<PAGE>   1

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549



                                    FORM 10-K
               For Annual Reports Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934


For the Fiscal Year Ended                                Commission File Number
February 28, 1999                                                       0-12490


                                 ACR GROUP, INC.
             (Exact name of registrant as specified in its Charter)



           Texas                                        74-2008473
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                       Identification No.)


              3200 Wilcrest Drive, Suite 440, Houston, Texas 77042
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (713) 780-8532

        Securities registered pursuant to Section 12(b) of the Act: None
          Securities registered pursuant to Section 12(g) of the Act:
                     Common Stock, par value $.01 per share
                                (Title of class)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X   No
                                             ---    ---

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



<PAGE>   2

         The aggregate market value of the common stock held by nonaffiliates of
the registrant on April 30, 1999 was $12,229,593. The aggregate market value was
computed by reference to the last trading price as reported on the National
Association of Securities Dealers Automated Quotation System. For the purposes
of this response, Executive Officers, Directors and holders of more than 10% of
the Registrant's common stock are considered affiliates of the registrant.

         The number of shares outstanding of the registrant's common stock as
of April 30, 1999: 10,659,303 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

         The registrant's definitive Proxy Statement for its Annual Meeting of
Shareholders to be held in August 1999 is incorporated by reference in answer to
Part III of this report.


                                      -2-

<PAGE>   3
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>

                                                                                 Page
                                                                                 ----
PART I
<S>           <C>                                                               <C>
         Item 1.           Business                                                4

         Item 2.           Properties                                              9

         Item 3.           Legal Proceedings                                       9

         Item 4.           Submission of Matters to a Vote of
                           Security Holders                                       10
PART II

         Item 5.           Market for Registrant's Common Equity
                           and Related Stockholder Matters                        10

         Item 6.           Selected Financial Data                                11

         Item 7.           Management's Discussion and Analysis
                           of Financial Condition and Results of
                           Operations                                             13

         Item 7A.          Quantitative and Qualitative Disclosures
                           About Market Risk                                      18

         Item 8.           Financial Statements and Supplementary
                           Data                                                   19

         Item 9.           Changes in and Disagreements with
                           Accountants on Accounting and Financial
                           Disclosure                                             40
PART III

         Item 10.          Directors and Executive Officers of the
                           Registrant                                             40

         Item 11.          Executive Compensation                                 40

         Item 12.          Security Ownership of Certain Beneficial
                           Owners and Management                                  40

         Item 13.          Certain Relationships and Related
                           Transactions                                           40
PART IV

         Item 14.          Exhibits, Financial Statement
                           Schedules, and Reports on Form 8-K                     41
</TABLE>


                                      -3-

<PAGE>   4

                                     PART I

ITEM 1.           BUSINESS.

General

         ACR Group, Inc. (which, together with its subsidiaries is herein
referred to as the "Company" or "ACRG") is a Texas corporation based in Houston.
In 1990, the Company began to acquire and operate businesses engaged in the
wholesale distribution of heating, ventilating, air conditioning and
refrigeration ("HVACR") equipment and supplies. The Company acquired its first
operating company in 1990. Since 1990, ACRG has acquired or started up eight
additional HVACR distribution companies and now has 37 branch operations in nine
states. The Company plans to continue expanding in the Sunbelt of the United
States and in other geographic areas with a high rate of economic growth,
through both acquisitions and internal growth.

The HVACR Industry

         The Company's interest in the HVACR distribution industry is a direct
result of the business experience of its Chairman and President, Alex Trevino,
Jr., who has been associated with the industry for over thirty years in varying
capacities, first as owner of his own distribution company and then as president
of various successor companies following the sale of his business.

         The Company sells supplies and equipment to installing contractors and
dealers and to other technically trained customers responsible for the
installation, repair and maintenance of HVACR systems. Maintenance of a large
and diverse inventory base is an important element in the Company's sales.

         The HVACR supply industry is segmented into discrete categories. First,
it serves both commercial and residential HVACR businesses. Each of these
segments is further divided into two markets - new construction sales and
replacement and/or repair sales. Some companies choose to specialize in serving
the new construction markets while others focus on the repair/replacement
market, commonly referred to as the "aftermarket." ACRG is not oriented toward
any particular segment but instead concentrates on acquiring and developing
profitable businesses in the Sunbelt region of the United States which have a
significant market share within their segment of the HVACR distribution
industry. The Company believes that its growth strategy is appropriate in view
of the competitive nature of the HVACR industry and the continuing consolidation
in that industry, discussed below.

         There are many manufacturers of products used in the HVACR industry,
and no single manufacturer dominates the market for a range of products. Some
manufacturers


                                      -4-

<PAGE>   5

limit the number and territory of wholesalers that may distribute their
products, but exclusivity is rare. Many manufacturers will generally permit any
distributor who satisfies customary commercial credit standards to sell their
products. In addition, there are some manufacturers, primarily of equipment,
that distribute their own products through factory branches. The widespread
availability of HVACR products to distributors results in significant
competition. There are several thousand HVACR wholesale distributors in the
United States, and there is no single company or group of companies that
dominates the HVACR distribution industry. The industry traditionally has been
characterized by closely-held businesses with operations limited to local or
regional geographic areas; however, a process of consolidation in this industry
is ongoing, as many of these companies reach maturity and face strategic
business issues such as ownership succession, changing markets and lack of
capital to finance growth. Management's goal is to attract the present owners
and management of such businesses by offering certain advantages related to
economies of scale: lower cost of products from volume purchasing, new product
lines, and financial, administrative and technical support.

         The Company believes that investing in the HVACR distribution industry
has fewer economic risks than many other industries. Although the HVACR industry
is affected by general economic conditions such as cycles in new home
construction, sales of replacement equipment and repair parts for the existing
base of installed air conditioning and heating systems provide a cushion against
economic swings. The aftermarket is far less susceptible to changes in economic
conditions than the new construction market and now represents approximately 70%
of all units installed annually. This percentage should continue to increase as
the base of installed systems expands. Much of the HVACR industry is also
seasonal; sales of air conditioning and heating systems are generally largest
during the times of the year when climatic conditions require the greatest use
of such systems. Sales of refrigeration systems, which are generally to
commercial customers, are subject to less seasonality.

The Company's operations are conducted through nine subsidiaries that
participate in the wholesale distribution of HVACR equipment and supplies:

         ACR Supply, Inc.

         The Company acquired ACR Supply, Inc. ("ACRS") effective February 28,
         1993, after making an initial investment in the company in 1991. At the
         end of fiscal 1999, ACRS had fifteen branches in Texas and one in
         Louisiana. Many of ACRS's branches have attained market share
         leadership in their respective areas. In major metropolitan areas such
         as San Antonio and Houston, ACRS encounters significantly more
         competition than in smaller cities. However, through aggressive sales
         efforts, the Houston branches have achieved a significant, but not
         dominant, share of their local HVACR markets.

                                      -5-

<PAGE>   6

         ACRS sells primarily to licensed contractors serving the residential
         and light commercial (restaurants, strip shopping centers, etc.)
         markets. The company's sales mix is approximately 35% equipment and 65%
         parts and supplies, with the equipment and parts generally directed to
         the aftermarket and the supplies used principally in new construction.

         Heating and Cooling Supply, Inc.

         The Company acquired Heating and Cooling Supply, Inc. ("HCS") in 1990.
         HCS operates from one location in Las Vegas, Nevada. There are
         approximately 20 independent HVACR distributors in the Las Vegas area
         that compete with HCS. Management believes that HCS is among the top
         three of such distributors in terms of annual sales from branch
         operations in the local area.

         HCS's sales growth in the past several years has mirrored the
         well-documented growth of the Las Vegas economy, and approximately 80%
         of HCS's sales are in the new construction markets. HCS has
         successfully expanded its business in the commercial HVACR market by
         emphasizing its capabilities in both the plan and specifications market
         and the specialty products market. HCS's proficiency in these two
         niches distinguishes it from most other HVACR distributors and, as a
         result, sales to commercial accounts were approximately 50% of total
         sales at the end of fiscal 1999.

         Total Supply, Inc.

         In 1990, the Company organized Total Supply, Inc. ("TSI") to fabricate
         air conditioning ductwork out of fiber glass ductboard, and in 1992
         converted the company's business to HVACR wholesale distribution. Since
         December 1992, TSI has distributed the GMC brand of HVACR equipment in
         Georgia and now has the GMC distribution rights to almost the entire
         state of Georgia. TSI sells almost exclusively to the residential
         market, and management estimates that sales are approximately evenly
         split between new construction and the aftermarket. The company's sales
         mix is approximately 70% equipment and 30% parts and supplies. TSI has
         four branches located in the Atlanta metropolitan area and one branch
         in Warner Robins, a suburb of Macon. In 1998, TSI closed its branch in
         far south Georgia, after management concluded that the Company could
         service the customers more economically out of the Warner Robins
         branch.

                                      -6-

<PAGE>   7

         Valley Supply, Inc.

         In 1994, the Company organized Valley Supply, Inc. ("VSI") as an HVACR
         distributor in the Memphis, Tennessee trade area, which includes
         southwestern Tennessee, northern Mississippi and western Arkansas. The
         Company was granted the franchise to distribute the GMC line of
         equipment within this trade area, succeeding another distributor which
         ceased business operations. Although sales of GMC equipment initially
         comprised virtually all of VSI's sales, management has continuously
         emphasized increasing the breadth of higher profit HVACR parts and
         supplies stocked at VSI. Approximately 80% of VSI's sales consisted of
         GMC equipment in fiscal 1999. In fiscal 1998, the Company assigned to
         management of TSI the responsibility for VSI's operations.

         Ener-Tech Industries, Inc.

         In January 1996, the Company acquired Ener-Tech Industries, Inc.
         ("ETI"), an HVACR distributor in Nashville, Tennessee. Unlike the
         Company's other HVACR distribution operations, ETI specializes in an
         industry subsegment. ETI sells controls and control systems to
         commercial and industrial end-users, HVACR contractors, dealers and
         other distributors. ETI also designs and assembles control systems used
         in commercial applications such as hospitals, restaurants and
         supermarkets. Such control systems perform a variety of functions
         including temperature control and monitoring, lighting control and
         energy management.

         ETI is an authorized distributor for Honeywell, Inc. for much of
         Tennessee and parts of Kentucky. By providing engineering services and
         assembly processes for its customers in connection with the sale of
         control systems, ETI obtains a higher gross margin on its sales than
         the Company's other distribution businesses. Additionally, ETI's sales
         tend to be greater in the cooler seasons of the year, when gas controls
         are in higher demand.

