<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                  For the Fiscal Year Ending September 30, 1998
                            Commission File No. 0-921

                         THE ARNOLD PALMER GOLF COMPANY
              ---------------------------------------------------- 
             (Exact name of registrant as specified in its charter)

        Tennessee                                        062-0331019            
--------------------------------------------------------------------------------
(State or other jurisdiction of                          (IRS Employer
incorporation or organization)                           Identification Number)

6201 Mountain View Road, Ooltewah, TN                             37363         
--------------------------------------------------------------------------------

Registrant's telephone number, (including area code)         (423) 238-5890     
                                                        ------------------------

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

Common Stock - par value       
     $.50 per share                                     None 
--------------------------------------------------------------------------------
    (Title of Class)                 (Name of Exchange on which Registered)

Securities registered pursuant to Section 12(g) of the Act:
                                        
                                      None
                                 --------------
                                (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.         
   X    Yes         No
-------     -------

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

         As of November 30, 1998, the aggregate market value of the voting stock
held by non-affiliates was approximately $849,102 (based on the closing price on
that date of $0.375 per share).

         As of November 30, 1998, 3,887,700 shares of Common Stock were
outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Specified portions of the Registrant's Proxy Statement for the Annual
Meeting of Shareholders to be held February 23, 1999, are incorporated by
reference into Part III of this Form 10-K. Other documents incorporated by
reference in this report are listed in the Exhibit Index.


<PAGE>   2


                                     PART I

Item 1.           Business

General
The Arnold Palmer Golf Company ("APGC" or the "Company") was incorporated in
Tennessee in 1932 and began operations as the Professional Golf Co., Inc. In
1966 it merged with First Flight Co. and in 1975 changed its name to ProGroup,
Inc. In July 1996, the Company changed its name to The Arnold Palmer Golf
Company. APGC manufactures, markets and distributes a full line of golf
products, including PALMER, NancyLopezGolf and First Flight golf equipment,
and HOTZ golf bags and luggage. APGC owns, subject to certain exceptions, the
exclusive worldwide right to the Arnold Palmer and Nancy Lopez trade names in
connection with the Company's manufacture, sale and distribution of golf
products. For purposes of this report, "fiscal 1998, 1997, and 1996" refer to
the fiscal years ended September 30, 1998, September 30, 1997 and March 2, 1996,
respectively. The "1996 transition period" refers to the seven-month period
ended September 30, 1996.

Principal Products
The Company manufactures and markets golf clubs, golf bags, golf accessories and
luggage.

Markets
The principal market for the products sold by the Company is the United States.
Foreign sales were negligible during fiscal 1998. Certain golf equipment is
manufactured and distributed on a contract basis to other wholesalers. Branded
golf products are sold to pro shops and retailers.

Methods of Distribution
The principal method of distribution of the Company's products is through
employee sales representatives and independent sales representatives. The
Company's products are sold through separate and distinct trade channels: golf
courses and resorts; golf shops not affiliated with golf courses; and major
retailers.

Sources of Supplies or Raw Materials
The Company's major sources of supplies or raw materials are as follows:

<TABLE>
<CAPTION>
          Source                                    Raw Material
          ------                                    ------------
<S>                                                 <C>
          Mortex International Ltd.                 Bag material/hardware
          SungLing Golf & Casting Co., LTD,         
            Dynamic Precision Casting Co., LTD.     Iron heads, Metal wood heads
          Aldila, Inc., True Temper Sports, Inc.    Shafts
</TABLE>

While the Company has not experienced significant delays in receiving supplies
or raw materials, it does recognize the fact that, in some cases, only a limited
number of suppliers are available.

Licenses, Patents, Etc.
As of March 1, 1992, the Company entered into an agreement (the "Palmer
Agreement") with Arnold Palmer Enterprises, Inc. ("Palmer Enterprises"),
pursuant to which the Company obtained a license to use the name, likeness and
endorsement of Arnold Palmer ("Palmer"), a director of the Company, in
connection with the advertisement, promotion and sale of golf clubs, bags,
balls, gloves and other products.



2
<PAGE>   3


The Palmer Agreement grants to the Company an exclusive worldwide right, subject
to certain exceptions, to use words or symbols, photographic representations,
images, likenesses or endorsements of Palmer in connection with the Company's
manufacture, sale and distribution of golf products. The Company also has the
right under the Palmer Agreement to sublicense to third parties the right to use
the licensed trademarks. The Palmer Agreement also gives the Company the right
to acquire the use of the Palmer identification in connection with the
manufacture, sale and distribution of certain other products upon the
termination of certain licensing arrangements with third party licensees. In
exchange for the grant of such license, the Company pays Palmer Enterprises as a
royalty a specified percentage of net sales ranging from 1% to 5% of each
different product category. The Company also pays a minimum annual royalty
regardless of the royalty amount determined as a percentage of product sales.
The Palmer Agreement also sets forth the manner in which the Company and Palmer
Enterprises divide sublicensing royalties. In addition to the foregoing, the
Palmer Agreement contains provisions relative to the appearances of Palmer to
promote the licensed products and product usage by Palmer.

The term of the License Agreement extends through March 1, 2007.

Effective January 1, 1998, the Company entered into a licensing agreement (the
"Lopez Agreement") with Nancy Lopez Enterprises, Inc., whereas the Company was
granted the exclusive world wide rights to use of the name, likeness,
endorsement and trademarks of Nancy Lopez ("Lopez") in connection with the
advertisement, promotion, and sale of licensed products. Licensed products
include golf clubs, bags, gloves, shoes, balls, apparel and other related golf
products. The Company was also granted the right to sublicense to third parties
the right to use of the Lopez Identification. In exchange for the rights granted
to the Company in the agreement, the Company will pay to Lopez Enterprises,
royalties equal to 3.25% of its net sales of licensed products in addition to
fixed royalties regardless of the amount of royalties payable as a percentage of
product sales. In addition to the foregoing, Lopez agrees to provide ancillary
marketing services to the Company at times and locations mutually convenient for
Lopez and the Company. Such ancillary services provided by Lopez will relate to
development and review of licensed products and production of print and
television advertising.

The term of the Lopez Agreement extends through December 31, 2007.

Seasonal Business
Golf equipment manufactured and marketed by the Company is largely for warm
weather recreation. The spring quarter of the Company's fiscal year is the start
of the golf season and typically the Company's sales are at their highest level
of the year. Sales for the summer quarter consist largely of reorders to fill in
customer service levels. The fall and winter quarters generate a lower level of
sales.

Working Capital Practices
It is necessary for the Company and the industry to begin purchasing raw
material inventory during the winter months to meet customer demands in the
spring and summer months.


3


<PAGE>   4

The Company and the industry provide extended payment terms to customers due to
the seasonal nature of the business in an effort to generate higher sales. Also,
the Company and the industry provide rights to return merchandise in certain
circumstances.

Customers
The Company's three largest customers, KMart Corporation, Wal-Mart Stores Inc.,
and Nevada Bob's Pro Shop, Inc., accounted for 12.5%, 4.7% and 4.0%,
respectively, of the Company's total sales during fiscal 1998.

Backlogs
With regard to continuing operations, the Company's backlog of unshipped orders
was approximately $653,000 on September 30, 1998, and approximately $2,391,000
on September 30, 1997.

Government Contracts
No material portion of the Company's business is subject to renegotiation of
profits on termination of contracts or subcontracts at the election of the
Government.

Competitive Conditions
The Company's principal methods of competition are through customer service,
pricing and the quality of the products sold. One negative factor pertaining to
the competitive position of the Company is that the number of suppliers for raw
materials such as shafts and club heads for making golf clubs is limited.
Another negative factor is the proliferation of competitive products available
resulting in keen price competition in the golf industry. Among the Company's
competitors are numerous companies that have substantially greater financial
resources, manufacturing capabilities, and larger design, sales and marketing
staffs than the Company.

Research
The Company spent approximately $550,000 on product research and development
during fiscal 1998. No material amount was spent by the Company during fiscal
1997, 1996 or the 1996 transition period on Company-sponsored research and
development activities. No material amount was spent in such years on
customer-sponsored research activities relating to the development of new
products, services or techniques or the improvement of existing products,
services or techniques.

Environmental Matters
Compliance with federal, state and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had, and is not expected
to have any material adverse effect upon the capital expenditures, earnings or
competitive position of the Company.

Employees
The Company employed 123 people as of September 30, 1998.

Operations and Sales to Foreign Countries
The Company markets its products on a limited basis in foreign countries. The
revenue derived from such foreign sales was less than 2% of net sales for fiscal
1998, 1997, 1996 and the 1996 transition period. Foreign sales are not expected
to be material during the fiscal year ending September 30, 1999.




4
<PAGE>   5



Item 2.   Properties

The Company owns or leases materially important properties as follows:

     (a)  6201 Mountain View Road, Ooltewah, Tennessee, is a leased building of
          cinder block and wood construction containing approximately 95,000
          square feet. During fiscal 1998 the property was used for
          manufacturing golf clubs and warehousing finished goods and raw
          materials. A portion of the property also houses the Company's
          corporate offices. Subsequent to September 30, 1998, the Company
          consolidated its golf club operations into its bag manufacturing
          facility in Pocahontas, Arkansas.

     (b)  Hotze Road, Pocahontas, Arkansas, is an owned facility consisting of a
          building of metal structure containing 72,000 square feet. This
          facility is used for manufacturing golf clubs and golf bags and
          warehousing raw materials.

     (c)  2100 West Fifth Street, Lumberton, North Carolina, is an owned
          facility consisting of a building of brick and frame structure
          containing 66,000 square feet. This facility, which had been idle, was
          sold October 5, 1998.

     (d)  1512 Sholar Avenue, Chattanooga, Tennessee, is a leased building of
          cinder block and concrete construction containing 47,400 square feet.
          This building was used for manufacturing golf clubs, warehousing and
          shipping until September 1997, at which time club operations were
          consolidated into the facility at 6201 Mountain View Road. The
          Company's lease obligation on this facility continues through December
          1998. The Company subleased a portion of the building during fiscal
          1998.

     (e)  300 Tanger Boulevard, Suite 405, Branson, Missouri, is a leased unit
          in a building of cinder block and concrete construction, said unit
          containing 2,900 square feet. This facility is used for retail sales.


Item 3.   Legal Proceedings

The Company is not a party to any material pending legal proceedings, other than
ordinary routine litigation incidental to the business, nor is any of its
property the subject of any such proceedings.


