe....................................................   271,549    322,653    329,488
  Other.....................................................    58,783     56,714     77,134
                                                              --------   --------   --------
    Total...................................................  $867,704   $924,028   $965,749
                                                              ========   ========   ========
</TABLE>

    Transfers between geographic areas are not significant.

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

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
U.S.........................................................  $ 97,390   $104,815   $101,595
Europe......................................................    24,419     36,798     40,301
Other.......................................................     3,189      3,473      3,409
                                                              --------   --------   --------
  Total.....................................................  $124,998   $145,086   $145,305
                                                              ========   ========   ========
</TABLE>

17.  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, 2000, 1999 and 1998, pursuant to this policy, the Company and
various of its subsidiaries sold an aggregate of approximately $9.6, $6.7, and
$13.0 million, respectively of the Company's products to various OYL entities in
the ordinary course of business. Additionally during fiscal years 2000, 1999,
and 1998, the Company purchased approximately $9.1, $1.2, and $2.3 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

                                       49
<PAGE>
17.  RELATED PARTY TRANSACTIONS (CONTINUED)
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 $506,400, $166,000, and $227,000 pursuant to the OMC Agreement,
$525,600, $105,000, and $124,000 pursuant to the Shenzhen Agreement, and
$11,621, $8,000, and $18,000 pursuant to the PT OYL Agreement for the years
ended June 30, 2000, 1999 and 1998 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
$239,700 and $147,500 for the years ended June 30, 2000 and 1999, respectively.
Payments are to be paid quarterly contingent on Wuhan-McQuay's financial
condition and receipt of approval from the Government of the People's Republic
of China.

    The Company secured certain letter of credit facilities totaling
$13.5 million that were supported by letters of credit from OYL, the Company's
parent, with $10.0 million in outstanding usage at June 30, 1999. The
commitments made under these facilities expired in March 2000. The related
letter of credit requirements were transferred over to the New Bank Revolving
Credit Facility.

    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 $24.1 and $25.3 million at June 30, 2000
and 1999, 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.

18.  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 fourteen (14) joint ventures (20% to 50% AMI ownership)
accounted for by the equity method, for which the Company recognized $40.1,
$27.6, and $35.6 million in sales for fiscal years 2000, 1999 and 1998,
respectively. The Company has loans outstanding to eight of the joint ventures
for a total principal sum of $3.8 million as of June 30, 2000. Summary financial
information for the affiliated companies (20% to 50% owned) is as follows:

<TABLE>
<CAPTION>
                                                                2000       1999       1998
                                                              --------   --------   --------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                           <C>        <C>        <C>
Current assets..............................................  $28,798    $36,413    $33,009
Property, plant and equipment and other assets..............    2,660      7,576      6,284
Current liabilities.........................................   21,693     28,845     27,804
Long-term debt..............................................    3,218      2,667      1,626
Net sales...................................................   59,460     62,676     28,463
Gross profit................................................   15,234     14,502      6,934
Net income (loss)...........................................      223       (477)       192
</TABLE>

    Investments in affiliates of $4.8 million is included in Other assets and
deferred charges in the Consolidated Balance Sheets at June 30, 2000 and 1999.

                                       50
<PAGE>
19.  OTHER INCOME (EXPENSE)

    During fiscal years ended June 30, 2000, 1999, and 1998, the Company had net
other income (expense) of $(1.6), $5.3, and $6.5 million, respectively. In
fiscal year 2000, the company recorded a loss of $1.3 million due to the sale of
the commercial air conditioning operation in France in October 1999. 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 14. 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, 2000, 1999 and 1998.

20.  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, 2000, and June 30, 1999, and for each of the three
years in the period ended June 30, 2000 and have issued our report thereon dated
August 10, 2000 (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.

                                          [LOGO]

Baltimore, Maryland
August 10, 2000

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

                                AAF-MCQUAY INC.

                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                             COL. C
               COL. A                    COL. B             ADDITIONS            COL. D           COL. E
------------------------------------  ------------   -----------------------   ----------       ----------
                                       BALANCE AT    CHARGED TO   CHARGED TO                    BALANCE AT
                                      BEGINNING OF   COSTS AND      OTHER                         END OF
            DESCRIPTION                  PERIOD       EXPENSES     ACCOUNTS    DEDUCTIONS         PERIOD
------------------------------------  ------------   ----------   ----------   ----------       ----------
<S>                                   <C>            <C>          <C>          <C>              <C>
YEAR ENDED JUNE 30, 2000
Allowance for doubtful
  receivables.......................     $ 7,057       $ 2,218                 $   2,307(a)       $ 6,968
Accrued warranty expense............      28,627        14,963         29         14,180(b)        29,439

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
</TABLE>

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

(a) Uncollectible accounts written off net of recoveries.