         Florida Cooling Supply, Inc.

         In 1996, the Company organized Florida Cooling Supply, Inc. ("FCS") and
         opened four branch operations in central Florida. The state of Florida
         is among the three largest in the United States in terms of installed
         HVACR systems. The Company's sales mix is approximately 25% equipment
         and 75% parts and supplies.

         Lifetime Filter, Inc.

         In January 1997, the Company acquired Lifetime Filter, Inc. ("LFI"), a
         manufacturer of electrostatic air filters which sells its products
         principally to HVACR contractors and dealers by mail order. LFI is
         based in Katy, Texas, a suburb of Houston. The

                                      -7-

<PAGE>   8

         Company's existing wholesale distribution network also distributes the
         products manufactured by LFI.

         West Coast HVAC Supply, Inc. d/b/a ACH Supply

         In April 1997, West Coast HVAC Supply, Inc. acquired the operating
         assets and liabilities of ACH Supply, Inc., ("ACH"). ACH had two
         branches located east of Los Angeles. In fiscal 1999, ACH opened a
         third branch in Canoga Park. The Company has attracted key employees
         with significant management experience working for a much larger HVACR
         wholesale distributor in southern California. ACH sells primarily HVACR
         parts and supplies, and in 1998, began distributing the Armstrong brand
         of HVACR equipment.

         Contractors Heating & Supply, Inc. ("CHS")

         In September 1997, CHS acquired certain of the assets, and assumed
         certain of the liabilities, of Contractors Heating and Supply Company,
         an HVACR distributor based in Denver, with branch operations in
         Colorado Springs and Glenwood Springs, Colorado, and in Albuquerque,
         New Mexico. CHS has operated in Denver since 1945, in Colorado Springs
         since 1959, and in Albuquerque since 1960, and is considered the market
         leader in each of its trade areas. CHS also operates a sheet metal shop
         in Colorado Springs, where products are fabricated for distribution
         through CHS's wholesale operations. Approximately 25% of CHS's total
         sales are products that it manufactures. In April 1999, CHS opened a
         distribution branch in Fort Collins, Colorado.

Energy Service Business

         In the early 1980's, the Company's primary business was the design,
installation and management of integrated systems intended to reduce energy
costs ("Systems") for users of commercial, industrial and institutional
facilities. ACRG has not installed any new Systems after 1985. Pursuant to
service contracts, customers paid ACRG a specified percentage of the utility
cost savings attributable to the Systems over the term of the contract. The
Company's contracts for its remaining Systems have all expired, but the Company
continues to manage 13 Systems for a single customer on a month-to-month basis.
The Company cannot predict for how long such an informal arrangement may
continue.

                                      -8-

<PAGE>   9
Executive Officers of the Registrant

         The Company's executive officers are as follows:

<TABLE>
<CAPTION>

         Name              Age         Position with the Company
         ----              ---         -------------------------
<S>                       <C>      <C>
Alex Trevino, Jr.          62      Chairman of the Board and President

Anthony R. Maresca         48      Senior Vice President, Secretary, Treasurer,
                                   and Chief Financial Officer
</TABLE>

         Alex Trevino, Jr. has served as Chairman of the Board since 1988, and
as President and Chief Executive Officer of the Company since July 1990. From
September 1987 to February 1990, he served as President of Western Operations of
the Refrigeration and Air Conditioning Group of MLX Corporation (now Pameco
Corporation), which is a national distributor of HVACR equipment and supplies.

         Anthony R. Maresca has been employed by the Company since June 1985,
serving as Corporate Controller until November 1985 when he was promoted to
Senior Vice President, Chief Financial Officer and Treasurer. Mr.
Maresca is a certified public accountant.

Employees

         As of February 28, 1999, the Company and its subsidiaries had
approximately 330 full-time employees. Neither the Company nor its subsidiaries
routinely use temporary labor. None of the Company's employees are represented
by any collective bargaining units. Management considers the Company's relations
with its employees to be good.

ITEM 2.  PROPERTIES.

         The Company and its subsidiaries occupy office and warehouse space
under operating leases with various terms. Generally, a branch location will
contain 10,000 to 25,000 square feet of showroom and warehouse space. Branch
locations that include a subsidiary's corporate office will be larger. The
Company owns the facilities occupied by LFI and by the Pasadena, Texas branch of
ACRS.

ITEM 3.  LEGAL PROCEEDINGS.

         As of February 28, 1999 the Company was not a party to any pending
legal proceeding that is deemed to be material to the Company and its
subsidiaries.

                                      -9-

<PAGE>   10

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

         No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended February 28, 1999.



                                     PART II



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

         The Company's common stock trades on the NASDAQ Stock Market(R) under
the symbol "ACRG." The table below sets forth the high and low sales prices
based upon actual transactions.

<TABLE>
<CAPTION>

                                                        High               Low
                                                        ----               ---
<S>                                                     <C>              <C>
         Fiscal Year 1999
                  1st quarter ended 5/31/98            $ 2.81           $ 1.75
                  2nd quarter ended 8/31/98              2.13             1.50
                  3rd quarter ended 11/30/98             2.00             1.00
                  4th quarter ended 2/28/99              1.63             1.00

         Fiscal Year 1998
                  1st quarter ended 5/31/97            $ 4.16           $ 2.19
                  2nd quarter ended 8/31/97              2.88             2.00
                  3rd quarter ended 11/30/97             3.00             2.00
                  4th quarter ended 2/28/98              2.75             1.88
</TABLE>

         As of April 30, 1999, there were 504 holders of record of the Company's
common stock. This number does not include the beneficial owners of shares held
in the name of a broker or nominee.

         The Company has never declared or paid cash dividends on its common
stock. The Company's loan agreements with two lenders each expressly prohibit
the payment of dividends by the Company. See Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources, and Note 4 of Notes to Consolidated Financial Statements.

                                     -10-

<PAGE>   11

ITEM 6.  SELECTED FINANCIAL DATA.


         The following selected financial data of the Company have been derived
from the audited consolidated financial statements. This summary should be read
in conjunction with the audited consolidated financial statements and related
notes included in Item 8 of this Report. Since February 28, 1994, the increase
in sales has resulted from acquisitions and internal expansion, as discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7. of this Report. The Company has never paid any dividends.

         The Company has not recorded a provision for income taxes other than
federal alternative minimum taxes and state income taxes for fiscal years 1995
through 1999 because of previously incurred net operating losses for which a tax
benefit had not previously been recorded. Additionally, the Company determined
in both fiscal 1998 and 1997 that further reductions in its deferred tax asset
valuation allowance were appropriate given expectations of higher future taxable
income from recently acquired businesses and, as a result, recorded additional
tax benefits of $420,000 and $360,000 in fiscal 1998 and 1997, respectively.






                                      -11-
<PAGE>   12



<TABLE>
<CAPTION>

                                                   ( In thousands except per share data )

                                                       Year Ended February 28 or 29,
                                         -----------------------------------------------------------
                                           1999         1998        1997        1996         1995
                                         ---------    ---------   ---------   ---------    ---------
<S>                                      <C>          <C>         <C>         <C>          <C>
  Income Statement Data:

  Sales                                  $ 117,887    $  96,164   $  78,371   $  56,500    $  41,281
  Gross Profit                              24,772       19,558      15,085      10,721        8,563

  Operating income                           3,317        2,064       1,659         765          945
                                         ---------    ---------   ---------   ---------    ---------

  Income before income taxes                 1,568          570         887         199          562

  Benefit (provision) for income taxes        (153)         333         258         (15)          (4)
                                         ---------    ---------   ---------   ---------    ---------

  Net Income                             $   1,415    $     903   $   1,145   $     184    $     558
                                         =========    =========   =========   =========    =========
  Earnings per common share:

     Basic                               $     .13    $     .09   $     .11   $     .02    $     .05
                                         =========    =========   =========   =========    =========

     Diluted                             $     .12    $     .08   $     .10   $     .02    $     .05
                                         =========    =========   =========   =========    =========
</TABLE>

<TABLE>
<CAPTION>

                                                           As of February 28 or 29,
                                         -----------------------------------------------------------
                                           1999         1998        1997        1996         1995
                                         ---------    ---------   ---------   ---------    ---------
<S>                                      <C>          <C>         <C>         <C>          <C>
  Balance Sheet Data:

  Working capital                        $  15,614    $  13,547   $  11,080   $   8,118    $   5,818

  Total assets                              45,103       41,108      30,558      22,010       17,131

  Long-term obligations                     17,616       16,655      11,160       6,703        3,728

  Shareholders' equity                       9,391        7,960       7,006       5,666        5,482
</TABLE>


                                      -12-

<PAGE>   13


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

RESULTS OF OPERATIONS

         Operating income increased to $3,316,631 in fiscal 1999, from
$2,063,996 in fiscal 1998 and $1,658,674 in fiscal 1997, representing increases
of 61% and 24% in fiscal 1999 and 1998, respectively. The increase in operating
income in fiscal 1999 was attributable to significantly improved financial
performance by the Company's larger, more seasoned companies, while the
Company's newer and smaller distribution operations generally showed less or no
improvement in financial results from prior years. The increase in operating
income in fiscal 1998, compared to fiscal 1997, was a result of earnings from
Contractors Heating & Supply ("CHS"), which the Company acquired in September
1997. Fiscal 1998 operating income at businesses owned by the Company from the
beginning of fiscal 1997 was equal to or less than fiscal 1997 operating income,
as unusually moderate and wet weather conditions during the spring and early
summer of 1997 reduced demand for air conditioning products in the Company's key
markets. Net income was $1,415,080, $903,366 and $1,144,788 in fiscal 1999, 1998
and 1997, respectively. Higher interest costs relating to the Company's
acquisitions significantly impacted net income in fiscal 1999 and 1998.
Reductions in the Company's deferred tax asset valuation allowance increased net
income by $420,000 in fiscal 1998 and $360,000 in fiscal 1997.

         Sales have increased annually, reaching $117.9 million in fiscal 1999,
compared to $96.2 million in fiscal 1998 and $78.4 million in fiscal 1997. Same
store sales increased 14%, 7% and 16% in fiscal 1999, 1998 and 1997,
respectively, with each year significantly exceeding the industry average. The
slower rate of growth in fiscal 1998 was due to unfavorable weather conditions
and a post-Olympic building slowdown in Georgia. Through fiscal 1997, the
majority of the Company's sales growth had resulted from internal expansion of
branch operations rather than from acquisitions, but in fiscal 1999 and 1998,
respectively, 54% and 71% of the increase in sales was attributable to
operations acquired since January 1997. In comparison, acquisitions accounted
for 28% of the growth in sales from fiscal 1996 to fiscal 1997.