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

No matters were submitted during the fourth quarter of fiscal 1998 to a vote of
security holders through the solicitation of proxies or otherwise.



5
<PAGE>   6



                                     PART II


Item 5.           Market for the Company's Common Stock and Related Security 
                  Holder Matters.

MARKET PRICES
The Company's common shares traded on The Nasdaq Stock Market under the symbol
"APGC.", until February 23, 1998. The Nasdaq Stock Market notified the Company
that under its revised continued listing requirements, the Company would no
longer qualify for continued listing on the Nasdaq Stock Market as of February
23, 1998, at which time the Company's common shares began trading through the
OTC-Bulletin Board under the same symbol (APGC). Based upon transfer agent
records, the Company's common shares were held by approximately 1,600
shareholders as of November 30, 1998. As of September 30, 1998, the Company also
had 833,333 shares of Series NB Preferred Stock outstanding which was held by an
affiliate of the Company and not actively traded. On October 1, 1998, the
affiliate of the Company elected to convert 833,333 shares of NB Preferred Stock
to 833,333 shares of Common Stock in accordance with the terms of the Series NB
Preferred Stock.

A quarterly summary of the high and low market prices per common share for
fiscal 1998 and 1997 is shown below: 

<TABLE>
<CAPTION>
                                       Fiscal 1998           Fiscal 1997
                                     -------------------------------------
         Quarter                     High       Low         High       Low
         -------                     ----       ---         ----       ---
         <S>                      <C>       <C>          <C>       <C> 
          First                   $2.9375   $1.7500      $4.2500   $3.8750
          Second                   2.8750    1.5000       4.5000    4.2500
          Third                    3.0625    1.5000       3.7500    3.3750
          Fourth                   3.0000    0.5625       3.2500    2.9375
</TABLE>

DIVIDENDS
Payment of dividends is subject to certain conditions contained in the Company's
loan agreements and is at the discretion of the Company's Board of Directors and
depends, among other factors, on earnings, capital requirements for planned
growth and the operating and fiscal condition of the Company. No dividends were
paid during fiscal 1998, 1997, 1996 and the 1996 transition period.






6
<PAGE>   7

Item 6.           Selected Financial Data.


                             SELECTED FINANCIAL DATA

   FOR FISCAL 1998, 1997, 1996, 1995, AND 1994, AND THE 1996 TRANSITION PERIOD

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



<TABLE>
<CAPTION>
                                                                               FISCAL YEAR ENDED                        1996
                                                           --------------------------------------------------------   Transition
                                                             1998        1997        1996        1995       1994        Period
                                                           --------    --------    --------    --------   ---------    -------- 
<S>                                                        <C>         <C>         <C>         <C>         <C>         <C>     
STATEMENT OF OPERATIONS INFORMATION:
    Net sales                                              $ 21,893    $ 28,454    $ 21,185    $ 24,621    $ 24,726    $ 18,456
    Net loss from continuing operations                    $(15,223)   $(11,228)   $ (5,625)   $ (9,460)   $ (1,054)   $ (2,294)

BALANCE SHEET INFORMATION:
    Total assets                                           $ 20,478    $ 22,753    $ 18,560    $ 31,271    $ 40,258    $ 24,934
    Long-term obligations and redeemable preferred stock   $ 31,528    $ 31,264    $  4,671    $  7,473    $  3,621    $ 20,996

PER COMMON SHARE DATA:
    Net loss per share from continuing operations -
      basic and dilutive                                   $  (5.01)   $  (3.77)   $  (2.15)   $  (3.73)  $    (.42)   $   (.80)
    Common shares outstanding at end of period                3,054       3,004       2,635       2,539       2,537       2,927
</TABLE>

The Company changed its fiscal year end from one ending on the Saturday closest
to the end of February to one ending September 30, effective September 30, 1996.
Therefore, the 1996 transition period relates to the seven-month period ended
September 30, 1996. Selected financial data for fiscal 1998, 1997, 1996, 1995,
and 1994 relates to the years ended September 30, 1998 and 1997, March 2, 1996,
February 25, 1995 and February 26, 1994.

In May 1995, the Company sold its Duckster apparel line of business. The results
of discontinued operations have been reported separately from the results of
continuing operations.



7
<PAGE>   8

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

Results of Operations

The Company's revenues for the fiscal year ending September 30, 1998 were
approximately $21.9 million compared to $28.5 million for the fiscal year ended
September 30, 1997. The net loss for the fiscal year 1998 was approximately
$15.2 million, or $5.01 per share, compared to a net loss for fiscal 1997 of
approximately $11.2 million, or $3.77 per share.
 
In 1998, the Company, like other golf manufacturing companies, endured extremely
difficult market conditions that resulted in industry-wide declines in sales
and excessive manufacturing and retail inventories. These conditions, combined
with financial challenges in the Asian markets, largely reduced manufacturing
and retail margins industry-wide. In fiscal 1998 the Company continued to
experience difficulty in selling premium and higher retail priced men's golf
products, causing inventory buildup and a longer-term evaluation of the product
lines' proper marketplace positioning. At the same time, a similar excessive
inventory situation, a manufacturing price-cutting environment, and out-dated
product designs affected the Company's market for golf bags. The challenging
market conditions in fiscal 1998 coupled with the unplanned reduction in Company
sales arising from the difficulty experienced by the premium and higher retail
priced men's golf products and bag lines resulted in large inventory write-downs
and a higher frequency of low margin close-out sales. Also in fiscal 1998, the
Company invested substantially in the development and introduction of
NancyLopezGolf, a new brand offering of golf equipment, bags, gloves and
accessories for women golfers. With the shipment of this product occurring
essentially after the peak retail selling months, and facing the same
challenging market conditions, the brand achieved strong initial product
placement and assisted the Company in creating new distribution ventures,
largely with off-course stores.

Recognizing these marketplace and individual brand challenges as well as the
additional ongoing operational and financial difficulties of the Company, the
Company's Board of Directors embarked upon numerous strategic business
initiatives in an effort to positively restructure the Company for the future.
These actions, largely implemented in the last six months of fiscal year 1998,
included: a complete management restructuring; the consolidation of the
Company's Tennessee-based manufacturing facility to its Arkansas-based
manufacturing facility; a downsizing of corporate personnel; a thorough analysis
and establishment of a long term plan for each brand's marketing, sales and
distribution strategy; and the effectuation of a financial restructuring
including the sale of National Golf Suppliers, an asset unrelated to the
Company's core business, and the sale of Company's investment in Nevada Bob's
Series D preferred stock. The Company also undertook to restructure the
Company's existing debt obligations with its third party lender. The Company's
restructuring plan is expected to be completed early in calendar 1999.

Comparison of the Years Ended September 30, 1998 and September 30, 1997

Net sales for fiscal year 1998 decreased $6.6 million to $21.9 million, a 22.9%
decrease from fiscal year 1997 net sales of $28.5 million. The tables below
compare the Company's net sales by product line and market segment for the year
ending September 30, 1998 to the year ending September 30, 1997.

                              Sales By Product Line
                                ($'s in millions)

<TABLE>
<CAPTION>
                               1998                1997             % Change
                               ----                ----             --------
   <S>                         <C>                 <C>              <C>
   Club                        11.0                14.1               -22.0%
   Bags                         7.8                11.0               -29.0%
   Apparel                      0.2                 0.2                -0.9%
   Outlet                       0.8                 0.7                21.4%
   Components                   2.1                 2.5               -15.3%

   -------------------------------------------------------------------------
   Total                       21.9                28.5               -22.9%
   -------------------------------------------------------------------------
</TABLE>

                             Sales By Market Segment
                                ($'s in millions)
<TABLE>
<CAPTION>
                               1998                  1997            % Change
                               ----                  ----            --------
   <S>                         <C>                   <C>             <C>
   Pro                         12.0                  14.0             -14.1%
   Retail                       6.6                  10.1             -33.9%
   Outlet                       0.8                   0.7              21.4%
   Contract                     0.2                   0.8             -78.7%
   Components                   2.1                   2.5             -15.3%
   Export                       0.2                   0.4             -56.9%
  
   -------------------------------------------------------------------------
   Total                       21.9                  28.5             -22.9%
   -------------------------------------------------------------------------
</TABLE>


A $3.1 million decrease in club sales and a $3.2 million decrease in bag sales
accounted for essentially all the decrease in the Company's sales for year
ending September 30, 1998. Sales to pro accounts (on-course golf shops and
off-course golf equipment stores), decreased 14.1% for the year ending September
30, 1998 while retail sales (mass merchants), decreased 33.9%. The sales
decrease was mostly attributable to soft market conditions during the year
resulting in overstocked inventories in the retail market. Additionally, one of
the Company's major mass merchant accounts which accounted for approximately
$1.6 million of sales during fiscal year ending September 30, 1997, did not
purchase significant amounts of product from the Company during fiscal year
1998.

Gross profit for the fiscal year ending September 30, 1998 was 5.3% compared to
7.1% for the fiscal year ending September 30, 1997. Inventory write downs and
adjustments of approximately $1.8 million accounted for 8.2% margin loss, while
approximately 15.1% of the Company's fiscal 1998 sales were closeout sales
generating only 4.1% gross profit.

Total selling and marketing expenses remained essentially unchanged for the
fiscal year ending September 30, 1998 compared to the fiscal year ending
September 30, 1997. As a percent of net sales, selling and marketing expenses
were 34.1% and 26.3% for years ending September 30, 1998 and September 30, 1997.
Selling expenses were less variable in fiscal 1998 as the Company replaced its
sales force of independent representatives with employee representatives who are
compensated on a salary and commission pay structure. The employee
representatives are also reimbursed for travel and certain other expenses
incurred by the employees.

General and administrative expenses were $6.8 million for the fiscal year ending
September 30, 1998 and included $2.4 million related to the Company's management
changes and reorganization. Costs in this category included severance for
terminated executives, severance related to the closed 



8

<PAGE>   9



Ooltewah, Tennessee club plant (which was consolidated into the Pocahontas,
Arkansas plant) and outside consulting services. Excluding these non-recurring
items, general and administrative expenses were $4.4 million compared to $5.0
million for the fiscal year ending September 30, 1997. Expense reductions were
primarily in salaries and benefits and legal expenses.