(b) Warranty claims honored during the year.

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

    None.

                                       53
<PAGE>
                                    PART III

ITEM 10.  DIRECTORS AND OFFICERS OF THE REGISTRANT

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

<TABLE>
<CAPTION>
NAME                            AGE                              POSITION
----                          --------   --------------------------------------------------------
<S>                           <C>        <C>
Ho Nyuk Choy................     46      President, Chief Executive Officer and Director

Gerald L. Boehrs............     59      Executive Vice President and Director

Eric R. Roberts.............     42      Group Executive Vice President--McQuay North America

Robert E. Brymer............     42      Group Vice President--AAF Americas

Bruce D. Krueger............     38      Vice President of Finance

Gary R. Boyd................     48      Vice President of Human Resources

Dixie L. Randle.............     47      General Counsel and Secretary

Ronald J. Pederson..........     42      Treasurer

Tan Sri Quek Leng Chan......     57      Director

Liu Wan Min.................     56      Director

Roger Tan Kim Hock..........     53      Director
</TABLE>

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

    GERALD L. BOEHRS has served as Executive Vice President of the Company since
May 1994 and most recently was the Chief Operating Officer of the Filtration
Products Group from April 1998 to June 2000. 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.

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

    ROBERT E. BRYMER has served as Group Vice President of AAF Americas since
June 2000. From May 1999 to June 2000, Mr. Brymer was Vice President--Sales &
Marketing for McQuay International. From May 1998 to May 1999, Mr. Brymer served
as a consultant for McQuay International prior to rejoining the Company. From
June 1996 to April 1998, he served as President--Air Filtration Division of AAF
International. Prior to June 1996, Mr. Brymer served in various executive
capacities with AAF since joining them in May 1993 as Director of Marketing.
Prior to joining AAF, he served as Vice President of Marketing and Sales for
Wedge Innovations for three years and Director of Marketing and various other
positions for Skil Tools for seven years.

                                       54
<PAGE>
    BRUCE D. KRUEGER has served as Vice President of Finance of the Company
since November 1999. From October 1997 until October 1999, Mr. Krueger served as
Vice President and Corporate Controller of the Company. He joined the Company as
Vice President and Global Controller of the Air Filtration Division of AAF in
January of 1996 and has held senior financial management positions in the air
filtration industry since 1992. Prior to 1992, Mr. Krueger served as Director of
Internal Audit at Clarcor and was with Coopers & Lybrand from 1984 to 1990.

    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 Engine Company.

    DIXIE L. RANDLE has served as the General Counsel and Secretary of the
Company since October 1999. From April 1998 until October 1999, Ms. Randle
served as General Counsel and Assistant Secretary, she served as Division
General Counsel of the Commercial Air Conditioning Group from July 1994 to
April 1998, 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
and was with Vinson & Elkins from 1982 to 1987.

    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 1998
through March 1995.

    TAN SRI QUEK LENG CHAN has served as Executive Chairman of Hume since 1990.
He has served as Chairman and Chief Executive Officer of Hong Leong since 1968.
Mr. Quek currently serves as Executive Chairman of Hong Leong Credit Berhad,
Hong Leong Bank Berhad, Hong Leong Industries Berhad, Hong Leong Properties
Berhad, Hume Cemboard Berhad, Camerlin Group Berhad, Tasek Corporation Berhad
and Dao Heng Bank Group Limited and as Chairman of Guoco Group Limited,
Benchmark Group PLC and HLG Capital Berhad. Mr. Quek is Deputy Chairman of
Brierley Investments Limited and a Director of OYL, First Capital
Corporation Ltd, Hong Leong Finance Limited and Thistle Hotels PLC.

    LIU WAN MIN currently serves as Joint Group Managing Director of OYL since
January 2000 and has served as Deputy Chairman of OYL since 1993. From 1974 to
1993, Mr. Liu served as Group Managing Director of OYL. From 1996 through 1997,
Mr. Liu served as the Group Managing Director of Nanyang Press 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.
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.