         The Company's gross margin percentage increased to 21.0% in fiscal
1999, from 20.3% in fiscal 1998 and 19.2% in fiscal 1997. The continual increase
in gross margin percentage from fiscal 1997 is a result of management's effort
to focus the Company on starting up and acquiring businesses that are expected
to enhance the Company's gross margin percentage. In particular, CHS
manufactures products that account for approximately 25% of its sales revenue
and, accordingly, achieves a higher gross margin percentage than if it purchased
all of its inventory from outside suppliers. The Company's gross margin
percentage has also been favorably affected by purchasing arrangements that
management has negotiated from its major suppliers, and by technology
improvements that have enabled management to implement more sophisticated
pricing strategies.

         Selling, general and administrative ("SG&A") costs as a percentage of
sales were 18.2% in fiscal 1999, compared to 18.5% in fiscal 1998 and 17.7% in
fiscal 1997. The increase from fiscal 1997 is due

                                      -13-

<PAGE>   14

in part to the SG&A percentage at the Company's manufacturing operations, which
are generally expected to incur higher SG&A costs as a percentage of sales than
the Company's distribution operations. In addition, the Company's distribution
business in California, which was acquired in 1997, has higher overhead costs
than would ordinarily be expected, as the Company has staffed this operation to
support a substantial growth rate over the next several years. In fiscal 1998,
the Company also recorded $580,000 more bad debt expense than in fiscal 1997,
which was largely attributable to the unexpected business failure of a single
customer with respect to which the Company wrote off $371,000 of accounts
receivable. In fiscal 1997, the Company recorded a non-recurring charge of
$125,000 for performance-based compensation pursuant to the employment contract
of its chief executive officer.

         Beginning in fiscal 1997, the Company earned commission revenue from a
supplier by providing warehousing and shipping services to another distributor
of the supplier. In calendar 1997, the supplier reduced the commission rate
applicable to this arrangement, and, at the end of 1997, the arrangement was
discontinued. Revenues from this source were $155,380 and $290,919 in fiscal
1998 and 1997, respectively.

         Net energy services income declined 77% from fiscal 1998 to fiscal
1999, after increasing 19% in fiscal 1998 from fiscal 1997. The Company
continues to provide a reduced level of services on a month-to-month basis to
its remaining customer, following the expiration of its energy services contract
in 1996. Management does not expect to negotiate another contract with the
customer and cannot estimate how long such an informal arrangement may continue.

         Interest expense increased 21% in fiscal 1999 compared to fiscal 1998,
and 82% in fiscal 1998 compared to 1997 as a result of the Company's increased
borrowings. In 1999, 1998 and 1997, interest expense was 1.7%, 1.8% and 1.2% of
sales, respectively. The increase in interest expense after fiscal 1997 was
attributable to indebtedness incurred in connection with the Company's 1997
acquisitions. Other non-operating income increased 49% from fiscal 1998 to
fiscal 1999, and 26% from fiscal 1997 to fiscal 1998, as the Company has more
strictly enforced its policy to collect finance charges from customers with past
due balances.

         Current income tax expense consists principally of state income taxes
and federal alternative minimum taxes. As a result of the Company's substantial
tax loss carryforwards, the Company has minimal liability for Federal income
taxes. See Liquidity and Capital Resources, below. In both fiscal 1998 and 1997,
the Company determined that further reductions in its deferred tax asset
valuation allowance were appropriate given expectations of higher future taxable
income from recently acquired subsidiaries and, as a result, recorded additional
tax benefits of $420,000 and $360,000 in fiscal 1998 and 1997, respectively.

                                      -14-

<PAGE>   15

Liquidity and Capital Resources

         Working capital increased from $13.5 million at February 28, 1998 to
$15.6 million at February 28, 1999, principally as a result of the Company's
earnings through sales growth. Accounts receivable represented 53 days of gross
sales at the end of both fiscal 1999 and 1998. Of the $1.5 million increase in
inventory, $.4 million was located at operations acquired or started up in the
fourth quarter of fiscal 1999, and $.4 million consisted of a new line of HVAC
equipment that the Company's California operations began distributing in fiscal
1999.

         The Company has credit facilities with a commercial bank ("Bank") which
include an $18 million revolving line of credit and a $500,000 term loan
facility for the purchase of capital equipment. At February 28, 1999, the
Company had available credit of $ 1,798,757 and $153,000 under the revolving
credit line and the term loan facility, respectively. Borrowings under the
revolving credit facility are secured by accounts receivable and inventory, and
the permitted amount of outstanding borrowings at any time is limited to 85% of
eligible accounts receivable and 50% of eligible inventory amounts. Borrowings
under the facility bear interest, at the Company's option, at either the Bank's
prime rate plus 1/2% or LIBOR plus 3.00%, payable monthly. Restrictive covenants
of the loan agreement prohibit the Company from paying dividends, prepaying any
subordinated indebtedness or incurring certain other debt without the Bank's
consent, and also require the Company to maintain certain financial ratios (see
Note 4 of Notes to Consolidated Financial Statements). The revolving credit line
and the term loan facilities mature in fiscal 2001 and fiscal 2002,
respectively. A schedule of declining prepayment penalties applies in the event
that the line of credit facility is paid prior to maturity.

         In connection with an acquisition in fiscal 1999, the Company issued a
note to the seller for $328,253, which is subordinated to the Bank. Such debt is
payable over a term of three years and bears interest at 10% per annum. The
Company made capital expenditures of $908,000 in fiscal 1999 for leasehold
improvements, computer software, equipment, and the addition and replacement of
vehicles under capital leases. At February 28, 1999, the Company had placed
orders for new production machinery for its manufacturing operations with an
aggregate cost of approximately $200,000.

         The Company has approximately $31.5 million in tax loss carryforwards
and $0.8 million in tax credit carryforwards. Such operating loss and tax credit
carryforwards will substantially limit the Company's federal income tax
liabilities in the near future. Certain provisions of the Internal Revenue Code
("Code") regulate the amount of additional stock that the Company could issue
without resulting in a change in ownership control, as defined in the Code.
Should such a change in control be deemed to occur, the Company's ability to
utilize its operating loss and tax credit carryforwards would be severely
restricted.

         The Company expects that cash flows from operations and the borrowing
availability under its revolving credit facility will provide sufficient
liquidity to meet its normal operating requirements, existing debt service and
expected capital expenditures. Subject to limitations set forth in its loan
agreement

                                      -15-

<PAGE>   16

with the Bank, funds available under the Company's revolving credit facility may
also be utilized to finance acquisitions. Although management has engaged in
discussions with several potential lenders or investors, the Company has no
commitment for additional financing and cannot predict whether or when any such
additional financing may materialize. Management is also reviewing the
suitability of several acquisition opportunities, but has not entered into
definitive agreements to acquire any companies. The Company's ability to
consummate a significant acquisition may be dependent upon obtaining additional
financing.

Seasonality

         The Company's sales volume and, accordingly, its operating income vary
significantly during its fiscal year. The highest levels of sales occur during
the times of the year when climatic conditions require the greatest use of air
conditioning, since the Company's operations are concentrated in the warmer
regions of the United States. Accordingly, sales will be highest in the
Company's second quarter ending August 31, and will be lowest in its fourth
fiscal quarter.

Inflation

         The Company does not believe that inflation has had a material effect
on its results of operations in recent years. Generally, manufacturer price
increases attributable to inflation uniformly affect both the Company and its
competitors, and such increases are passed through to customers as an increase
in sales prices.

Year 2000 Issue

         The Company has addressed its state of readiness to deal with the
problem commonly known as the Year 2000 issue. With respect to its own
information systems, the Company has installed an upgrade to its existing
integrated application software such that the software is now fully Year 2000
compliant. One of the Company's subsidiaries does not utilize the Company's
integrated software and has substantially completed testing for modifications to
its computer programs that will accommodate Year 2000. Such modifications were
accomplished by staff of the Company. The Company does not believe that it has a
material exposure to Year 2000 issues in elements of its own operations other
than its information systems, but management is continually updating its
assessment of such elements. The costs incurred by the Company to date to
achieve Year 2000 compliance have been less than $100,000 and have been expensed
as incurred, and the Company does not expect to incur material future costs in
connection with its ongoing efforts.

         The Company has informally discussed Year 2000 preparedness with its
most significant suppliers and has obtained assurances that such suppliers do
not expect any disruption in their ability to fulfill customer orders as a
result of Year 2000 issues. To date, the Company has not undertaken an
assessment of the Year 2000 preparedness of its customers. The Company does not
have any interconnectivity with its customers' computer systems, and no customer
represents more than 1% of

                                      -16-

<PAGE>   17

consolidated sales. Management may initiate discussions during 1999 with its
most significant customers concerning their Year 2000 preparedness, but does not
believe that customers' lack of preparedness would have a material adverse
effect on the Company's sales or results of operations.

         The Company has not developed a specific contingency plan to address a
worst case scenario dealing with lack of Year 2000 preparedness. Although
management is confident that the Company's own internal systems will be fully
Year 2000 compliant, the Company's branch operations would be able to conduct
business using manual systems for an indefinite period of time if the Company's
automated information systems were unexpectedly disabled. Management believes
that a Year 2000 contingency plan would principally address issues relating to
the potential inability of suppliers, service providers or customers to
satisfactorily address their own Year 2000 issues. The Company expects to
continually assess the Year 2000 preparedness of such parties and, if
circumstances dictate, may undertake specific contingency plans.

         While management believes that it has taken adequate steps to address
the Year 2000 issue, there can be no assurance that the inability of either
significant business partners or key parties that provide the country's business
and public service infrastructure to adequately address the Year 2000 issue
would not have a material adverse impact on the Company.

Recently Issued Accounting Standards

         In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards ("SFAS") No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. It was effective in the first quarter
of fiscal 1999 and its adoption had no impact on the Company's net income or
shareholders' equity.

         In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes standards for
reporting information about a company's operating segments and related
disclosures about products and services, geographic areas of operations and
major customers. The Company adopted SFAS No. 131 effective March 1998.
Management operates the business of the Company as a single segment.
As a result, no additional disclosure is required.

         During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for the Company's fiscal
year 2001. This statement requires companies to record derivative instruments on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of a derivative would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company has not historically used derivatives, and management
does not believe that the adoption of SFAS No. 133 will have a material effect
on earnings or the financial position of the Company.