Interest expense for the year ending September 30, 1998 increased 37.3% to $3.0
million from $2.2 million for year ending September 30, 1997. The increase was
due to an increase in long term debt of $10.0 million on which the per annum
interest expense was 7.97%. Royalty and other income decreased $0.5 million for
the year ending September 30, 1998 compared to the same prior year period. The
decrease was due to the losses related to the sale of the Company's component
division (National Golf Suppliers) and it's idle plant facility in Lumberton,
North Carolina. The loss on the sale of the component division was $0.4 million
and the loss on the idle plant facility was $0.1 million. A royalty agreement
held by the Company provided $1.0 million of royalty income in 1998. Beginning
October 1, 1998, the maximum royalty per the agreement will be $50,000 annually
and as a result, the Company expects a decrease in royalty income for fiscal
1999.

Comparison of the Years Ended September 30, 1997 and September 30, 1996

Net sales for fiscal year 1997 increased $3.6 million to $28.5 million, compared
to sales of $24.9 million for the twelve month period ending September 30, 1996.
The tables below compare the Company's net sales by product line and market
segment for year ending September 30, 1997 to the comparable period ending
September 30, 1996.

                              Sales By Product Line
                                ($'s in millions)

<TABLE>
<CAPTION>
                                1997                1996             % Change
                                ----                ----             --------
    <S>                         <C>                 <C>              <C>
    Club                        14.1                13.5                4.8%
    Bags                        11.0                10.6                3.4%
    Apparel                      0.2                 0.0                0.0%
    Outlet                       0.6                 0.5               26.5%
    Components                   2.5                 0.3                  *

    ------------------------------------------------------------------------
    Total                       28.5                24.9               14.4%
    ------------------------------------------------------------------------
</TABLE>

                        Sales By Market Segment
                           ($'s in millions)
<TABLE>
<CAPTION>

                                1997                1996             % Change
                                ----                ----             --------
    <S>                         <C>                 <C>              <C>
    Pro                         14.0                12.3               13.4% 
    Retail                      10.1                11.7              -13.7%
    Outlet                       0.6                 0.5               26.5%
    Contract                     0.8                 0.0                0.0%
    Components                   2.5                 0.3                  *
    Export                       0.4                 0.1                  *

    ------------------------------------------------------------------------
    Total                       28.5                24.9               14.4%
    ------------------------------------------------------------------------
</TABLE>
    * Due to insignificance of 1996 sales, percent change is not meaningful.

Although combined sales for clubs and bags increased 4.2% to $24.1 million, the
most significant increase in sales was in the Company's component division. The
Company acquired its component 


9

<PAGE>   10


division, National Golf Suppliers, in June 1996, therefore 1996 component sales
are fiscal fourth quarter sales only. Pro sales (primarily to off-course golf
equipment stores), increased $1.7 million in fiscal 1997 to $14.0 million. Pro
club sales were adversely affected by returns of approximately $370,000 in
fiscal 1997 resulting from a license claim by COBRA Golf in which the Company
voluntarily pulled its Standard Plus II product from customers and ceased
selling the product. Retail sales decreased 13.7% in fiscal 1997 to $10.1
million. The decrease was primarily attributable to overstocked inventories in
the retail market as merchants entered their Fall 1996 and Spring 1997 buying
season.

Gross profit for fiscal 1997 was 7.1% compared to 19.4% for the twelve months
ending September 30, 1996. Excess inventory write-downs to lower of cost or
market of $2.4 million ($1.4 million in clubs and club raw material and $1.0
million in bags and bag raw materials), accounted for 8.3% of the decrease in
gross profit contribution. The write-downs were taken due to an approximate 50%
reduction in club and bag stock keeping units, in order to better manage
inventory levels and to improve manufacturing and customer service operations.
The Company believes the write downs were necessary to market the discontinued
products in alternate trade channels to protect its current product line. In
addition to the above, write downs on the Company's Standard Plus II product
were $618,000 for fiscal 1997 and accounted for 2.2% of the gross profit
decrease. Write downs on plant assets and other costs associated with plant
restructuring totaled $471,000, or 1.7% of net sales. Fiscal 1997 gross profits
were also lower due to closeout pricing on approximately $4.2 million of
discontinued merchandise.

Selling and marketing expenses increased $1.2 million in fiscal 1997. The
increase was primarily due to costs associated with replacing the Company's
sales force consisting of non-employee sales agents with employee-sales
representatives and regional sales management personnel. Fiscal 1997 selling
expense also includes a $335,000 write off of point-of-purchase display units
not currently being used. General and administrative expenses increased $1.1
million in fiscal 1997, of which approximately $0.5 million were in increased
legal fees. The increase in legal expenses related primarily to litigation
between the Company and its former CEO, and the dispute between the Company and
COBRA Golf, regarding the Standard Plus II product. Other increases in general
and administrative expenses reflect a full year of expenses from the Company's
component division (National Golf Suppliers) and additional senior management
personnel.

Other income increased $0.2 million in fiscal 1997, due to increased royalty
payments from the Company's sub-licensees. Interest expense decreased 8.3% from
$2.4 million to $2.2 million for fiscal 1997. Cash interest expense increased
$0.6 million due to interest expense on higher average revolving credit facility
balances during fiscal 1997 and interest on the Company's $12 million long term
note. The increase in cash interest expense was offset by a $0.8 million
decrease in non-cash interest expense relating to amortization of the Company's
subordinated debt discount and subordinated notes in 1996, which was not as
significant in 1997.




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<PAGE>   11



Comparison of the Seven-Month Periods Ended September 30, 1996 and 
September 30, 1995

Net sales from continuing operations for the seven month transition period
ending September 30, 1996, increased $3.7 million or 25.0% compared to the same
period in 1995. As shown in the table below, the Company's significant growth
was in golf club sales, which increased 63.9% to $10.0 million, and accounted
for 54.0% of the Company's total net sales for the 1996 transition period.

                              Sales By Product Line
                                ($'s in millions)

<TABLE>
<CAPTION>
                             1996                  1995              % Change
                             ----                  ----              --------
    <S>                      <C>                   <C>               <C>
    Clubs                    10.0                   6.1                63.9%
    Bags                      7.3                   8.1                -9.9%
    Outlet                    0.6                   0.4                50.0%
    Other                     0.6                   0.2               200.0%

    ------------------------------------------------------------------------
    Total                    18.5                  14.8                25.0%
    ------------------------------------------------------------------------
</TABLE>


                             Sales By Market Segment
                                ($'s in millions)

<TABLE>
<CAPTION>
                             1996                  1995             % Change
                             ----                  ----             --------
    <S>                      <C>                   <C>              <C> 
    Pro                       9.6                   6.8                41.2%
    Retail                    7.7                   7.4                 4.1%
    Outlet                    0.6                   0.4                50.0%
    Other                     0.6                   0.2               200.0%

    ------------------------------------------------------------------------
    Total                    18.5                  14.8                25.0%
    ------------------------------------------------------------------------
</TABLE>


The decrease in bag sales of $0.8 million was attributable to a decline in
retail bag sales, which declined 26.5% from 1995 sales of $3.4 million. Pro bag
sales were $4.8 million compared to $4.7 million in 1995.

The most favorable sales increase for the Company was a 41.2% increase in its
pro business segment, which increased to $9.6 million in 1996 from $6.8 million
in 1995. Essentially all the increase in the pro business was in golf club
sales. The increase in club sales was primarily in the off-course golf equipment
stores. Pro sales accounted for 51.9% of the Company's total sales in the 1996
transition period compared to 45.9% in the comparable 1995 period. Net margins
on total sales increased to 27.9% compared to 25.5% in 1995, and was
attributable to the more favorable product mix and higher margins in pro clubs.
While total bag net margins remained constant with prior year at 28.8%, total
club margins increased to 32.3% compared to 29.7% in 1995. A decrease in retail
club margins to 28.1% in 1996 from 32.2% in 1995, was offset by a significant
increase in pro club margins of 40.0% in 1996, compared to 29.4% in 1995.

Selling and marketing expenses increased $1.7 million for the seven months
ending September 30, 1996. A substantial portion of the increase was in
advertising and promotion as the Company was not investing significant resources
in this area in the prior year. Additionally, commission and royalty expenses
were greater than prior year due to sales growth. General and administrative
expenses increased $1.2 million over 1995 primarily resulting from expenditures
relative to the 




11
<PAGE>   12

Company's ongoing training and implementation of its new fully integrated
management information systems.

Interest expense decreased 38.8% to $1.1 million for the seven months ending
September 30, 1996. This was due to a decrease in non-cash interest expense
relating to amortization of the Company's subordinated debt discounts and
subordinated notes. Interest expense was also reduced due to the sale of certain
properties and the retirement of related debt.

Other income for the 1996 transition period increased approximately $0.8 million
over the same prior year period, most of which was royalty income from the
Company's licensing agreement for its patented hosel design (PHD) technology. In
the 1996 transition period, the Company also recognized $0.2 million in other
income related to the increase in the net pension asset recognized on the
balance sheet. None was recognized in the seven months ending September 30,
1995.

The Company recorded a $0.9 million charge against other income for the period
ending September 30, 1996. The Company was due to receive $1.2 million on
October 10, 1996, as final payment for the sale of its Duckster apparel division
to DeLong Sportswear. In September 1996, the Company became aware that DeLong
Sportswear would default on the final payment, and in lieu of payment accepted
manufacturing equipment and certain apparel items with a fair market value of
approximately $0.3 million in addition to other considerations beneficial for
the Company. The charge against other income reflects the writedown of the note
plus accrued interest, to $0.3 million. 

Liquidity and Capital Resources

The Company generally relies upon internally generated cash and short-term
borrowings to satisfy working capital and capital expenditure requirements.
Generally, short-term borrowings increase from December to April, because the
Company builds inventory through the winter to support its spring shipping
season. Capital expenditures for 1999 are expected to be minimal.

The Company had negative working capital of $4.2 million as of September 30,
1998 and a current ratio of 0.74 to one. This compares to working capital of
$10.5 million and a current ratio of 3.8 to one at September 30, 1997. As of
September 30, 1998, the Company's outstanding balance on its revolving credit
facility was $12.3 million compared to $0.2 million at September 30, 1997. The
outstanding balance at September 30, 1998 was due to mature on December 31,
1998. In addition, the Company had long term debt of $22.0 million as of
September 30, 1998 which was due to mature December 31, 1999.

Due to the continued losses of the Company, the board of Directors embarked upon
numerous strategic business initiatives including the effectuation of a
financial restructuring plan as more fully discussed above. With the consent of
the Company's Chairman, the guarantor of the Company's existing indebtedness
(the "Guarantor"), the Company sold National Golf Suppliers, an asset unrelated
to the Company's core business, and the Company's investment in Nevada Bob's
Series D preferred stock. The Company also entered into negotiations to replace
the existing third-party lender of the Company with an affiliate of the
Guarantor. With the financial support of the Guarantor and of his affiliates,
the Company has been able to meet its outstanding financial commitments.