                                       55
<PAGE>
ITEM 11.  EXECUTIVE COMPENSATION

    SUMMARY COMPENSATION TABLE

    The following table sets forth information concerning compensation paid or
accrued by the Company to the following individuals for services rendered in all
capacities to the Company and its subsidiaries during the 2000, 1999, and 1998
fiscal years: (i) the Chief Executive Officer, (ii) each of the next four most
highly compensated executive officers, and (iii) the former Chief Executive
Officer and another former executive officer who served in those capacities for
a portion of fiscal 2000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                    LONG TERM
                                                                                   COMPENSATION
                                                                                      AWARDS
                                                     ANNUAL COMPENSATION           ------------
                                              ----------------------------------    SECURITIES
                                                                    OTHER ANNUAL    UNDERLYING     ALL OTHER
NAME AND PRINCIPAL POSITION          YEAR     SALARY $   BONUS $    COMPENSATION   OPTIONS/SARS   COMPENSATION
---------------------------        --------   --------   --------   ------------   ------------   ------------
                                                                        $(A)           #(J)           $(B)
                                                                    ------------   ------------   ------------
<S>                                <C>        <C>        <C>        <C>            <C>            <C>
Ho Nyuk Choy ....................    2000     223,188     81,667           --            --           3,600
  President and Chief Executive
  Officer and Director(c)

Gerald L. Boehrs ................    2000     225,019     73,067           --            --          12,124
  Executive Vice President and       1999     221,410     56,244           --            --           9,572
  Director                           1998     212,521    125,107(d)    54,940(e)       2.12           7,977

Bruce D. Krueger ................    2000     181,490     47,960           --            --           9,378
  Vice President of Finance          1999     176,539     98,379(f)    61,676(g)         --           7,811
                                     1998     136,146     45,236       43,292(h)       0.97           6,800

Robert E. Brymer ................    2000     170,769     20,381           --            --           6,894
  Group Vice President--AAF          1999      48,846(i)   5,452       92,404(k)         --              --
  Americas                           1998     155,385      5,800           --            --           5,894

Eric R. Roberts .................    2000     161,854     31,546                         --           7,936
  Group Executive Vice               1999     126,827    107,381                         --           9,768
  President--McQuay North America    1998     110,489     57,758                         --           2,896

Joseph B. Hunter ................    2000     224,976         --       26,150(l)         --           5,600
  Former President and Chief         1999     446,376    140,000           --            --          16,267
  Executive Officer                  1998     413,243    225,500           --         22.70          14,988

Michael J. Christopher ..........    2000     198,796     51,206       36,707(l)         --           8,106
  Former Executive Vice President    1999     219,628     36,071           --            --           8,149
                                     1998     205,286     78,409           --          1.92           8,266
</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 named executive's account
    under the Company's 401(k) and other supplemental retirement plans.

(c) Mr. Ho Nyuk Choy was appointed President and Chief Executive Officer in
    January 2000.

(d) Includes a relocation bonus of $65,342 for Mr. Boehrs' relocation from
    Minneapolis to Louisville as he assumed the Chief Operating Officer of
    Filtration Products Group position.

                                       56
<PAGE>
(e) Represents reimbursement for relocation and moving expense. Mr. Boehrs was
    reimbursed $44,855 for relocation expense including temporary living expense
    and closing cost. The reimbursement for moving expense totaled $10,085.

(f) Includes a relocation bonus of $81,005 for Mr. Krueger's relocation from
    Baltimore to Louisville.

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

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

(i)  Represents salary for approximately three months. Excludes $154,000 paid to
    Mr. Brymer for consulting services provided to McQuay International from
    September 1998 to April 1999.

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

(k) Represents severance benefits following the termination of Mr. Brymer's
    employment by AAF International.

(l)  Represents severance benefits.

STOCK OPTION PLAN

    In 1997, the Company adopted a Stock Option Plan that provides for the grant
of non-qualified stock options to certain members of management and key
employees to purchase the common stock of the Company's parent AAF-McQuay
Group Inc. The Company granted options under the stock option plan during fiscal
year 1999. The related impact to the Statement of Operations was based on an
independent valuation of the Company at or near the grant date.

    There were no options granted during fiscal year 2000.