                                      -17-

<PAGE>   18

         In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AcSEC") issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 establishes criteria for determining
which costs of developing or obtaining internal-use computer software should be
charged to expense and which should be capitalized. The Company will adopt SOP
98-1 prospectively effective March 1, 1999. In April 1998, the AcSEC issued SOP
98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 establishes
standards for the reporting and disclosure of start-up costs, including
organization costs. The Company will adopt SOP 98-5 on March 1, 1999. The
Company believes that the adoption of these statements will not have a material
effect on the Company's consolidated financial position or results of
operations.

Safe Harbor Statement

         This Annual Report on Form 10-K includes forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements which are other than
statements of historical facts. Forward-looking statements involve risks and
uncertainties which could cause actual results or outcomes to differ materially.
The Company's expectations and beliefs are expressed in good faith and are
believed by the Company to have a reasonable basis but there can be no assurance
that management's expectations, beliefs or projections will be achieved or
accomplished. The forward-looking statements in this document are intended to be
subject to the safe harbor protection provided under the securities laws. In
addition to other factors and matters discussed elsewhere herein, the following
are important factors that, in the view of the Company, could cause actual
results to differ materially from those discussed in the forward-looking
statements: the ability of the Company to continue to expand through
acquisitions, the availability of debt or equity capital to fund the Company's
expansion program, unusual weather conditions, the effects of competitive
pricing and general economic conditions.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

         The Company is subject to market risk exposure related to changes in
interest rates on its senior credit facility, which includes revolving credit
and term notes. These instruments carry interest at a pre-agreed upon percentage
point spread from either the prime interest rate or LIBOR. Under its senior
credit facility the Company may, at its option, fix the interest rate for
certain borrowings based on a spread over LIBOR for 30 days to 6 months. At
February 28, 1999 the Company had $15.3 million outstanding under its senior
credit facility. Based on this balance, an immediate change of one percent in
the interest rate would cause a change in interest expense of approximately
$153,000, or $.01 per diluted share, on an annual basis. The Company's objective
in maintaining these variable rate borrowings is the flexibility obtained
regarding lower overall cost as compared with fixed-rate borrowings.

                                      -18-

<PAGE>   19



ITEM 8.                 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                       OF ACR GROUP, INC. AND SUBSIDIARIES

<TABLE>
<CAPTION>

                                                                               Page
                                                                               ----
<S>                                                                            <C>
Report of Independent Auditors                                                  20


Consolidated balance sheets as of February 28, 1999 and 1998                    21


Consolidated statements of operations for the fiscal years
ended February 28, 1999, 1998 and 1997                                          23


Consolidated statements of shareholders' equity for the
fiscal years ended February 28, 1999, 1998 and 1997                             24


Consolidated statements of cash flows for the fiscal years
ended February 28, 1999, 1998 and 1997                                          25


Notes to Consolidated Financial Statements                                      27
</TABLE>




                                      -19-

<PAGE>   20



                         REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Shareholders
ACR Group, Inc.


         We have audited the accompanying consolidated balance sheets of ACR
Group, Inc. and subsidiaries as of February 28, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended February 28, 1999. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

         We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ACR
Group, Inc. and subsidiaries at February 28, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended February 28, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.



                                     ERNST & YOUNG LLP


Houston, Texas
April 23, 1999



                                      -20-

<PAGE>   21

                       ACR GROUP, INC. AND SUBSIDIARIES
                         CONSOLIDATED BALANCE SHEETS

                       As of February 28, 1999 and 1998

                                    ASSETS

<TABLE>
<CAPTION>

                                                  1999          1998
                                              -----------   -----------
<S>                                           <C>           <C>
Current assets:

Cash                                          $   129,581   $    90,000

Accounts receivable, net of allowance
   for doubtful accounts of $684,487 in
   1999 and $762,709 in 1998                   14,205,827    11,888,542

Inventory                                      18,449,176    16,962,351
Prepaid expenses and other                        437,860       611,873

Deferred income taxes                             487,000       487,000
                                              -----------   -----------
        Total current assets                   33,709,444    30,039,766
                                              -----------   -----------
Property and equipment, net of
   accumulated depreciation                     3,695,862     3,713,827

Deferred income taxes                             973,000       973,000

Goodwill, net of accumulated amortization
   of $476,583 in 1999 and $297,836 in 1998     6,239,953     5,962,700

Other assets                                      484,370       418,528
                                              -----------   -----------
        Total assets                          $45,102,629   $41,107,821
                                              ===========   ===========
</TABLE>



                                      -21-
<PAGE>   22

                        ACR GROUP, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                        As of February 28, 1999 and 1998

                      LIABILITIES AND SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>

                                                         1999            1998
                                                    ------------    ------------
Current liabilities:

<S>                                                 <C>             <C>
   Current maturities of long-term debt             $  1,314,039    $  1,087,620

   Current maturities of capital lease
     obligations                                         236,179         249,445

   Accounts payable                                   14,955,698      14,009,495

   Accrued expenses and other liabilities              1,589,688       1,146,211
                                                    ------------    ------------
        Total current liabilities                     18,095,604      16,492,771
                                                    ------------    ------------
Long-term debt                                        17,394,032      16,282,153

Long-term capital lease obligations                      221,743         372,477
                                                    ------------    ------------
        Total liabilities                             35,711,379      33,147,401
                                                    ------------    ------------
Shareholders' equity:
   Preferred stock, $.01 par, authorized
     2,000,000 shares, none outstanding
   Common stock, $.01 par, authorized
     25,000,000 shares, issued and
     outstanding 10,659,303 shares in 1999
     and 10,634,017 shares in 1998                       106,593         106,340

   Additional paid-in capital                         41,684,697      41,669,200

   Accumulated deficit                               (32,400,040)    (33,815,120)
                                                    ------------    ------------
       Total shareholders' equity                      9,391,250       7,960,420
                                                    ------------    ------------
       Total liabilities and shareholders' equity   $ 45,102,629    $ 41,107,821
                                                    ============    ============
</TABLE>



                   The accompanying notes are an integral part
                          of these financial statements


                                      -22-

<PAGE>   23

                        ACR GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

           For the Fiscal Years Ended February 28, 1999, 1998 and 1997

<TABLE>
<CAPTION>

                                                   1999             1998             1997
                                               -------------    -------------    -------------
<S>                                            <C>              <C>              <C>
Sales                                          $ 117,886,777    $  96,164,148    $  78,371,020

Cost of sales                                     93,115,088       76,606,033       63,285,694
                                               -------------    -------------    -------------
Gross profit                                      24,771,689       19,558,115       15,085,326

Selling, general and administrative expenses     (21,494,841)     (17,819,076)     (13,859,797)

Commission income                                       --            155,380          290,919

Energy services income, net                           39,783          169,577          142,226
                                               -------------    -------------    -------------
Operating income                                   3,316,631        2,063,996        1,658,674

Interest expense                                  (2,036,484)      (1,686,830)        (925,409)

Other non-operating income                           288,178          193,319          153,238
                                               -------------    -------------    -------------
Income before income taxes                         1,568,325          570,485          886,503

Provision (benefit) for income taxes:
   Current                                           153,245           87,119          101,715
   Deferred                                             --           (420,000)        (360,000)
                                               -------------    -------------    -------------
Net income                                     $   1,415,080    $     903,366    $   1,144,788
                                               =============    =============    =============
Earnings per common share:

   basic                                       $         .13    $         .09    $         .11
                                               =============    =============    =============
   diluted                                     $         .12    $         .08    $         .10
                                               =============    =============    =============
</TABLE>




                   The accompanying notes are an integral part
                          of these financial statements


                                      -23-

<PAGE>   24

                        ACR GROUP, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

           For the Fiscal Years Ended February 28, 1999, 1998 and 1997


<TABLE>
<CAPTION>

                                            No. of Shares                     Additional      Accumulated
                                               Issued         Par Value     Paid-In Capital      Deficit           Total
                                             ----------       ---------     ---------------   ------------      ----------
<S>                                          <C>              <C>            <C>              <C>               <C>
Balance, February 29, 1996                   10,246,555       $102,466       $41,427,020      ($35,863,274)     $5,666,212

   Shares issued as compensation                125,000          1,250           123,750                           125,000

   Issuance of warrant                                                            70,000                            70,000

   Net income                                                                                    1,144,788       1,144,788
                                             ----------       --------       -----------      ------------      ----------
Balance, February 28, 1997                   10,371,555        103,716        41,620,770       (34,718,486)      7,006,000

   Exercise of options                          262,462          2,624            (1,570)                            1,054

   Issuance of warrant                                                            50,000                            50,000

   Net income                                                                                      903,366         903,366
                                             ----------       --------       -----------      ------------      ----------
Balance, February 28, 1998                   10,634,017        106,340        41,669,200       (33,815,120)      7,960,420

   Exercise of options                           25,000            250            13,500                            13,750

   Exercise of warrant                              286              3                (3)                                0

   Issuance of warrant                                                             2,000                             2,000

   Net income                                                                                    1,415,080       1,415,080
                                             ----------       --------       -----------      ------------      ----------
Balance, February 28, 1999                   10,659,303       $106,593       $41,684,697      ($32,400,040)     $9,391,250
                                             ==========       ========       ===========      ============      ==========
</TABLE>



                   The accompanying notes are an integral part
                          of these financial statements



                                      -24-

<PAGE>   25

                        ACR GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

           For the Fiscal Years Ended February 28, 1999, 1998 and 1997

<TABLE>
<CAPTION>

                                                         1999           1998           1997
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Operating activities:
   Net income                                         $ 1,415,080    $   903,366    $ 1,144,788
   Adjustments to reconcile net income
     to net cash used in operating activities:
       Depreciation                                       862,369        826,018        622,243
       Amortization                                       260,151        203,660         82,794
       Deferred income tax benefit                             --       (420,000)      (360,000)
       Stock issued as compensation                            --             --        125,000
       Issuance of warrants                                 2,000             --             --
       Provision for bad debts                            569,138        832,515        252,572
       Loss (gain) on sale of assets                          501           (455)          (798)
       Changes in operating assets and liabilities:
         Accounts receivables                          (2,793,371)    (1,931,772)    (1,772,188)
         Inventory                                     (1,275,954)      (913,528)    (3,673,165)
         Prepaid expenses and other assets                 30,673       (373,327)      (172,147)
         Accounts payable                                 877,713      2,163,174      1,521,117
         Accrued expenses and other liabilities           410,553        (20,937)       425,050
                                                      -----------    -----------    -----------
Net cash provided by (used in) operating activities       358,853      1,268,714     (1,804,734)
                                                      -----------    -----------    -----------