On October 20, 1998, an affiliate of the Guarantor, the Thomas C. Lupton Trust,
("Trust"), purchased the Company's $5.0 million investment in Nevada Bob's
Holdings, Inc. Series D Preferred Stock at cost. Proceeds from the sale of the
Series D Shares were used to pay $5.0 million on the Company's September 30,
1998 revolver balance of $12.3 million. On October 30, 1998, the Trust purchased
the remaining current revolver debt of $7.3 million and the Company's long term
debt of $22.0 million from the bank which held the notes.

The Trust has agreed to suspend interest payments on the revolver debt and the
term debt, and to amend the due date on the revolver debt to December 31, 1999.



12


<PAGE>   13
Also subsequent to September 30, 1998, a $5.0 million revolving credit facility
was established with a bank. This credit facility is an unsecured promissory
note due on December 30, 1999, and is guaranteed by the Guarantor. The Company
believes this facility will satisfy working capital and capital expenditure
requirements through fiscal 1999.

Impact of Inflation and Changing Prices

Management believes that the impact of inflation and other changes in prices
during fiscal 1998, 1997 and 1996 and the 1996 transition period, had no
material effect on the Company's financial condition or operating results.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133"). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in the contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting.

SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The
Company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the Company's election, before January
1, 1998).

SFAS No. 133 could increase the volatility in earnings and other comprehensive
income, however, based on the Company's current and anticipated level of
derivative instruments and hedging activities, the Company does not believe the
impact would be material.

Year 2000

The Company's information system and business processes applications operate on
an IBM AS/400 mid range computer. The hardware and its related License Internal
Code (LIC) have been upgraded to a Year 2000 compliant level. The Company's
software applications operating on the AS/400 are fully integrated management
information system developed by JBA International. The Company began the
conversion to the JBA software in mid calendar year 1996. The only remaining JBA
application to be implemented is Fixed Assets, which the Company anticipates
having implemented no later than July 1999. The Company's PC based applications,
which consist primarily of Lotus Smart Suite and cc: Mail, have been in the
process of upgrading to a Year 2000 compliance level with an anticipated
completion date no later than mid calendar year 1999. The cost for completing
the PC based applications upgrade is not expected to be material.


13


<PAGE>   14

The Company does not believe there are any significant risks to its continuing
operations related to Year 2000 issues. Certain customers in the mass
merchandise market, submit their orders via EDI processing to the Company. These
customers have notified the Company that their systems will be Year 2000
compliant within the required time frame to ensure uninterrupted data
interchange related to order fulfillment. The Company has also received
notification from certain raw material suppliers that their systems will be
Year 2000 compliant within the required time frame. Although the Company does
not anticipate any issues related to timely supply of raw materials, it is
seeking confirmation from its other major suppliers that their systems will
likewise be Year 2000 compliant.

Item 8.           Financial Statements and Supplementary Data.

Index to Financial Statements and Schedules

         Report of Independent Public Accountants

         Balance Sheets as of September 30, 1998 and September 30, 1997

         Statements of Operations for the Years Ended September 30, 1998, 
         September 30, 1997, March 2, 1996 and the Seven-Month Period Ended
         September 30, 1996

         Statements of Stockholders' Equity (Deficit) for the Years Ended 
         September 30, 1998, September 30, 1997, March 2, 1996 and the
         Seven-Month Period Ended September 30, 1996.

         Statements of Cash Flows for the Years Ended September 30, 1998, 
         September 30, 1997, March 2, 1996 and the Seven-Month Period Ended
         September 30, 1996.

         Notes to Financial Statements

         Financial Statement Schedules
           See Part IV, Item 14(a)2



14
<PAGE>   15
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS




To The Arnold Palmer Golf Company:


We have audited the accompanying balance sheets of THE ARNOLD PALMER GOLF
COMPANY (a Tennessee corporation) as of September 30, 1998 and 1997 and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the years ended September 30, 1998 and 1997, the seven-month period ended
September 30, 1996, and the year ended March 2, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Arnold Palmer Golf Company
as of September 30, 1998 and 1997, and the results of its operations and its
cash flows for the years ended September 30, 1998 and 1997, the seven-month
period ended September 30, 1996, and the year ended March 2, 1996, in conformity
with generally accepted accounting principles.



/s/ ARTHUR ANDERSEN LLP

Chattanooga, Tennessee
December 4, 1998



15

<PAGE>   16


                         THE ARNOLD PALMER GOLF COMPANY


                                 BALANCE SHEETS

                           SEPTEMBER 30, 1998 AND 1997
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



                                     ASSETS

<TABLE>
<CAPTION>
                                                                                   1998            1997
                                                                                  -------         -------
<S>                                                                               <C>             <C>    
 CURRENT ASSETS:
     Cash                                                                         $   371         $   703
     Accounts receivable, less allowance for doubtful accounts of $977 and
        $843 at September 30, 1998 and 1997                                         3,514           5,311
     Inventories                                                                    7,004           7,375
     Prepaid expenses and other                                                     1,162             847
                                                                                  -------         -------
                  Total current assets                                             12,051          14,236
                                                                                  -------         -------
 PROPERTY, PLANT, AND EQUIPMENT, NET                                                1,669           1,493
                                                                                  -------         -------
 OTHER ASSETS:
     Investment in Nevada Bob's Holdings, Inc.                                      5,000           5,000
     Property held for sale                                                            94             170
     Goodwill                                                                          85             502
     Other                                                                          1,579           1,352
                                                                                  -------         -------
                  Total other assets                                                6,758           7,024
                                                                                  -------         -------
                                                                                  $20,478         $22,753
                                                                                  =======         =======
</TABLE>




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



16
<PAGE>   17


                         THE ARNOLD PALMER GOLF COMPANY


                                 BALANCE SHEETS

                           SEPTEMBER 30, 1998 AND 1997
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)





                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
                                                                                   1998            1997
                                                                                  -------         -------
<S>                                                                               <C>             <C>    
CURRENT LIABILITIES:
    Current maturities of long-term obligations                                   $     3         $   102
    Short-term borrowings from bank                                                12,250             150
    Accounts payable                                                                1,573           2,121
    Accrued liabilities                                                             2,389           1,370
                                                                                  -------         -------
                 Total current liabilities                                         16,215           3,743
                                                                                  -------         -------
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES                                   26,525          26,162
                                                                                  -------         -------
COMMITMENTS AND CONTINGENCIES (NOTE 12)

REDEEMABLE PREFERRED STOCK, $.50 par value, 833,333 shares authorized,
    issued, and outstanding (liquidation preference of $5,000 plus
    accumulated dividends)                                                          5,000           5,000
                                                                                  -------         -------
STOCKHOLDERS' EQUITY (DEFICIT):
    Common stock, $.50 par value, 10,000,000 shares authorized; 3,054,367 and
       3,004,367 shares issued and outstanding at September 30, 1998 and 1997       1,527           1,502
    Additional paid-in capital                                                      6,401           6,313
    Accumulated deficit                                                           (35,190)        (19,967)
                                                                                  -------         -------
                 Total stockholders' equity (deficit)                             (27,262)        (12,152)
                                                                                  -------         -------
                                                                                  $20,478         $22,753
                                                                                  =======         =======
</TABLE>




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




17
<PAGE>   18


                         THE ARNOLD PALMER GOLF COMPANY


                            STATEMENTS OF OPERATIONS

                               FOR THE YEARS ENDED

                 SEPTEMBER 30, 1998 AND 1997, MARCH 2, 1996, AND

                 THE SEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1996

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



<TABLE>
<CAPTION>
                                                                           Fiscal Years                    1996
                                                               ------------------------------------     Transition
                                                                 1998          1997          1996         Period
                                                               --------      --------      --------      --------
<S>                                                            <C>           <C>           <C>           <C>     
NET SALES                                                      $ 21,893      $ 28,454      $ 21,185      $ 18,456
COST OF SALES                                                    20,730        26,447        17,983        13,301
                                                               --------      --------      --------      --------
       Gross profit                                               1,163         2,007         3,202         5,155

SELLING EXPENSES                                                  7,469         7,479         4,559         4,466
GENERAL AND ADMINISTRATIVE EXPENSES                               6,775         4,955         2,573         2,405
                                                               --------      --------      --------      --------
                                                                (13,081)      (10,427)       (3,930)       (1,716)
                                                               --------      --------      --------      --------
OTHER INCOME (EXPENSE):
    Interest expense, net                                        (3,038)       (2,212)       (2,965)       (1,129)
    Royalty and sub-license income, net                           1,459         1,402           974           937
    Writedown of note receivable                                      0             0             0          (894)
    Other, net                                                     (563)            9           296           508
                                                               --------      --------      --------      --------
                                                                 (2,142)         (801)       (1,695)         (578)
                                                               --------      --------      --------      --------
       Loss from continuing operations before income taxes      (15,223)      (11,228)       (5,625)       (2,294)
                                                                                                         --------
PROVISION FOR INCOME TAXES                                            0             0             0             0
                                                               --------      --------      --------      --------
LOSS FROM CONTINUING OPERATIONS                                 (15,223)      (11,228)       (5,625)       (2,294)
                                                               --------      --------      --------      --------
DISCONTINUED OPERATIONS (NOTE 13):
    Income from discontinued operations                               0             0           348             0
                                                               --------      --------      --------      --------
                                                                      0             0           348             0
                                                               --------      --------      --------      --------
NET LOSS                                                       $(15,223)     $(11,228)     $ (5,277)     $ (2,294)
                                                               ========      ========      ========      ======== 
BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE FROM:
    Continuing operations                                      $  (5.01)     $  (3.77)     $  (2.15)     $   (.80)
    Discontinued operations                                         .00           .00           .13           .00
                                                               --------      --------      --------      --------
                                                               $  (5.01)     $  (3.77)     $  (2.02)     $   (.80)
                                                               ========      ========      ========      ======== 
</TABLE>


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



18
<PAGE>   19



                         THE ARNOLD PALMER GOLF COMPANY


                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                               FOR THE YEARS ENDED

                   SEPTEMBER 30, 1998 AND 1997, MARCH 2, 1996,

               AND THE SEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1996
                                 (IN THOUSANDS)