    The following table presents a summary of the options and their respective
fiscal year end values for the three executive officers named in the summary
compensation table who held options at the end of fiscal 2000:

    AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
                               OPTION/SAR VALUES

<TABLE>
<CAPTION>
                                                                 NUMBER OF SECURITIES    VALUE OF UNEXERCISED
                                      SHARES                    UNDERLYING UNEXERCISED       IN-THE-MONEY
                                     ACQUIRED        VALUE         OPTIONS/SARS AT         OPTIONS/SARS AT
                                    ON EXERCISE   REALIZED($)     FISCAL YEAR-END(#)      FISCAL YEAR-END($)
                                    -----------   -----------   ----------------------   --------------------
<S>                                 <C>           <C>           <C>                      <C>
Gerald L. Boehrs .................      none           0                 2.12                     0
  Executive Vice President

Bruce D. Krueger .................      none           0                 0.97                     0
  Vice President of Finance

Eric R. Roberts ..................      none           0                 0.58                     0
  Group Executive Vice President--
  McQuay North America
</TABLE>

EMPLOYMENT AGREEMENT

    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

                                       57
<PAGE>
$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 other than for cause, the Company
must 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

    RETIREMENT PLAN.  The Company adopted a retirement plan (the "Retirement
Plan") in April 1982, which has been subsequently amended and remains in effect
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, if a participating executive is
involuntarily terminated without good cause, 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. Involuntary
termination "without good cause" is defined to include (i) any 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 that
provides for compensation in the event of retirement or death.

    If a participant retires after he attains the age of 65, the Company must
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. If 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. Ho Nyuk Choy is the only officer or employee of the Company who
participated in deliberations of the Company's Board of Directors concerning
executive officer compensation during the last fiscal year. The Company's Board
of Directors determines the compensation paid to the President and Chief
Executive Officer.

                                       58
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                             PRINCIPAL STOCKHOLDERS

    The following table sets forth information as of September 22, 2000 with
respect to the beneficial ownership of shares of the Company's Common Stock by
each person known to the Company to own 5% or more of its Common Stock
(determined in accordance with the applicable rules of the Commission), by each
the Company's directors and current executive officers named in the summary
compensation table, and by such directors and executive officers as a group.

                   COMMON STOCK, PAR VALUE $100.00 PER SHARE

<TABLE>
<CAPTION>
NAME                                          NUMBER OF SHARES   PERCENT OUTSTANDING
----                                          ----------------   -------------------
<S>                                           <C>                <C>
            5% BENEFICIAL OWNERS
--------------------------------------------
AAF-McQuay Group Inc.(a)....................       2,947                 100
  10300 Ormsby Park Pl. Ste 600
    Louisville, KY 40223

      DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------------------
Tan Sri Quek Leng Chan(a)...................       2,947                 100
Liu Wan Min.................................        0.00                   *
Roger Tan Kim Hock..........................        0.00                   *
Ho Nyuk Choy................................        0.00                   *
Gerald L. Boehrs(b).........................        1.41                   *
Bruce D. Krueger(b).........................        0.65                   *
Eric R. Roberts.............................        0.19                   *
Robert E. Brymer............................        0.00                   *
All current directors and executive officers
  as a group (11 persons)(a)................       2,947                 100
</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 (Strawinskylaan 3105, Atrium, 7th Floor, Amsterdam,
    The Netherlands). AMG Holdings N.V. is a wholly-owned subsidiary of AMG
    Holdings B.V., a Netherlands corporation (Strawinskylaan 3105, Atrium, 7th
    Floor, Amsterdam, 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 64.4% of the outstanding stock of OYL is owned by Hume, a
    company also publicly traded on the Kuala Lumpur Stock Exchange.
    Approximately 50.9% 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.

                                       59
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT IN PARENTS OF THE COMPANY

    The following tables set forth information as of June 30, 2000 for OYL and
Hume with respect to the beneficial ownership of shares of each of those
company's equity securities by the Company's directors and current executive
officers who hold such securities and the directors and executive officers as a
group.

                OYL ORDINARY SHARES, PAR VALUE RM 1.00 PER SHARE

<TABLE>
<CAPTION>
NAME                                          NUMBER OF SHARES   PERCENT OUTSTANDING
----                                          ----------------   -------------------
<S>                                           <C>                <C>
Tan Sri Quek Leng Chan......................      84,868,828(a)          64.4
Liu Wan Min.................................       6,000,000              4.6
Ho Nyuk Choy................................          64,000                *

All current directors and executive officers
  as a group (11 persons)...................      90,932,828             69.0
</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......................     123,750,455(b)          50.9
All current directors and executive officers
  as a group (11 persons)...................     123,750,455             50.9
</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 50.9% 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 123,750,455 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, 2000, 1999, and 1998, pursuant to this policy, the Company and
various of its subsidiaries sold an aggregate of approximately $9.6, $6.7, and
$13.0 million, respectively of the Company's products to various OYL entities in
the ordinary course of business. Additionally during fiscal years 2000, 1999,
and 1998, the Company purchased approximately $9.1, $1.2, and $2.3 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