Investing activities:
   Acquisition of property and equipment                 (745,810)      (659,844)      (754,686)
   Acquisition of businesses, net of cash acquired       (383,847)    (4,314,882)      (895,651)
   Proceeds from disposition of assets                     77,424        270,683         42,951
                                                      -----------    -----------    -----------
Net cash used in investing activities                  (1,052,233)    (4,704,043)    (1,607,386)
                                                      -----------    -----------    -----------

Financing activities:
   Proceeds from longterm debt                          2,084,262      7,243,588      4,293,457
   Payments on longterm debt                           (1,365,051)    (4,132,012)      (816,800)
   Exercise of stock options                               13,750          1,054             --
                                                      -----------    -----------    -----------
Net cash provided by financing activities                 732,961      3,112,630      3,476,657
                                                      -----------    -----------    -----------
Net increase (decrease) in cash                            39,581       (322,699)        64,537

Cash at beginning of year                                  90,000        412,699        348,162
                                                      -----------    -----------    -----------
Cash at end of year                                   $   129,581    $    90,000    $   412,699
                                                      ===========    ===========    ===========
</TABLE>


                                   (continued)


                                      -25-

<PAGE>   26

                        ACR GROUP, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
           For the Fiscal Years Ended February 28, 1999, 1998 and 1997

<TABLE>
<CAPTION>

                                                  1999           1998           1997
                                                  ----           ----           ----
<S>                                           <C>            <C>            <C>
Schedule of noncash investing and financing
   activities:
   Acquisition of subsidiaries:
     Fair value of assets acquired            $   505,283    $ 5,740,545    $ 1,305,466
     Fair value of liabilities assumed           (111,283)    (4,099,618)       (66,932)
     Goodwill                                     456,000      3,389,970      1,241,426
     Notes payable to sellers                     328,253        762,903      1,166,662
   Purchase of property and equipment
     (net of cash):
     For notes payable                             63,540           --          250,000
     Under capital leases                          98,365        190,239        371,118
   Sale of assets for note receivable                --          201,136           --
Supplemental cash flow information:
   Interest paid                                2,043,789      1,499,458        917,373
   Federal income taxes paid                        5,900         21,300         22,000
</TABLE>


                   The accompanying notes are an integral part
                          of these financial statements


                                      -26-
<PAGE>   27



                        ACR GROUP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1  -     Description of Business and Summary of Significant Accounting Policies

Description of Business

         ACR Group, Inc.'s (the "Company") principal business is the wholesale
distribution of heating, ventilating, air conditioning and refrigeration
("HVACR") equipment, parts and supplies in the southeastern United States,
central and south Texas, Nevada, New Mexico, Colorado and southern California.

Principles of Consolidation

         The consolidated financial statements include the accounts of ACR
Group, Inc. and its subsidiaries, all of which are wholly-owned. All significant
intercompany accounts and transactions have been eliminated.

Use of Estimates

         The preparation of financial statements in conformity 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.

Revenue Recognition

         Revenues are recognized at the time merchandise is shipped or delivered
to the customer.

Energy Services

         Revenues from energy service contracts, which expired in 1996 and
continue on a month-to-month basis, are recognized when the related energy cost
savings are billed to the user. These revenues are insignificant to the sales of
the Company and are presented net of costs to provide such services.

Inventories

         Inventories are valued at the lower of cost or market using the average
cost method. Substantially all inventories represent finished goods held for
sale. The Company has an arrangement with an HVACR equipment manufacturer and a
field warehouse agent whereby HVACR equipment is

                                      -27-

<PAGE>   28
held for sale in bonded warehouses located at the premises of the Company's
operations in Georgia and Memphis, with payment due only when products are sold.
Such inventory is accounted for as consigned merchandise and is not recorded on
the Company's balance sheet. The cost of such inventory held in the bonded
warehouses was $6,182,556 at February 28, 1999 and $8,048,017 at February 28,
1998.

         The terms of the consignment agreement with the supplier further
provide that merchandise not sold within a specified period of time must be
purchased by the Company. The Company believes that substantially all consigned
merchandise will be sold in the ordinary course of business before any purchase
obligation is incurred.

Property and Equipment

         Property and equipment are stated at cost. Depreciation and
amortization are provided on the straight-line method over the following
estimated useful lives.

                  Buildings                          20-40 years
                  Leasehold improvements             Primary term of the lease
                  Furniture and fixtures             5-7 years
                  Vehicles                           3-6 years
                  Other equipment                    3-10 years

Goodwill

         Goodwill represents the excess cost of companies acquired over the fair
value of their tangible assets. Substantially all goodwill is being amortized on
a straight-line basis over 40 years. The carrying value of goodwill is reviewed
if the facts and circumstances suggest that it may be impaired. If this review
indicates that goodwill will not be recoverable, as determined based on the
undiscounted cash flows of the entity acquired over the remaining amortization
period, the Company's carrying value of the goodwill will be reduced by the
estimated shortfall of the discounted cash flows.

Income Taxes

         The Company and its subsidiaries file a consolidated federal income tax
return. The Company uses the liability method in accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.

                                      -28-

<PAGE>   29

Stock-Based Compensation

         The Company measures compensation cost for stock-based compensation
plans using the intrinsic value method of accounting prescribed in Accounting
Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to
Employees".

Supplier/Sources of Supply

         The Company currently purchases a majority of its HVACR equipment and
repair parts from two primary suppliers. The Company has not encountered any
significant difficulty to date in obtaining equipment and repair parts to
support its operations at current or expected near-term future levels. However,
any disruption in these supply sources could have an adverse effect upon the
Company's operations.

Recently Issued Accounting Standards

         In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. It was effective in the
first quarter of fiscal 1999 and its adoption had no impact on the Company's net
income or shareholders' equity.

         In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which establishes standards for
reporting information about a company's operating segments and related
disclosures about products and services, geographic areas of operations and
major customers. The Company adopted SFAS No. 131 effective March 1998.
Management operates the business of the Company as a single segment.
As a result, no additional disclosure is required.

         During 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for the Company's fiscal
year 2001. This statement requires companies to record derivative instruments on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of a derivative would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company has not historically used derivatives, and management
does not believe that the adoption of SFAS No. 133 will have a material effect
on earnings or the financial position of the Company.

         In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants ("AcSEC") issued Statement of
Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 establishes criteria for determining
which costs of developing or obtaining internal-use computer software should be
charged to expense and which should be capitalized. The Company will adopt SOP
98-1

                                      -29-

<PAGE>   30

prospectively effective March 1, 1999. In April 1998, the AcSEC issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities." SOP 98-5 establishes standards
for the reporting and disclosure of start-up costs, including organization
costs. The Company will adopt SOP 98-5 on March 1, 1999. The Company believes
that the adoption of these statements will not have a material effect on the
Company's consolidated financial position or results of operations.

2  -     Acquisitions

         On September 9, 1997, the Company, through a wholly-owned subsidiary,
acquired certain of the assets, and assumed certain of the liabilities, of
Contractors Heating and Supply Company ("CHS"). CHS was paid $4,626,315 cash at
closing, and received a promissory note ("Note") for $1,200,000. The liabilities
assumed by the Company's subsidiary included $1,200,000 owed by CHS to certain
of its shareholders, which was paid in full at closing by the Company's
subsidiary. The Note is to be repaid in three annual principal installments of
$400,000 each, plus accrued interest at the prime rate plus 1/2%, beginning
August 31, 1998, and is secured by a first lien on machinery and equipment
purchased from CHS that is used to fabricate sheet metal products. The Note is
subordinated to the Company's indebtedness to its senior secured lender (Note
4).

         In January 1999, the Company, through a wholly-owned subsidiary,
entered into a Purchase Agreement pursuant to which it acquired all of the
issued and outstanding capital stock of Beaumont A/C Supply, Inc. ("BACS"), a
Texas corporation for $850,000. As consideration for the acquisition, the
Company paid $521,747 cash and issued a promissory note for $328,253. The note
shall be due and payable in 12 quarterly installments of principal and interest
commencing March 31, 1999. The excess of the final purchase price over the
estimated fair value of the net assets acquired was $456,000, which was recorded
as goodwill. Pro forma results of operations relating to this acquisition are
not presented because the effects of the acquisition would not be material.

        The acquisitions described above were accounted for using the
purchase method of accounting, and the consolidated financial statements include
the operating results from the respective dates of acquisition. Unaudited pro
forma results of the Company's operations for the year ended February 28, 1998
as if the acquisition of CHS occurred as of the beginning of fiscal 1998, are as
follows:

<TABLE>
<CAPTION>

                                              1998
                                              ----
<S>                                     <C>
         Sales                          $105,633,688
         Net income                          993,846
         Earnings per common share:
           Basic                                0.10
           Diluted                              0.08
</TABLE>

         These pro forma results are presented for comparative purposes only and
include certain adjustments to give effect to interest expense on acquisition
debt, amortization of goodwill and additional depreciation expense as a result
of a step-up in the basis of fixed assets, together with related income tax
effects. They do not purport to be indicative of the results of operations which
actually would have resulted had the combination occurred on March 1, 1997 or of
future results of operations of the consolidated entities.


                                      -30-

<PAGE>   31



3  -     Property and Equipment

         Property and equipment consisted of the following at the end of
February:

<TABLE>
<CAPTION>

                                          1999           1998
                                      -----------    -----------
<S>                                   <C>            <C>
Land                                  $   224,593    $   279,495
Building and leasehold improvements     1,654,758      1,473,339
Furniture and fixtures                    202,525        149,821
Vehicles                                1,530,580      1,507,782
Other equipment                         3,197,891      2,712,360
Energy management equipment               223,111        260,887
                                      -----------    -----------
                                        7,033,458      6,383,684
Less accumulated depreciation          (3,337,596)    (2,669,857)
                                      -----------    -----------
Net property and equipment            $ 3,695,862    $ 3,713,827
                                      ===========    ===========
</TABLE>

         Capitalized lease assets of $1,171,694 and $1,183,086 together with
accumulated amortization of $627,811 and $575,624 are included in property and
equipment as of February 28, 1999 and 1998, respectively. Amortization expense
is included with depreciation expense.