<TABLE>
<CAPTION>
                                                               COMMON STOCK      ADDITIONAL
                                                            -----------------     PAID-IN   ACCUMULATED
                                                            SHARES     AMOUNT     CAPITAL     DEFICIT       TOTAL
                                                            ------     ------     -------    --------      -------- 
<S>                                                         <C>       <C>        <C>        <C>           <C>     
BALANCE AT FEBRUARY 25, 1995                                 2,539     $1,270     $4,118     $ (1,168)     $  4,220
    Net loss                                                     0          0          0       (5,277)       (5,277)
    Issuance of warrants for 232 shares of common stock          0          0        139            0           139
    Issuance of common stock                                    96         47        537            0           584
                                                             -----     ------     ------     --------      -------- 
BALANCE AT MARCH 2, 1996                                     2,635      1,317      4,794       (6,445)         (334)

    Net loss                                                     0          0          0       (2,294)       (2,294)
    Conversion of subordinated convertible note into 192
      shares of common stock                                   192         96        863            0           959
    Issuance of common stock                                   100         50        334            0           384
                                                             -----     ------     ------     --------      -------- 
BALANCE AT SEPTEMBER 30, 1996                                2,927      1,463      5,991       (8,739)       (1,285)

    Net loss                                                     0          0          0      (11,228)      (11,228)
    Issuance of common stock                                    77         39        322            0           361
                                                             -----     ------     ------     --------      -------- 
BALANCE AT SEPTEMBER 30, 1997                                3,004      1,502      6,313      (19,967)      (12,152)
                                                             -----     ------     ------     --------      -------- 
    Net loss                                                     0          0          0      (15,223)      (15,223)
    Issuance of common stock                                    50         25         88            0           113
                                                             -----     ------     ------     --------      -------- 
BALANCE AT SEPTEMBER 30, 1998                                3,054     $1,527     $6,401     $(35,190)     $(27,262)
                                                             =====     ======     ======     ========      ======== 
</TABLE>


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



19
<PAGE>   20





                         THE ARNOLD PALMER GOLF COMPANY


                            STATEMENTS OF CASH FLOWS

       FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997, MARCH 2, 1996, AND

                 THE SEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1996

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                           Fiscal Years                    1996
                                                                                ------------------------------------     Transition
                                                                                  1998          1997          1996         Period
                                                                                --------      --------      --------      --------
<S>                                                                             <C>           <C>           <C>           <C>     
OPERATING ACTIVITIES:
    Net loss                                                                    $(15,223)     $(11,228)     $(5,277)     $(2,294)
    Adjustments to reconcile net loss to net cash used in
       operating activities:         
          Depreciation                                                               457           407          400          140
          Amortization                                                               454           364        1,674          433
           (Gain) loss on disposal of property, plant, and                           269           (11)        (100)         (98)
              equipment
          Loss on disposal of National Golf Suppliers                                476             0            0            0
          Writedown of note receivable                                                 0             0            0          894
          Writedown of property, plant and equipment                                  76           727            0            0
           Changes in operating assets and liabilities, net of effects from
              the purchase and sale of National Golf Suppliers:
                 Accounts receivable                                               1,599           319        3,409       (1,778)
                 Inventories                                                        (327)        2,116        2,479          489
                 Prepaid expenses and other                                          233           254          452         (481)
                 Accounts payable                                                   (533)          (18)      (2,400)         251
                 Accrued liabilities                                               1,157          (557)      (1,577)         (12)
                                                                                --------      --------      -------      ------- 
                     Net cash used in operating activities                       (11,362)       (7,627)        (940)      (2,456)
                                                                                --------      --------      -------      ------- 
INVESTING ACTIVITIES:
    Additions to property, plant, and equipment                                   (1,137)       (1,041)        (150)        (291)
    Proceeds from sale of property, plant, and equipment                             214            23        3,855          125
    Investment in Nevada Bob's Holdings, Inc.                                          0             0            0       (5,000)
    Payments received on note receivable                                               0             0        1,600            0
                                                                                --------      --------      -------      ------- 
                     Net cash provided by (used in) investing
                        activities                                                  (923)       (1,018)       5,305       (5,166)
                                                                                --------      --------      -------      ------- 
FINANCING ACTIVITIES:
    Net increase (decrease) in short-term borrowings from bank                    12,100         9,354       (1,733)       2,700
    Proceeds from debt obligations                                                     0         1,109            0            0
    Principal payments on debt obligations                                          (147)       (1,162)      (2,656)         (41)
    Issuance of redeemable preferred stock                                             0             0            0        5,000
                                                                                --------      --------      -------      ------- 
                     Net cash provided by (used in) financing
                        activities                                              $ 11,953         9,301       (4,389)       7,659
                                                                                ========      ========      =======      =======
</TABLE>



20
<PAGE>   21



<TABLE>
<S>                                                                             <C>           <C>           <C>           <C>     
NET INCREASE (DECREASE) IN CASH                                                 $   (332)          656          (24)          37


CASH, BEGINNING OF PERIOD                                                            703            47           34           10
                                                                                --------      --------      -------      ------- 
CASH, END OF PERIOD                                                             $    371      $    703      $    10      $    47
                                                                                ========      ========      =======      =======


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
       Cash payments (refunds) during the period for:
          Interest                                                              $  2,390      $  1,810      $ 1,085      $   613
                                                                                ========      ========      =======      =======

          Income taxes, net                                                     $      0      $      0      $    (5)     $     0
                                                                                ========      ========      =======      =======
</TABLE>






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




21
<PAGE>   22




                         THE ARNOLD PALMER GOLF COMPANY


                          NOTES TO FINANCIAL STATEMENTS


For purposes of these financial statements and notes to these financial
statements, "fiscal 1998 and 1997" relates to the years ended September 30, 1998
and 1997, while "fiscal 1996" pertains to the year ended March 2, 1996. The
"1996 transition period" relates to the seven-month period ended September 30,
1996. All monetary amounts are expressed in thousands of dollars unless 
otherwise indicated.


  1.  NATURE OF OPERATIONS

      The Arnold Palmer Golf Company (the "Company") manufactures, markets and
      distributes golf products, including PALMER and NancyLopezGolf equipment
      and HOTZ golf bags and luggage. The Company's principal market is the
      United States. The Company owns, subject to certain exceptions, the
      exclusive worldwide right to the Arnold Palmer and Nancy Lopez trade names
      in connection with the Company's manufacture, sale and distribution of
      golf products. The Company sells primarily to retailers and golf specialty
      stores and grants credit to customers based on defined payment terms. The
      Company performs ongoing credit evaluations and generally does not require
      collateral. Three large customers accounted for 21%, 17%, 25%, and 32%, of
      net sales from continuing operations for fiscal 1998 and 1997, the 1996
      transition period, and fiscal 1996, respectively.

      In July 1996, the Company changed its name to The Arnold Palmer Golf
      Company from ProGroup, Inc.


  2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      DISCONTINUED OPERATIONS

      As discussed in Note 13, on May 5, 1995, the Company sold its Duckster
      line of headwear, outerwear, and shirts. Consistent with the provisions of
      Accounting Principles Board Opinion No. 30, the results of discontinued
      operations have been reported separately from the results of continuing
      operations, and a provision was made in fiscal 1995 for the loss on the
      disposal of the Duckster line of business.

      REVENUE RECOGNITION

      Revenue is recognized when the Company's products are shipped to its
      customers.




22
<PAGE>   23

      INVENTORIES

      Inventories are valued at the lower of cost or market using the first-in,
      first-out (FIFO) method. Cost includes material, labor and factory
      overhead. Market is net realizable value for finished goods. For raw
      materials and work-in-process, market is replacement cost.

      PROPERTY, PLANT, AND EQUIPMENT

      Property, plant, and equipment are recorded at cost, less accumulated
      depreciation and amortization. Expenditures for maintenance and repairs
      are charged to expense as incurred. The property, plant, and equipment
      balances consisted of the following at September 30, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                        1998                1997
                                                                      -------             -------
<S>                                                                   <C>                 <C>    
            Land                                                      $    70             $    70
            Buildings and improvements                                    735                 595
            Machinery and equipment                                     2,209               2,936
            Furniture and fixtures                                        805                 630
            Construction in progress                                      467                 234
                                                                      -------             -------
                                                                        4,286               4,465
            Less accumulated depreciation and amortization             (2,617)             (2,972)
                                                                      -------             -------
                                                                      $ 1,669             $ 1,493
                                                                      =======             =======
</TABLE>

      Included in property held for sale at September 30, 1998 and 1997 is the
      Company's idle Lumberton, North Carolina plant, which was sold October 5,
      1998.

      Depreciable assets are depreciated principally using the straight-line
      method for financial reporting purposes and accelerated methods for income
      tax purposes over the estimated useful lives of the related assets. The
      estimated useful lives used in computing annual depreciation provisions
      are as follows:

<TABLE>
<CAPTION>
                                                   YEARS
                                                  -------
<S>                                               <C> 
            Buildings and improvements            5 to 31
            Machinery and equipment               3 to 10
            Furniture and fixtures                3 to 10
</TABLE>

      During fiscal 1998 and 1997, the Company recorded impairment losses of
      approximately $76 and $727. The write-down related to a $76 and $101
      write-down of its idle Lumberton, North Carolina facility in fiscal 1998
      and 1997, respectively, as well as certain construction in progress and
      tooling costs in 1997, which the Company will not utilize in the future.

      GOODWILL

      Goodwill of $85 relates to a business acquired before November 1, 1970,
      and is not required to be amortized. The Company continually evaluates
      whether subsequent events and circumstances have occurred that indicate
      that the remaining balance may not be 



23
<PAGE>   24

      recoverable. When factors indicate that goodwill should be evaluated for
      possible impairment, the Company uses an estimate of the future
      undiscounted net cash flows of the related businesses over the remaining
      life of the goodwill in measuring whether goodwill is recoverable. The
      Company recognized $30 of goodwill amortization expense in fiscal 1998 and
      1997 related to a business line that was sold September 30, 1998 (Note 3).

      ADVERTISING EXPENSES

      The Company expenses advertising costs as incurred. Advertising expense
      for fiscal 1998, 1997, the 1996 transition period, and fiscal 1996 was
      $869, $1,133, $883, and $547, respectively.

      FISCAL YEAR

      During the 1996 transition period, the Company's Board of Directors
      elected to change the Company's year end to September 30, effective
      September 30, 1996. Fiscal 1996 was based on a 52-53-week period ending on
      the Saturday closest to the end of February.