                                       60
<PAGE>
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 $506,400, $166,000, and $227,000
pursuant to the OMC Agreement, $525,600, $105,000, and $124,000 pursuant to the
Shenzhen Agreement, and $11,621, $8,000, and $18,000 pursuant to the PT OYL
Agreement for the years ended June 30, 2000, 1999, and 1998 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 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
$239,700 through June 30, 2000. 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 had 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 expired in March 2000 and were
not renewed. 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

           1.  Financial Statements

                       Report of the Independent Auditors

                       Consolidated Balance Sheets--at June 30, 2000 and 1999

                       Consolidated Statements of Operations--Years ended June
                           30, 2000, 1999, and 1998

                       Consolidated Statements of Cash Flows--Years ended June
                           30, 2000, 1999, and 1998

                       Consolidated Statements of Stockholder's Equity--Years
                           ended June 30, 2000, 1999, and 1998

                       Consolidated Statements of Comprehensive Income--Years
                           ended June 30, 2000, 1999, and 1998

           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.

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<PAGE>

<TABLE>
<CAPTION>
(B) EXHIBITS
------------
<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)
      10.1        Executive Employment and Compensation Agreement dated
                  January 1, 1991 with Gerald L. Boehrs(1)
      10.2        Senior Executive Severance Agreement dated April 26, 1994
                  with Gerald L. Boehrs(1)
      10.3        Executive Salary Continuation Agreement dated July 25, 1990
                  with Gerald L. Boehrs(1)
      10.4        Trademark License and Royalty Agreement dated December 27,
                  1995 with P.T. O.Y.L. Sentra Manufacturing(1)
      10.5        Trademark License and Royalty Agreement dated December 27,
                  1995 with Shenzhan O.Y.L. Electrical Company Ltd.(1)
      10.6        Trademark License and Royalty Agreement dated December 27,
                  1995 with O.Y.L. Manufacturing Company SDN BHD(1)
      10.7        Technology Licensing Agreement dated August 8, 1995 with
                  McQuay-Wuhan Air Conditioning & Refrigeration Company
                  Ltd.(1)
      10.8        Asset Transfer Agreement dated May 29, 1995 by and among AAF
                  Asia Pte., Ltd. and McQuay Air Conditioning (Singapore) Pte.
                  Ltd.(1)
      10.9        Supply and Procurement Agreement dated May 2, 1994 with
                  EnergyLine Systems, Inc.(1)
     10.10        Stock Option Plan effective January 1, 1996(3)
     10.11        Employment Agreement dated April 1, 1999 with Bruce D.
                  Krueger(4)
     10.12        Revolving Credit, Term Loan and Security Agreement dated
                  September 30, 1999 with PNC Bank, N.A.(5)
     10.13        First Amendment to Revolving Credit, Term Loan and Security
                  Agreement dated October 25, 1999, with PNC Bank, N.A.(5)
     10.14        Second Amendment to Revolving Credit, Term Loan and Security
                  Agreement dated November 12, 1999, with PNC Bank, N.A.(5)
       21         Subsidiaries
       24         Power of Attorney
       27         Financial Data Schedule
</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-Q as filed with the
    Commission on May 9, 1997.

(4) Incorporated by reference to the Company's 10-K as filed with the Commission
    on October 1, 1999.

(5) Incorporated by reference to the Company's 10-Q as filed with the Commission
    on November 16, 1999.

     (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, 2000.

                                       62
<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 29, 2000.

<TABLE>
<S>                                                    <C>  <C>
                                                       AAF-MCQUAY INC.

                                                       By:               /s/ HO NYUK CHOY
                                                            -----------------------------------------
                                                                           Ho Nyuk Choy
                                                              PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>

    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>
<C>                                                    <S>
                  /s/ HO NYUK CHOY
     -------------------------------------------
                    Ho Nyuk Choy                       September 29, 2000
             PRINCIPAL EXECUTIVE OFFICER

                /s/ BRUCE D. KRUEGER
     -------------------------------------------
                  Bruce D. Krueger                     September 29, 2000
              VICE PRESIDENT OF FINANCE
     (PRINCIPAL FINANCE AND ACCOUNTING OFFICER)

The Board of Directors:

            Liu Wan Min
            Ho Nyuk Choy                                   Quek Leng Chan
            Gerald L. Boehrs                               Roger Tan Kim Hock

                By: /s/ HO NYUK CHOY
     -------------------------------------------
                    Ho Nyuk Choy                       September 29, 2000
                  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.

                                       63