4  -     Debt

         Debt is summarized as follows at the end of February:

<TABLE>
<CAPTION>

<S>                                          <C>             <C>
Revolving line of credit                     $ 14,579,715    $ 12,528,527
Notes payable  Catalyst Fund and affiliate      1,929,059       2,242,599
Notes payable to sellers of companies
   acquired (note 2)                            1,421,622       1,742,234
Real estate loan                                  323,820         350,400
Equipment term loan                               346,851         387,190
Other                                             107,004         118,823
                                             ------------    ------------
                                               18,708,071      17,369,773

Less current maturities                        (1,314,039)     (1,087,620)
                                             ------------    ------------
Longterm debt, less current maturities       $ 17,394,032    $ 16,282,153
                                             ============    ============
</TABLE>

                                      -31-


<PAGE>   32

         The Company has a revolving line of credit arrangement with a
commercial bank ("Bank") pursuant to which the Company may borrow up to $18
million, including up to $1 million for letters of credit. Borrowings under the
facility bear interest, at the Company's option, at either the Bank's prime rate
plus 1/2% or LIBOR plus 3.00%, payable monthly. At February 28, 1999, the
Company had elected the LIBOR interest option (7.97%) for $14 million of
borrowings under the facility, with the balance at the prime rate option
(8.25%). Borrowings are limited to 85% of eligible accounts receivable and 50%
of eligible inventory amounts. As of February 28, 1999, the Company's available
credit under the facility was $1,798,757. Restrictive covenants of the loan
agreement prohibit the Company from paying dividends, prepaying any subordinated
indebtedness or incurring certain other debt without the Bank's consent, and
also require the Company to maintain certain financial ratios. The revolving
credit facility matures August 31, 2000. A schedule of declining prepayment
penalties applies in the event of payment prior to maturity.

         In January 1998, the Company obtained loans aggregating $1.54 million
from The Catalyst Fund, Ltd. ("Catalyst") and an affiliate of Catalyst to pay
certain outstanding indebtedness to St. James Capital Partners, L.P. ("St.
James") , and also borrowed $450,000 from Catalyst for an acquisition. The
Company previously borrowed $1 million from Catalyst in 1993. Such borrowings
all bear interest at 12 1/2% per annum, payable monthly, and have varying
principal repayment schedules. The aggregate outstanding principal at February
28, 1999 is to be repaid in monthly installments of $30,000 from March through
August 1999, $48,750 from September 1999 through August 2001, and $30,000 from
September 2001 through January 2003. The Catalyst loans are all secured by the
stock and operating assets of certain of the Company's subsidiaries and an
assignment of proceeds from life insurance policies on the Company's President.
Catalyst has subordinated its security interests to the Bank. In connection with
the January 1998 loans, the Company granted Catalyst a warrant to purchase
175,000 shares of the Company's common stock at a price of $2.06 per share,
exercisable at any time before February 28, 2003. The proceeds of the January
1998 loans were allocated between the debt and the warrant, resulting in a debt
discount of $50,000, which is being amortized to expense over the term of the
loan. In connection with the 1993 loan, the Company granted Catalyst a warrant
to purchase 1,000,000 shares of the Company's common stock at a price of $0.59
per share and, in connection with the amendment to the repayment schedule of the
1993 loan during fiscal 1998, the expiration date of the warrant was extended
until February 28, 2003 (see Note 7). Covenants of the Company's loan agreement
with Catalyst, which covers all of the Catalyst loans, prohibit dividends and
restrict additional borrowings without Catalyst's consent, and also require the
Company to maintain specified financial ratios.

         The notes payable to sellers include debt incurred in connection with
five acquisitions from fiscal 1996 to fiscal 1999 and are payable in
installments over terms of two to four years. Such notes bear interest at rates
from prime plus 1/2% (8.25% at February 28, 1999) to 10%. Certain seller notes
are secured by a first lien on certain production machinery and real property.
All of the notes payable to sellers are subordinated to the Company's
indebtedness to the Bank.

                                      -32-

<PAGE>   33

         The Company also has mortgage indebtedness to the Bank, which is
secured by a deed of trust on both the land and building occupied by a branch
facility in the Houston area. The note is being repaid in equal monthly
principal installments of $2,400, plus interest at the prime rate plus 1%, with
the unpaid principal balance due at maturity on April 30, 2000. The Company also
has a term loan facility with the Bank under which the Company may borrow up to
$500,000 for capital expenditures. Borrowings under the facility bear interest
at the prime rate plus 1/2%. Principal is being repaid at $7,883 monthly, with
the unpaid principal balance payable in full in 2002.

         Based upon the borrowing rates currently available to the Company for
debt instruments with similar terms and average maturities, the carrying value
of long-term debt approximates fair value.

         Future maturities of debt are $1,314,039 in 2000, $16,177,505 in 2001,
$773,771 in 2002 and $442,756 in 2003.

5  -     Lease Commitments

         The Company leases warehouse and office equipment and vehicles under
capital leases. Future minimum lease payments under capital leases are as
follows:

<TABLE>
<CAPTION>

                                                             Capital lease
        Year ending February 28 or 29,                         payments
        ------------------------------                         --------
<S>                                                           <C>
                    2000                                      $ 259,104
                    2001                                        161,833
                    2002                                         42,030
                    2003                                         18,120
                    2004                                          6,800
                                                              ---------
       Total minimum lease payments                             487,887
       Less amounts representing interest                       (29,965)
                                                              ---------
       Present value of future minimum lease payments           457,922
       Less current maturities of capital lease obligations    (236,179)
                                                              ---------
       Longterm obligations under capital leases              $ 221,743
                                                              =========
</TABLE>



                                      -33-

<PAGE>   34

         Additionally, the Company leases its corporate offices, office and
warehouse space occupied by its HVACR operations, and various office equipment
and vehicles under non-cancelable operating lease agreements that expire at
various dates through 2008. The leases for its branch facilities often require
that the Company pay the taxes, insurance and maintenance expenses related to
the leased properties. Certain of the Company's lease agreements include renewal
and/or purchase options. Future minimum lease payments under such leases are:
$2,646,951 in 2000, $2,343,517 in 2001, $1,657,997 in 2002, $1,190,697 in 2003,
$791,966 in 2004 and $1,432,371 after 2004.

         Rental expenses were $2,414,026, $1,800,350 and $1,292,999 in 1999,
1998 and 1997, respectively.

6  -     Income Taxes

         The Company recognizes a tax benefit from a net operating loss
carryforward if it is more likely than not that such benefit will ultimately be
realized. Such a tax benefit is recorded on the balance sheet as a deferred tax
asset. To the extent that it cannot be determined that such tax benefit will
more likely than not be realized, a valuation allowance is established against
the deferred tax asset. The deferred tax asset is classified as current to the
extent that a tax benefit is expected to be realized in the next fiscal period.

         The Company has not recorded a provision for income taxes other than
alternative minimum taxes and state income taxes for fiscal years 1997 through
1999 because of previously incurred net operating losses for which a tax benefit
had not previously been recorded. Additionally, the Company determined in both
fiscal 1998 and 1997 that further reductions in its deferred tax asset valuation
allowance were appropriate given expectations of higher future taxable income
from recently acquired businesses and, as a result, recorded additional tax
benefits of $420,000 and $360,000 in fiscal 1998 and 1997, respectively. The
difference between the income tax provision computed at the statutory federal
income tax rate and the financial statement provision for taxes is summarized
below:



                                      -34-

<PAGE>   35
\
<TABLE>
<CAPTION>

                                               Year Ended February 28,
                                        -----------------------------------
                                          1999         1998         1997
                                        ---------    ---------    ---------
<S>                                     <C>          <C>          <C>
Tax at statutory rate                   $ 533,231    $ 193,965    $ 301,411
Increase (reduction) in tax expense
   resulting from:
   Change in valuation allowance         (588,631)    (650,299)    (668,578)
   Nondeductible expenses                  61,288       57,868       48,725
   Other                                  147,357       65,585       60,157
                                        ---------    ---------    ---------
Actual income tax provision (benefit)   $ 153,245    $(332,881)   $(258,285)
                                        =========    =========    =========
</TABLE>

         As of February 28, 1999 and 1998, the Company had net operating loss
carryforwards of $31.5 million and $32.8 million, respectively, which are
available to offset future taxable income, substantially all of such
carryforwards will expire from 2000 to 2003. In addition, as of February 28,
1999 and February 28, 1998, the Company has investment and research and
development tax credit carryforwards of approximately $0.8 million and $1.1
million, respectively which expire in fiscal 2000. For financial reporting
purposes, the Company has recognized a valuation allowance of $10.6 million and
$11.2 million as of February 28, 1999 and February 28, 1998, respectively, to
offset the deferred tax assets related primarily to the loss carryforward and
the credit carryforwards. The decrease in the valuation allowance for fiscal
1997, 1998 and 1999 was principally due to the recognition of net operating loss
carryforwards which had previously not been recognized. There are no other
significant components of the Company's deferred tax assets and liabilities as
of February 28, 1999.

7  -     Stock Option Agreements and Equity Transactions

         Pursuant to an employment contract that expired February 28, 1998, the
President of the Company was granted 125,000 shares of the Company's common
stock ("Stock"), valued at $125,000, during fiscal 1997. In addition, he
received options to purchase 125,000 shares of Stock which are presently
exercisable at prices from $0.76 to $2.81 per share and expire from May 1999 to
June 2002. During fiscal 1998, the President exercised options for 8,437 shares
at $.13 per share and 325,000 shares at $0.49 per share in a cashless exercise
that resulted in the issuance of 254,025 shares of Stock. Effective March 1,
1998, both the President and the Chief Financial Officer of the Company

                                      -35-

<PAGE>   36

entered into employment contracts that expire February 28, 2002, and in
connection therewith, were granted options to purchase 300,000 and 100,000
shares of Stock, respectively, at $2.24 per share. Such options will vest on
March 1, 2006. The option agreements further provide for accelerated vesting if
the market price of Stock, as defined in the agreements, reaches specified
levels prior to the stated vesting date.

         In connection with its financing provided to the Company, St. James
Capital Partners, L.P. ("St. James") received a warrant to acquire 280,000
shares of the Company's common stock at an exercise price of $1.625 per share,
exercisable at any time before January 2002. 1,325 shares were purchased in a
cashless exercise in May 1998, which resulted in the issuance of 286 shares of
Stock. In connection with its loan to the Company, the Catalyst Fund, Ltd.
("Catalyst") received a warrant to purchase 1,000,000 shares of the Company's
common stock at a price of $.59 per share, exercisable at any time before
February 2003. See Note 4. During 1997, Catalyst sold 250,000 of such warrants
to St. James. In connection with a January 1998 loan to the Company (see Note 4)
Catalyst and an affiliate received warrants to purchase an aggregate of 175,000
shares of the Company's common stock at a price of $2.06 per share, exercisable
at any time before February 2003. Certain of these warrants outstanding,
pursuant to which 1,175,000 shares of common stock may be acquired, contain a
put option under certain limited circumstances. The features enabling the holder
to exercise the put option are either within management's control or, at the
Company's option, provide for a net cash or net share (non-redeemable preferred
shares with a defined coupon rate) settlement.