      NET LOSS PER SHARE

      Effective for the year ended September 30, 1998, the Company adopted
      Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
      ("SFAS No. 128"), which changes the criteria for reporting earnings per
      share ("EPS") by replacing primary EPS with basic EPS and fully diluted
      EPS with diluted EPS. Due to losses in each period presented, the diluted
      EPS calculation includes no common share equivalents due to their
      anti-dilutive effect. The weighted average number of shares outstanding
      for fiscal 1998, 1997, the 1996 transition period, and for fiscal 1996 are
      3,041,490, 2,978,099, 2,852,213, and 2,615,619, respectively.

      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 reported amounts of assets and liabilities and
      disclosure of contingent assets and liabilities at the date of the
      financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.

      STOCK-BASED COMPENSATION

      The Company accounts for its stock-based compensation plans under
      Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
      to Employees" ("APB No. 25"). Effective in the 1996 transition period, the
      Company adopted the disclosure option of Statement of Financial Accounting
      Standards ("SFAS No. 123") "Accounting for Stock-Based Compensation".

      RECENT ACCOUNTING PRONOUNCEMENT

      In June 1998, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 133, "Accounting for Derivative
      Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133
      establishes accounting and reporting standards requiring that every
      derivative instrument (including certain derivative instruments 




24
<PAGE>   25

      embedded in other contracts) be recorded in the balance sheet as either an
      asset or liability measured at its fair value. SFAS No. 133 requires that
      changes in the derivative's fair value be recognized currently in earnings
      unless specific hedge accounting criteria are met. Special accounting for
      qualifying hedges allows a derivative's gains and losses to offset related
      results on the hedged item in the income statement, and requires that a
      company must formally document, designate, and assess the effectiveness of
      transactions that receive hedge accounting.

      SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
      The Company may also implement the Statement as of the beginning of any
      fiscal quarter after issuance (that is, fiscal quarters beginning June 16,
      1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS
      No. 133 must be applied to (a) derivative instruments and (b) certain
      derivative instruments embedded in hybrid contracts that were issued,
      acquired, or substantively modified after December 31, 1997 (and, at the
      Company's election, before January 1, 1998).

      SFAS No. 133 could increase the volatility in earnings and other
      comprehensive income; however, based on the Company's current and
      anticipated level of derivative instruments and hedging activities, the
      Company does not believe the impact would be material.


  3.  ACQUISITION AND DISPOSAL OF NATIONAL GOLF SUPPLIERS, INC.

      In June 1996, the Company issued 100,000 shares of its common stock in
      exchange for certain assets and liabilities of National Golf Suppliers,
      Inc. ("NGS"), a wholesaler of golf club component parts located in
      Louisville, KY.

      The acquisition of NGS was accounted for under the purchase method of
      accounting. Accordingly, the operating results of NGS have been included
      in the Company's results of operations from the date of acquisition. The
      excess of the aggregate purchase price over the fair value of net assets
      acquired was recorded as goodwill and was being amortized on a
      straight-line basis over a 15 year period. The impact of the acquisition
      on pro forma net loss and loss per share, as if the acquisition had taken
      place at the beginning of fiscal 1996, was not significant for the 1996
      transition period and fiscal 1996.

      On September 30, 1998, the Company sold NGS for a $538 short-term
      receivable which was paid in full in October 1998, a $230 installment
      promissory note, and a minority ownership interest in the successor
      entity. The Company does not exercise significant influence over the
      successor entity and the investment is accounted for under the cost method
      of accounting. The sale resulted in a loss of approximately $476. The 
      promissory note is due to be repaid through September 2001, and bears 
      interest at the rate of 9.5%



25
<PAGE>   26

  4.  INVENTORIES

      Inventories as of September 30, 1998 and 1997 consisted of the following:

<TABLE>
<CAPTION>
                                        1998              1997
                                       ------            ------
            <S>                        <C>               <C>   
            Raw materials              $3,503            $3,602
            Work-in-process                 9                14
            Finished goods              3,492             3,759
                                       ------            ------
                                       $7,004            $7,375
                                       ======            ======
</TABLE>

  5.  INVESTMENT IN NEVADA BOB'S HOLDINGS, INC.

      In August 1996, the Company purchased 625,000 mandatorily redeemable,
      convertible shares of Series D Preferred Stock ("Series D Shares") of
      Nevada Bob's Holdings, Inc. ("NBHI") for $5,000. The shares are
      convertible to common shares of NBHI at any time at the currently
      effective conversion rate, as defined, and will automatically convert to
      common shares if NBHI successfully completes an initial public offering of
      at least $20,000. If the Series D Shares are not converted to common
      shares of NBHI by August 21, 2000, NBHI shall redeem 33 1/3% of the shares
      annually over a three year period at 150% of the original cost per share
      plus any declared but unpaid dividends. This investment is classified as
      held-to-maturity and is accounted for using the cost method of accounting.

      In October 1998, the Series D Shares were sold for $5,000 to a trust (the 
      "Trust") affiliated with the Company's Chairman (the "Guarantor"). The 
      Trust has agreed to maintain the sharing agreement with the Company on
      any investment gains the Series D Shares yield (Note 11).


  6.  SHORT-TERM BORROWINGS

      Short-term borrowings consist of advances under a $12,000 line of credit
      agreement and a separate $2,000 line of credit agreement with a bank . The
      lines of credit and long-term obligations are collaterized by accounts
      receivable, inventory, and other business assets and are guaranteed by the
      Guarantor.

      There are no financial covenants under the lines of credit. Advances under
      the lines of credit bear interest at the bank's prime rate less .5% (7.75%
      at September 30, 1998). Interest is payable monthly. At September 30,
      1998, advances outstanding under the lines of credit were $12,250, letters
      of credit outstanding were $520, and $1,230 was unused.

      The line of credit was scheduled to mature December 31, 1998. However,
      subsequent to September 30, 1998, the Company reduced outstanding
      borrowings on the line of credit $5,000 from the sale of its investment in
      NBHI, and the Trust purchased the remaining $7,250 from the bank. The
      Trust has agreed to extend the due date and suspend interest payments on
      the $7,250 until December 31, 1999.

      In fiscal 1997, the Company borrowed and repaid $1,100 from the Guarantor.




26
<PAGE>   27

  7.  LONG-TERM OBLIGATIONS

      Long-term obligations consisted of the following at September 30, 1998 and
      1997:

<TABLE>
<CAPTION>
                                                                                                        1998                 1997
                                                                                                     --------             --------
            <S>                                                                                      <C>                  <C>     
            Term loan with bank, interest payable monthly at 8.25%, due December 31, 1999            $ 12,000             $ 12,000

            Term loan with bank, interest payable monthly at LIBOR plus 2% (7.97% at
                September 30, 1998), due December 31, 1999                                             10,000               10,000

            Subordinated notes ($5,000 face amount) to related parties, net of discount
                of $478 and $853 at September 30, 1998 and 1997, interest payable
                monthly at 6.0% (effective interest rate of 15.9%), due November 2, 1999                4,522                4,147

            Other obligations                                                                               6                  117
                                                                                                     --------             --------
                                                                                                       26,528               26,264
            Less: current maturities                                                                       (3)                (102)
                                                                                                     --------             --------
                                                                                                     $ 26,525             $ 26,162
                                                                                                     ========             ========
</TABLE>

      In November 1994, the Company completed a private placement of $5,000 in
      subordinated notes. The holders of the $5,000 subordinated notes (which
      include the Guarantor and another director of the Company) also received
      warrants to purchase up to 1,000,000 shares of common stock of the Company
      at $5.50 per share. The estimated fair value of the warrants was recorded
      as additional paid-in capital.

      Future scheduled maturities of long-term obligations as of September 30,
      1998, were as follows:

                              1999            $     3
                              2000             26,525

      Subsequent to September 30, 1998, the Trust purchased the outstanding
      $22,000 of term loans from the bank. The Trust has agreed to suspend any
      interest or principal payments until the maturity date of December 31,
      1999.


  8.  INCOME TAXES

      There was no current income tax provision or benefit recorded during
      fiscal 1998, 1997, the 1996 transition period, and fiscal 1996 due to the
      losses sustained by the Company.



27
<PAGE>   28

      Deferred income tax assets and liabilities reflect the impact of temporary
      differences between the amounts of assets and liabilities for financial
      reporting and income tax reporting purposes. Temporary differences and
      carryforwards which give rise to deferred tax assets and liabilities at
      September 30, 1998 and 1997, are as follows:

<TABLE>
<CAPTION>
                                                                                          1998                 1997
                                                                                        --------             --------
                   <S>                                                                  <C>                  <C>     
                    Deferred tax assets:
                        Tax loss carryforwards                                          $ 18,004             $ 12,086
                        Inventory and receivables reserves                                   943                1,221
                        Other accruals and reserves                                          591                  550
                                                                                        --------             --------
                                                                                          19,538               13,857
                                                                                        --------             --------
                    Deferred tax assets valuation allowance                              (18,860)             (13,114)
                                                                                        --------             --------

                    Deferred tax liabilities:
                        Pension asset                                                        457                  417
                        LIFO to FIFO change                                                   65                  222
                        Prepaid expenses                                                       0                   32
                        Excess tax depreciation                                              156                   72
                                                                                        --------             --------
                                                                                             678                  743
                                                                                        --------             --------
                    Net deferred tax asset                                              $      0             $      0
                                                                                        ========             ========
</TABLE>

      At September 30, 1998 and 1997, the Company had federal tax loss
      carryforwards of approximately $48,300 and $32,300 which expire in years
      2009 through 2013 if not utilized earlier.

      The difference between the provision for income taxes and the amount
      computed by multiplying the loss from continuing operations before income
      taxes by the statutory rate is summarized as follows:

<TABLE>
<CAPTION>
                                                                         Fiscal Years                               1996
                                                        -----------------------------------------------          Transition
                                                          1998               1997                1996              Period
                                                        -------             -------             -------            ------
      <S>                                               <C>                 <C>                 <C>              <C>  
      Expected tax benefit                              $ 5,746             $ 3,818             $ 1,913             $ 780
      Change in valuation allowance                      (5,746)             (3,818)             (1,913)             (780)
                                                        -------             -------             -------             -----
             Provision for income taxes from
                 continuing operations                  $     0             $     0             $     0             $   0
                                                        =======             =======             =======             =====
</TABLE>


  9.  EMPLOYEE BENEFIT PLANS

      PENSION PLANS

      The Company has a noncontributory defined benefit pension plan covering
      substantially all salaried and hourly employees. The plan provides
      benefits based on years of service and compensation levels. In the opinion
      of management, the Company's funding policy is consistent with the
      requirements of the Employee Retirement Income Security Act of 1974. Plan
      assets are invested primarily in common stocks and corporate debt
      securities.



28
<PAGE>   29

      Pension income for fiscal 1998, 1997, the 1996 transition period, and
      fiscal 1996 included the following components:

<TABLE>
<CAPTION>
                                                                    Fiscal Years                   1996
                                                          ---------------------------------     Transition
                                                          1998         1997          1996         Period
                                                          -----        -----        -------       ------
          <S>                                             <C>          <C>          <C>          <C>  
          Service cost                                    $  38        $  56        $    86        $  36
          Interest cost on projected benefit obligation     337          346            365          199
          Actual return on plan assets                       (1)        (864)        (1,047)        (342)
          Net amortization and deferral                    (478)         161            430          (35)
          Net loss due to special early retirement
             benefits                                         0          251              0            0
                                                          -----        -----        -------        -----
          Net pension income                              $(104)       $ (50)       $  (166)       $(142)
                                                          =====        =====        =======        ===== 
</TABLE>


      The following table sets forth the funded status of the plan as of
      September 30, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                   1998           1997
                                                                  -------        -------
      <S>                                                         <C>            <C>    
      Actuarial present value of benefit obligation:
          Vested benefit obligation                               $ 5,260        $ 4,223
          Nonvested benefit obligation                                112            110
                                                                  -------        -------
      Accumulated benefit obligation                              $ 5,372        $ 4,333
                                                                  =======        =======
      Projected benefit obligation                                $ 5,484        $ 4,433
      Plan assets at fair value                                     5,612          6,103
                                                                  -------        -------
      Plan assets in excess of projected benefit obligation           128          1,670
      Unrecognized net (gain) loss                                  1,165           (451)
      Unrecognized prior service cost                                 140            156
      Unrecognized initial net asset                                 (231)          (277)
                                                                  -------        -------
      Net pension asset recognized on the balance sheet           $ 1,202        $ 1,098
                                                                  =======        =======
</TABLE>




29
<PAGE>   30

      The following assumptions were used to measure the net periodic pension
      income and the projected benefit obligation:

<TABLE>
<CAPTION>
                                                                       Fiscal Years              1996
                                                                ---------------------------   Transition
                                                                1998      1997         1996     Period
                                                                ----      ----         ----     ------
      <S>                                                       <C>        <C>         <C>    <C> 
      Discount rate used to determine the projected
          benefit obligation                                    6.0%       7.5%        7.25%      7.5%
      Rate of increase in future compensation levels
          used to determine the projected benefit
          obligation                                            5.0%       5.0%        5.0%       5.0%
      Expected long-term rate of return on plan assets
          used to determine net periodic pension income         8.0%       9.0%        9.0%       9.0%
</TABLE>

      The Company curtailed the benefits under its defined benefit plan in 1994.
      Under this curtailment, nonunion employees that were not at least age 50
      with at least five years of service accrue no further benefits under the
      plan.

      401(K) PROFIT-SHARING PLAN

      The Company has a 401(k) profit-sharing plan covering substantially all
      employees at least 21 years of age with six months of service. The plan
      allows for employees to contribute a portion of their compensation,
      subject to certain limitations. The Company may make discretionary
      contributions to the plan. Total discretionary contributions during fiscal
      1998, 1997, the 1996 transition period, and fiscal 1996 were $32, $38,
      $20, and $39, respectively.


10.   CAPITAL STOCK

      STOCK ISSUANCES

      In fiscal 1998 and 1997, the Company issued 50,000 and 77,562 common
      shares, respectively, to certain professional golfers as compensation
      under endorsement agreements.

      As consideration to the Guarantor for his guarantee of a line of credit in
      January 1995, the Company issued an $850 subordinated convertible note and
      a warrant to purchase up to 390,000 common shares of the Company. The cost
      of the guarantee was set up as a deferred asset and amortized to interest
      expense over the life of the note. Additionally, the Guarantor was given
      preemptive rights through January 27, 2000 with respect to future
      issuances by the Company sufficient to enable the Guarantor to maintain
      his fully diluted common stock ownership percentage. In March 1996, the
      $850 subordinated note plus accrued interest was converted to 191,814
      shares of common stock under the terms of the note.




30
<PAGE>   31

      In March 1995, the Company entered into a revolving credit facility with
      the Guarantor. For each $100 drawn under this facility, the Guarantor was
      issued 3,750 shares of the Company's common stock. Under this facility,
      the Guarantor was issued 80,625 shares in fiscal 1996.

      STOCK OPTION PLANS

      The Company has incentive stock option plans which were adopted under a
      1981 plan and a 1992 plan for its officers and key employees which provide
      for issuance of options to purchase up to 950,000 and 324,032 common
      shares, respectively. The plans are administered by the Executive
      Committee of the Board of Directors.

      At September 30, 1998, the total number of shares available for options
      was as follows:

<TABLE>
              <S>                                                 <C>    
               Reserved for:
                   Outstanding stock options                        631,127
                   Stock options authorized but not granted         482,805
                                                                  ---------
                                                                  1,113,932
                                                                  =========
</TABLE>

      Stock options are exercisable at the market price on the date of grant and
      expire on various dates through 2007. Stock options generally vest ratably
      over a 3 year period from the date of grant or date of hire.

      Stock option activity for fiscal 1998, 1997, the 1996 transition period,
      and fiscal 1996, was as follows:

<TABLE>
<CAPTION>
                                                                      
                                                                         Weighted
                                                                         Average
                                                         Shares       Exercise Price
                                                       --------       --------------
               <S>                                      <C>           <C> 
               Outstanding at February 25, 1995         425,732        $   8.68
                   Granted at market price              241,000            4.09
                   Canceled or expired                  (70,200)          11.23
                                                       --------
               Outstanding at March 2, 1996             596,532            6.53
                   Granted at market price               80,000            5.38
                   Canceled or expired                  (20,000)           7.63
                                                       --------
               Outstanding at September 30, 1996        656,532            6.36
                   Granted at market price              152,000            3.89
                   Canceled or expired                 (179,137)           7.14
                                                       --------
               Outstanding at September 30, 1997        629,395            5.54
                   Granted at market price              320,000            3.39
                   Canceled or expired                 (318,268)           6.56
                                                       --------
               Outstanding at September 30, 1998        631,127            3.93
                                                        =======
</TABLE>


      Of the options outstanding at September 30, 1998, 120,000 have an exercise
      price of $1.55 and a remaining contractual life of 8.9 years. Options to
      exercise an additional 466,000 




31
<PAGE>   32

      shares have exercise prices between $3.0 and $5.38, with a weighted
      average exercise price of $4.07 and a weighted average remaining
      contractual life of 10 years. Of these options, 200,334 are exercisable at
      a weighted average exercise price of $3.94. The remaining 45,127 options
      have exercise prices between $7.12 and $10.93, with a weighted average
      exercise price of $8.82, and a weighted average contractual life of 1.2
      years. All of these options are exercisable at a weighted average price of
      $8.82.

      Of the options outstanding at September 30, 1998, 1997, and 1996, and
      March 2, 1996, total shares exercisable were 245,461, 315,729, 362,199,
      and 348,865, respectively, with weighted average price of $4.84, $7.10,
      $8.11, and $8.19, respectively.

      The Company accounts for the plans under APB No. 25, under which no
      compensation cost has been recognized for stock options granted with
      exercise prices equal to the fair value of the Company's common shares on
      the date of grant. The Company adopted SFAS No. 123 for disclosure
      purposes only in the 1996 transaction period. Had compensation cost for
      these plans been determined consistent with SFAS No. 123, the Company's
      net loss and loss per share would have been increased to the following pro
      forma amounts:

<TABLE>
<CAPTION>
                                                                        FISCAL YEARS                    1996
                                                            -----------------------------------      TRANSITION
                                                              1998          1997         1996          PERIOD
                                                            --------      --------      -------        ------- 
     <S>                          <C>                       <C>           <C>           <C>          <C>     
     Net loss:                    As reported               $(15,223)     $(11,228)     $(5,277)       $(2,294)
                                  Pro Forma                  (15,478)      (11,335)      (5,364)        (2,490)

     Loss per share:              As reported               $  (5.01)     $  (3.77)     $ (2.02)       $ (0.80)
                                  Pro Forma                    (5.09)        (3.81)        (.05)         (0.87)
</TABLE>

      Because the SFAS No. 123 method of accounting has not been applied to
      options granted prior to February 26, 1995, the resulting pro forma
      compensation cost may not be representative of that to be expected in
      future years.

      The fair value of option grants is estimated on the date of grant using
      the Black-Scholes option pricing model with the following weighted average
      assumptions used for grants in fiscal 1998 and 1997, the 1996 transition
      period, and fiscal 1996, respectively: risk-free interest rates of 5.49,
      6.05, 6.30, and 5.40 percent; expected dividend yields of 0 percent;
      expected lives of one year after vesting; expected volatility of 72%, 60%,
      73%, and 73%. Using these assumptions, the fair value of the stock options
      granted in fiscal 1998 and 1997, the 1996 transition period and fiscal
      1996 is $253, $264, $165, and $503, respectively, which would be amortized
      as compensation over the vesting period of the options. The weighted
      average fair value of options granted during fiscal 1998 and 1997, the
      1996 transition period, and fiscal 1996 is $0.79, $1.74, $2.13, and $2.09,
      respectively.

      STOCK PURCHASE WARRANTS

      The Company, in conjunction with the November 1994 issuance of its $5,000
      subordinated notes, issued warrants to purchase 1,000,000 shares of common
      stock at an exercise price of 




32
<PAGE>   33

      $5.50. Each warrant may be exercised with $5.50 in cash or principal value
      of the notes at any time during the life of the warrants, which expire on
      November 3, 1999.

      In connection with the January 1995 guarantee of the Company's line of
      credit, the Guarantor was issued a warrant to purchase up to 390,000
      common shares at $6.25 per share. These warrants expire January 27, 2000.
      In March 1995, all 390,000 warrants were immediately vested and subject to
      a reset price of $5.00 per share.

      PREFERRED STOCK

      The Company's shareholders have authorized the issuance of up to 1 million
      shares of preferred stock, having a par value of $.50 per share. The
      designation, powers, preferences, and rights of the shares shall be
      determined by the Company's Board of Directors prior to issuance. As
      discussed in Note 11, 833,333 shares of preferred stock have been issued.