         During fiscal 1999, the Company engaged Magnum Financial Group, L.L.C.
("Magnum") to promote interest in the Company's equity securities. In connection
with these activities, Magnum received warrants to acquire 75,000 shares of the
Company's common stock with exercise prices for 25,000 shares each at $2.50,
$3.00 and $3.50 per share. The warrants are immediately vested and can be
exercised at any time before December 2001. The weighted average fair value of
the warrants at the date of grant was approximately $.19 per share and is being
recognized as compensation expense over the service period.

         In fiscal 1997, the Company established the 1996 Stock Option Plan for
key employees and directors of the Company and its subsidiaries. The plan
provides for granting up to 500,000 non-qualified and/or incentive stock
options. 134,500 options were granted in fiscal 1998 (none in fiscal year 1997
or 1999) of which 19,500 expired in fiscal 1999, and 385,000 shares of common
stock were available for future grants at February 28, 1999. Options granted
under the plan are immediately vested. In March 1999, the Company granted
141,500 options at an exercise price of $1.50 per share.

                                      -36-

<PAGE>   37



         A summary of the Company's stock option activity and related
information follows:

<TABLE>
<CAPTION>
                                                              Year Ended February 28,
                                    --------------------------------------------------------------------------
                                            1999                       1998                      1997
                                    ---------------------   ------------------------      --------------------
                                                 Weighted                  Weighted                  Weighted
                                                  Average                   Average                   Average
                                                 Exercise                  Exercise                  Exercise
                                    Options       Price        Options      Price         Options     Price
                                    -------    ----------   ----------    ----------      -------   ----------
<S>                                 <C>        <C>             <C>        <C>             <C>       <C>
Outstanding  beginning of year      299,500    $     1.96      423,437    $     0.53      423,437   $     0.53
     Granted                        410,000          2.24      209,500          2.51         --           --
     Exercised                      (25,000)         0.55     (333,437)         0.48         --           --
     Forfeited                      (29,500)         2.29         --            --           --           --
                                   --------                 ----------                    -------
Outstanding  end of year            655,000          2.18      299,500          1.96      423,437         0.53
Exercisable  end of year            201,667          1.96      200,000          1.69      423,437         0.53
Weighted average fair value of
   options granted during year     $   1.58                 $     1.38                       --
</TABLE>



65,000 and 190,000 options outstanding at February 28, 1999 have a weighted
average exercise price of $.75 and $2.53 per share with ranges from $.70 to $.77
and $1.88 to $2.81 per share. These options have a weighted average contractual
life remaining of less than one year and 3.5 years. 400,000 options outstanding
at February 28, 1999 have a weighted average exercise price of $2.24 per share
and a weighted average contractual life remaining of 6.9 years.



                                      -37-

<PAGE>   38



         Pro forma information has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model. For options granted during fiscal 1999 and
1998, the following assumptions were used:

         -       Expected life of 5 to 8 years
         -       No expected dividend yield
         -       Expected volatility of .649 in fiscal 1999 and .622 in
                 fiscal 1998
         -       Risk-free interest rate of 5.0%

         The Company's pro forma information follows:

<TABLE>
<CAPTION>

                                                 Year Ended February 28,
                                       -------------------------------------------
                                         1999           1998             1997
                                       -----------    -----------    -------------
<S>                                    <C>            <C>            <C>
Net income under APB 25                $ 1,415,080    $   903,366    $   1,144,788
Effect of FASB 123                        (130,836)      (164,879)            --
                                       -----------    -----------    -------------
Pro forma net income                     1,284,244        738,487        1,144,788
Pro forma basic earnings per share     $      0.12    $      0.07    $        0.11
Pro forma diluted earnings per share   $      0.11    $      0.06    $        0.10
</TABLE>



         The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, these models require the input of
highly subjective assumptions including the expected stock price volatility.
Because of these inherent assumptions, the existing models do not necessarily
provide a reliable single measure of the fair value of the Company's employee
stock options. As a result of the above factors, possible future grants and the
vesting provisions of the Company's stock options, the pro forma results would
not necessarily be representative of the effects on reported net income for
future years.



                                      -38-

<PAGE>   39



8  -  Profit Sharing Plan

         The Company has a qualified profit sharing plan ("Plan") under Section
401(k) of the Internal Revenue Code. The Plan is open to all eligible employees.
The Company matches 50% of the participant's contributions, not to exceed 3% of
each participant's compensation. Company contributions to the Plan were
$171,786, $138,416 and $111,609 for fiscal 1999, 1998 and 1997, respectively.

9  -  Earnings per Share

         The following table sets forth the computation of basic and diluted
earnings per share:

<TABLE>
<CAPTION>

                                                    Year Ended February 28,
                                             ---------------------------------------
                                                 1999          1998          1997
                                             -----------   -----------   -----------
<S>                                          <C>           <C>           <C>
Numerator:
Net income                                   $ 1,415,080   $   903,366   $ 1,144,788
Numerator for basic and diluted earnings
   per share income available to common
   stockholders                              $ 1,415,080   $   903,366   $ 1,144,788
                                             ===========   ===========   ===========

Denominator:
Denominator for basic earnings per share
   weighted average shares                    10,637,123    10,376,886    10,309,055


Effect of dilutive securities:
   Employee stock options                         49,245       268,842       211,674
   Warrants                                      665,431       912,280       434,809
   Convertible debt                                    -       452,483             -
                                             -----------   -----------   -----------
Dilutive potential common shares                 714,676     1,633,605       646,483
                                             -----------   -----------   -----------
Denominator for diluted earnings per share
   adjusted weighted average shares and
   assumed conversions                        11,351,799    12,010,491    10,955,538
                                             ===========   ===========   ===========
Basic earnings per share                     $       .13   $       .09   $       .11
                                             ===========   ===========   ===========
Dilutive earnings per share                  $       .12   $       .08   $       .10
                                             ===========   ===========   ===========
</TABLE>





                                      -39-

<PAGE>   40

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

         None



                                    PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Incorporated by reference.


ITEM 11. EXECUTIVE COMPENSATION.

         Incorporated by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         Incorporated by reference.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         Incorporated by reference.





                                      -40-

<PAGE>   41



                                     PART IV



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


(a)(1)   Financial Statements included in Item 8.

                  See Index to Financial Statements of ACR Group, Inc. set
         forth in Item 8, Financial Statements and Supplementary Data.


(a)(2)   Index to Financial Statement Schedules included in Item 14.

                  The following financial statement schedule for the years
         ended February 28, 1999, 1998 and 1997 is included in this report:

         Schedule II - Valuation and Qualifying Accounts

                  All other schedules are omitted because they are not
         applicable or the required information is included in the financial
         statements or notes thereto.


(a)(3)   Exhibits

         The following exhibits are filed with or incorporated by reference into
this report. The exhibits which are denoted by an asterisk (*) were previously
filed as a part of, and are hereby incorporated by reference from, either (a)
Annual Report on Form 10-K for fiscal year ended June 30, 1991 (referred to as
"1991 10-K"), or (b) Annual Report on Form 10-K for fiscal year ended February
28, 1993 (referred to as "1993 10-K"), or (c) Form S-8 Registration Statement
under the 1933 Act for Registrant, Registration No. 333-16325 filed November 18,
1996 (referred to as "RS 333-16325"), or (d) Current Report on Form 8-K dated
January 24, 1997, or (e) Annual Report on Form 10-K for fiscal year ended
February 28, 1997 (referred to as "1997 10-K"), or (f) Form 10-Q for quarter
ended August 31, 1997 (referred to as "August 31, 1997 10-Q"), or (g) Annual
Report on Form 10-K for fiscal year ended February 28, 1998 (referred to as
"1998 10-K").


                                      -41-

<PAGE>   42


<TABLE>
<CAPTION>

Exhibit Number     Description
--------------     -----------
<S>               <C>
      * 3.1        Restated Articles of Incorporation (Exhibit 3.1 to 1991 10-K)

      * 3.2        Articles of Amendment to Articles of Incorporation (Exhibit 3.2 to 1993 10-K)

      * 3.3        Amended and Restated Bylaws (Exhibit 3.2 to 1991 10-K)

      * 3.4        Amendment to Bylaws dated December 8, 1992 (Exhibit 3.4 to 1993 10-K)

      * 4.1        Specimen of Common Stock Certificate of ACR Group, Inc. (Exhibit 4.1 to 1993
                   10-K)

      *10.1        Employment Agreement between the Company and Alex Trevino, Jr. dated as of
                   March 1, 1998 (Exhibit 10.1 to 1998 10-K)

      *10.2        Stock Option Agreement between the Company and Alex Trevino, Jr. dated as of
                   March 1, 1998 (Exhibit 10.2 to 1998 10-K)

      *10.3        Employment Agreement between the Company and Anthony R. Maresca dated as of
                   March 1, 1998 (Exhibit 10.3 to 1998 10-K)

      *10.4        Stock Option Agreement between the Company and Anthony R. Maresca dated as of
                   March 1, 1998 (Exhibit 10.4 to 1998 10-K)

      *10.5        Registration Rights Agreement by and between the Company,  Alex Trevino, Jr.
                   and Anthony R. Maresca (Exhibit 10.5 to 1998 10-K)

      *10.6        Note Agreement between The Catalyst Fund, Ltd., as Lender, and the Company,
                   ACR Supply, Inc., Fabricated Systems, Inc. and Heating and Cooling Supply,
                   Inc., as Borrowers, dated as of May 27, 1993 (Exhibit 10.18 to 1993 10-K)
</TABLE>


                                      -42-

<PAGE>   43

<TABLE>

<S>               <C>
      *10.7        First Amendment to Note Agreement by and among The Catalyst Fund, Ltd., the
                   Company, ACR Supply, Inc., Total Supply, Inc. f/k/a Fabricated Systems, Inc.,
                   Heating and Cooling Supply, Inc. and West Coast HVAC Supply,  Inc., dated as of
                   April 14, 1997 (Exhibit 10.7 to 1998 10-K)

      *10.8        Second Amendment and Restated Note Agreement by and between the Company, all
                   subsidiaries of the Company, The Catalyst Fund, Ltd., and Southwest/Catalyst Capital,
                   Ltd., dated as of January 28, 1998 (Exhibit 10.8 to 1998 10-K)

      *10.9        Warrant for the Purchase of 750,000 Shares of Common Stock of the Company
                   issued to The Catalyst Fund, Ltd. dated January 28, 1998 (Exhibit 10.9 to 1998
                   10-K)

      *10.10       Warrant for the Purchase of 50,000 Shares of Common Stock of the Company
                   issued to The Catalyst Fund, Ltd. dated January 28, 1998 (Exhibit  10.10 to
                   1998 10-K)

      *10.11       Warrant for the Purchase of 125,000 Shares of Common Stock of the Company
                   issued to Southwest/Catalyst Capital, Ltd. dated January 28, 1998 (Exhibit
                   10.11 to 1998 10-K)

      *10.12       Registration Rights Agreement between The Catalyst Fund, Ltd.and the Company
                   dated as of January 28, 1998 (Exhibit 10.12 to 1998 10-K)

      *10.13       Registration Rights Agreement between Southwest/Catalyst Capital, Ltd. and the
                   Company dated as of January 28, 1998 (Exhibit 10.13 to 1998 10-K)

      *10.14       Loan and Security Agreement between the Company and NationsBank of Texas, N.A.
                   dated as of August 27, 1997 (Exhibit 10.1 to August 31, 1997 10-Q)

      *10.15       First Amendment to Loan and Security Agreement by and between the Company and
                   NationsBank of Texas, N.A. dated as of  September 9, 1997 (Exhibit  10.2 to
                   August 31, 1997 10-Q)
</TABLE>

                                      -43-

<PAGE>   44

<TABLE>

<S>               <C>

      *10.16       Purchase Agreement by and among the Company, Richard O'Leary, Lifetime Filter,
                   Inc. and O'Leary Family Partnership, Ltd. (Exhibit  2.1 to Form 8-K dated
                   January 24, 1997)

      *10.17       1996 Stock Option Plan of ACR Group, Inc. (Exhibit 4 to RS 333-16325)

      *10.18       Agreement of Purchase and Sale by and between the Company and St. James
                   Capital Partners, L.P. dated as of January 24, 1997 (Exhibit  10.15 to 1997
                   10-K)

      *10.19       10% Convertible Promissory Note of the Company issued to St. James Capital
                   Partners, L.P. dated as of January 24, 1997 (Exhibit 10.16 to 1997 10-K)

      *10.20       Warrant to Purchase 280,000 Shares of Common Stock of the Company issued to
                   St. James Capital Partners,  L.P. dated January 24, 1997 (Exhibit 10.17 to 1997
                   10-K)

      *10.21       Registration Rights Agreement between St. James Capital Partners,  L.P. and the
                   Company dated as of January 24, 1997 (Exhibit 10.18 to 1997 10-K)

       21.1        Subsidiaries of the Company

       23.1        Consent of Independent Auditors

       27.1        Financial Data Schedule
</TABLE>

(b)      Reports on Form 8-K

                  No report on Form 8-K was filed during the period from
December 1, 1998 to February 28, 1999.

(c)      Exhibits
                  See Item 14(a)(3), above.

(d)      Financial Statement Schedule


                                      -44-

<PAGE>   45

                                                                     SCHEDULE II


                        ACR GROUP, INC. AND SUBSIDIARIES
                        VALUATION AND QUALIFYING ACCOUNTS

           For the Fiscal Years Ended February 28, 1999, 1998 and 1997

<TABLE>
<CAPTION>

                                                                        Additions
                                                               --------------------------
                                              Balance at       Charged to      Charged to                        Balance at
                                              beginning        costs and          other                            end of
              Description                     of period         expenses        accounts        Deductions         period
              -----------                     ---------        ---------        ---------       ----------         ------
<S>                                           <C>              <C>              <C>           <C>                <C>
Year ended February 28, 1999:

   Allowance for doubtful accounts:
     Accounts receivable                      $762,709         $569,138           $9,931 (2)    $657,291 (1)      $684,487

Year ended February 28, 1998:

   Allowance for doubtful accounts:
     Accounts receivable                       584,024          832,515          108,355 (2)     762,185 (1)       762,709

Year ended February 28, 1997:

   Allowance for doubtful accounts:
     Accounts receivable                       459,501          252,572           25,000 (2)     153,049 (1)       584,024
</TABLE>


(1) Accounts/notes and related allowance written off.
(2) Allowance related to accounts receivable of acquired companies.





                                      -45-

<PAGE>   46



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                        ACR GROUP, INC.


Date:  May 28, 1999                     By:   /s/ Anthony R. Maresca
                                              ---------------------------------
                                              Anthony R. Maresca
                                              Senior Vice President and
                                              Chief Financial Officer

         Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

Signature
<S>                                      <C>                                    <C>
/s/ Alex Trevino, Jr.                     Chairman of the Board,                  May 21, 1999
----------------------------              President and
Alex Trevino, Jr.                         Chief Executive Officer
                                          (Principal executive officer)


/s/ Anthony R. Maresca                    Senior Vice President,                  May 25, 1999
----------------------------              Chief Financial Officer
Anthony R. Maresca                        and Director
                                          (Principal financial and
                                          accounting officer)


/s/ Ronald T. Nixon                       Director                                May 20, 1999
----------------------------
Ronald T. Nixon



/s/ Roland H. St. Cyr                     Director                                May 20, 1999
----------------------------
Roland H.  St. Cyr


/s/ A. Stephen Trevino                    Director                                May 24, 1999
----------------------------
A.  Stephen Trevino
</TABLE>



                                      -46-

<PAGE>   47
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>

Exhibit Number     Description
--------------     -----------
<S>               <C>
      * 3.1        Restated Articles of Incorporation (Exhibit 3.1 to 1991 10-K)

      * 3.2        Articles of Amendment to Articles of Incorporation (Exhibit 3.2 to 1993 10-K)

      * 3.3        Amended and Restated Bylaws (Exhibit 3.2 to 1991 10-K)

      * 3.4        Amendment to Bylaws dated December 8, 1992 (Exhibit 3.4 to 1993 10-K)

      * 4.1        Specimen of Common Stock Certificate of ACR Group, Inc. (Exhibit 4.1 to 1993
                   10-K)

      *10.1        Employment Agreement between the Company and Alex Trevino, Jr. dated as of
                   March 1, 1998 (Exhibit 10.1 to 1998 10-K)

      *10.2        Stock Option Agreement between the Company and Alex Trevino, Jr. dated as of
                   March 1, 1998 (Exhibit 10.2 to 1998 10-K)

      *10.3        Employment Agreement between the Company and Anthony R. Maresca dated as of
                   March 1, 1998 (Exhibit 10.3 to 1998 10-K)

      *10.4        Stock Option Agreement between the Company and Anthony R. Maresca dated as of
                   March 1, 1998 (Exhibit 10.4 to 1998 10-K)

      *10.5        Registration Rights Agreement by and between the Company,  Alex Trevino, Jr.
                   and Anthony R. Maresca (Exhibit 10.5 to 1998 10-K)

      *10.6        Note Agreement between The Catalyst Fund, Ltd., as Lender, and the Company,
                   ACR Supply, Inc., Fabricated Systems, Inc. and Heating and Cooling Supply,
                   Inc., as Borrowers, dated as of May 27, 1993 (Exhibit 10.18 to 1993 10-K)
</TABLE>


<PAGE>   48

<TABLE>

<S>               <C>
      *10.7        First Amendment to Note Agreement by and among The Catalyst Fund, Ltd., the
                   Company, ACR Supply, Inc., Total Supply, Inc. f/k/a Fabricated Systems, Inc.,
                   Heating and Cooling Supply, Inc. and West Coast HVAC Supply,  Inc., dated as of
                   April 14, 1997 (Exhibit 10.7 to 1998 10-K)

      *10.8        Second Amendment and Restated Note Agreement by and between the Company, all
                   subsidiaries of the Company, The Catalyst Fund, Ltd., and Southwest/Catalyst Capital,
                   Ltd., dated as of January 28, 1998 (Exhibit 10.8 to 1998 10-K)

      *10.9        Warrant for the Purchase of 750,000 Shares of Common Stock of the Company
                   issued to The Catalyst Fund, Ltd. dated January 28, 1998 (Exhibit 10.9 to 1998
                   10-K)

      *10.10       Warrant for the Purchase of 50,000 Shares of Common Stock of the Company
                   issued to The Catalyst Fund, Ltd. dated January 28, 1998 (Exhibit  10.10 to
                   1998 10-K)

      *10.11       Warrant for the Purchase of 125,000 Shares of Common Stock of the Company
                   issued to Southwest/Catalyst Capital, Ltd. dated January 28, 1998 (Exhibit
                   10.11 to 1998 10-K)

      *10.12       Registration Rights Agreement between The Catalyst Fund, Ltd.and the Company
                   dated as of January 28, 1998 (Exhibit 10.12 to 1998 10-K)

      *10.13       Registration Rights Agreement between Southwest/Catalyst Capital, Ltd. and the
                   Company dated as of January 28, 1998 (Exhibit 10.13 to 1998 10-K)

      *10.14       Loan and Security Agreement between the Company and NationsBank of Texas, N.A.
                   dated as of August 27, 1997 (Exhibit 10.1 to August 31, 1997 10-Q)

      *10.15       First Amendment to Loan and Security Agreement by and between the Company and
                   NationsBank of Texas, N.A. dated as of  September 9, 1997 (Exhibit  10.2 to
                   August 31, 1997 10-Q)
</TABLE>



<PAGE>   49

<TABLE>

<S>               <C>

      *10.16       Purchase Agreement by and among the Company, Richard O'Leary, Lifetime Filter,
                   Inc. and O'Leary Family Partnership, Ltd. (Exhibit  2.1 to Form 8-K dated
                   January 24, 1997)

      *10.17       1996 Stock Option Plan of ACR Group, Inc. (Exhibit 4 to RS 333-16325)

      *10.18       Agreement of Purchase and Sale by and between the Company and St. James
                   Capital Partners, L.P. dated as of January 24, 1997 (Exhibit  10.15 to 1997
                   10-K)

      *10.19       10% Convertible Promissory Note of the Company issued to St. James Capital
                   Partners, L.P. dated as of January 24, 1997 (Exhibit 10.16 to 1997 10-K)

      *10.20       Warrant to Purchase 280,000 Shares of Common Stock of the Company issued to
                   St. James Capital Partners,  L.P. dated January 24, 1997 (Exhibit 10.17 to 1997
                   10-K)

      *10.21       Registration Rights Agreement between St. James Capital Partners,  L.P. and the
                   Company dated as of January 24, 1997 (Exhibit 10.18 to 1997 10-K)

       21.1        Subsidiaries of the Company

       23.1        Consent of Independent Auditors

       27.1        Financial Data Schedule
</TABLE>

(b)      Reports on Form 8-K

                  No report on Form 8-K was filed during the period from
         December 1, 1998 to February 28, 1999.

(c)      Exhibits

                  See Item 14(a)(3), above.

(d)      Financial Statement Schedule