11.   REDEEMABLE PREFERRED STOCK

      In August 1996, the Company issued 833,333 shares of Series NB Preferred
      Stock ("NB Shares") for $5,000 to the Guarantor to fund the Company's
      investment in NBHI. The NB Shares, which were subsequently transferred to
      the Trust, have a stated value of $6 per share and are convertible at any
      time to common stock on a one to one ratio. The NB Shares are entitled to
      cumulative dividends equal to 30% of the earnings realized by the Company
      from its investment in NBHI's Series D Shares. The NB Shares shall have a
      preference in liquidation of $5,000 plus accumulated dividends and are
      required to be redeemed upon sale or redemption of the Series D Shares of
      NBHI.

      In October 1998, the Trust converted all the NB Shares to 833,333 shares
      of common stock.


12.   COMMITMENTS AND CONTINGENCIES

      OPERATING LEASES

      The Company has entered into various operating leases for buildings and
      office equipment. Rent expense was approximately $821, $768, $405, and
      $433, for fiscal 1998, 1997, the 1996 transition period, and fiscal 1996,
      respectively. Approximate future minimum rental commitments for the next
      five years for noncancelable operating leases as of September 30, 1998,
      were as follows:

                            1999                                      $553
                            2000                                       347
                            2001                                        49

      Included in fiscal 1998 and 1997 rent expense is $166 and $82,
      respectively, of lease payments to an entity controlled by the Guarantor,
      the owner of the Company's Ooltewah, Tennessee headquarters since April
      1997.



33
<PAGE>   34

      LITIGATION

      The Company is party to certain legal proceedings incidental to its
      business. In the opinion of management, based in part on the advice of
      legal counsel, the ultimate disposition of these matters will not have a
      material adverse effect on the Company's financial position or results of
      operations.

      ROYALTY COMMITMENTS

      The Company pays royalties under a license agreement with Arnold Palmer
      Enterprises, Inc., a company controlled by a shareholder and a member of
      the Company's Board of Directors. The Company has the right to sub-license
      its rights under this agreement. The agreement expires March 1, 2007, but
      may be extended for successive five-year periods. Under the terms of the
      agreement, the Company will pay royalties of 1% to 5% of net sales of
      specified products and a portion of sub-licensing royalties. The Company
      has committed to pay minimum royalties of $750 through 2007. During fiscal
      1998, 1997, the 1996 transition period, and fiscal 1996, the Company
      incurred royalty expense under this agreement of approximately $750, $700,
      $442, and $500, respectively.

      Effective January 1, 1998, the Company entered into a license agreement
      with Nancy Lopez Enterprises, Inc., a company controlled by a member of
      the Company's Board of Directors. The Company has the right to sub-license
      its rights under this agreement. The agreement expires December 31, 2007
      and provides that the Company will pay royalties of 3.25% of net sales of
      licensed products, as defined. The Company has committed to pay minimum
      royalties ranging from $207 in calendar year 1998 to $426 in calendar year
      2007 and make minimum advertising expenditures for promotion of specified
      products ranging from $1,000 in calendar year 1998 to $2,700 in calendar
      year 2007. During fiscal 1998 the Company incurred royalty expense under
      this agreement of approximately $174.


13.   DISCONTINUED OPERATIONS - SALE OF DUCKSTER

      On May 5, 1995, the Company sold its Duckster line of headwear, outerwear,
      and shirts for approximately $3,000 in cash and a $2,726 installment
      promissory note. The Company also retained approximately $4,200 in
      existing accounts receivable. The sale resulted in an estimated loss on
      disposal of $1,244, which was included as a component of discontinued
      operations in fiscal 1995.

      Approximately $1,126 of the promissory note receivable was not repaid by
      the buyer. In lieu of payment, the buyer turned over certain manufacturing
      equipment and other consideration to the Company. As a result, in the 1996
      transition period the Company wrote the note receivable and related
      accrued interest receivable down $894 to $300, the estimated fair value of
      the consideration received.




34
<PAGE>   35

14.   CHANGE IN FISCAL YEAR

      During the 1996 transition period, the Company changed its fiscal year end
      to September 30 from the Saturday closest to the end of February.
      Accordingly, the September 30, 1996 results of operations are for a
      seven-month period.

      Following are selected financial data for the seven-month periods ended
      September 30, 1996 and 1995:

<TABLE>
<CAPTION>
                                                                  1996            1995
                                                                 -------         -------
                                                                               (Unaudited)
              <S>                                                <C>             <C>    
              Net sales                                          $18,456         $14,777
              Gross profit                                         5,155           3,765
              Loss from continuing operations                     (2,294)         (1,446)
              Income from discontinued operations                      0             348
              Net loss                                            (2,294)         (1,098)
              Loss per share from continuing
                  operations-basic and diluted                     (0.80)         (0.55)
              Loss per share-basic and diluted                     (0.80)         (0.42)
</TABLE>


15.   FAIR VALUE OF FINANCIAL INSTRUMENTS

      The carrying value of cash, accounts receivable, accounts payable and
      accrued liabilities are reasonable estimates of their fair values because
      of the short maturity of these financial instruments. Due to the fact that
      no liquid market exists for: a) the Company's investment in the NBHI
      Series D Shares, b) the subordinated notes payable, and c) the Company's
      Series NB Preferred Stock, it is not practicable to estimate the fair
      value of these financial instruments. Due to the guarantee of the lines of
      credit and term loans by the Guarantor, it is not practicable to estimate
      the fair value of these financial instruments.


16.   CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS

      The Company currently outsources a significant portion of its bag
      manufacturing from one supplier in the Far East. Transactions with this
      entity are subject to government regulations. Although there are a limited
      number of manufacturers of golf bags, management believes that other
      suppliers could provide a similar product on reasonably comparable terms.
      Also, the Company could manufacture bags at its Pocahontas, Arkansas
      plant. A change in suppliers, however, could cause a delay in
      manufacturing and a possible loss of sales, which would affect operating
      results adversely.





35
<PAGE>   36

17.   SUBSEQUENT EVENT

      Subsequent to year-end, the Company and a bank entered into a $5,000
      unsecured loan commitment due December 30, 1999, which is guaranteed by
      the Guarantor. The proceeds are to be used to meet working capital
      requirements.



36
<PAGE>   37


Item 9.   Disagreements on Accounting and Financial Disclosure.
No event described in Item 304 of Regulation S-K has occurred.

                                    PART III

Item 10.  Directors and Executive Officers of the Company.

          (a)  Directors
          The information found in the section titled Election of Directors in
          the Company's 1999 Proxy Statement is incorporated herein by
          reference.

          (b)  Executive Officers
          The following lists the names of all executive officers of the
          Company, their ages, their positions with the Company and the year in
          which they were first elected to these positions:

          John T. Lupton. Age 72. Mr. Lupton was initially named Chairman of the
          Board of Directors and Chief Executive Officer of the Company in
          March, 1995 and continued as Chairman and Chief Executive Officer
          through February 20, 1997. Mr. Lupton was re-appointed as Chairman and
          Chief Executive Officer on November 21, 1997.  In March 1998 the 
          Company named a new President & Chief Executive Officer. Mr. Lupton
          continued serving as Chairman of the Board of Directors. Mr. Lupton is
          the former Chairman of JTL Corp., a bottler of Coca-Cola and related
          products, and a private investor.

          Cynthia L. Davis. Age 36. Ms. Davis has been President & Chief
          Executive Office since March 1998. Ms. Davis joined the Company in
          June 1997 as Executive Vice President & General Manager. Prior to
          joining the Company, Ms. Davis served as Vice President of the Ladies
          Professional Golf Association (LPGA) from 1994 to 1997, and as
          Executive Director, Teaching & Club Pro Division of the LPGA from 1992
          to 1993.

          Dexter Scudder Graybeal. Age 57. Mr.. Graybeal has been Vice President
          since April, 1994. He has been employed by the Company since March of
          1972 in various capacities including Regional and National Sales
          Manager, Director of Sales, Vice President - Sales and Vice
          President/General Manager - Arnold Palmer Golf Co.

          David J. Kirby. Age 49. Mr.. Kirby has been Vice President - Finance
          since February, 1996. He joined the Company as Cost Accountant in
          January, 1993, and was named Controller in November 1994. Prior to
          1993, Mr.. Kirby served as Financial Analyst and Controller at Balsam
          Corporation.

Item 11.  Executive Compensation.
The information found in the section titled Executive Compensation and Other
Information in the Company's 1999 Proxy Statement is incorporated herein by
reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.
The information found in the section titled Voting Securities and Principal
Holders Thereof in the Company's 1999 Proxy Statement is incorporated herein by
reference.




37
<PAGE>   38


Item 13.   Certain Relationships and Related Transactions.
The information found in the sections titled Certain Transactions and Agreements
with Certain Executive Officers in the Company's 1999 Proxy Statement is
incorporated herein by reference.

                                     PART IV

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

    (a)    1.  Financial Statements

               The financial statements are set forth in Part II, Item 8.

           2.  Financial Statement Schedules:

               Report of Independent Public Accountants

               Schedule II -- Valuation and Qualifying Accounts

           3.  Exhibits:

               See the Exhibit Index on page xx of this Form 10-K.

    (b)        The Registrant did not file any reports on Form 8-K during the 
               last quarter of fiscal 1998.





38
<PAGE>   39
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS





To The Arnold Palmer Golf Company:


We have audited, in accordance with generally accepted auditing standards, the
financial statements included in Part II, Item 8 of this Form 10-K and have
issued our report thereon dated December 4, 1998. Our audits were made for the
purpose of forming an opinion on these statements taken as a whole. Schedule II
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in our audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.





/s/ ARTHUR ANDERSEN LLP

Chattanooga, Tennessee
December 4, 1998




39
<PAGE>   40



                                                                     SCHEDULE II




                         THE ARNOLD PALMER GOLF COMPANY


                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

       FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997, MARCH 2, 1996, AND
                 THE SEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1996

                                 (IN THOUSANDS)



<TABLE>
<CAPTION>
                    COL. A                                    COL. B                   COL. C               COL. D           COL. E
                  -----------                                ---------       -------------------------   -------------       ------
                                                                                      ADDITIONS
                                                                             -------------------------                      
                                                             BALANCE AT      CHARGED TO    CHARGED TO                       BALANCE
                                                             BEGINNING        COST AND       OTHER                         AT END OF
                  DESCRIPTION                                OF PERIOD        EXPENSES     ACCOUNTS(1)   DEDUCTIONS(2)       PERIOD
                  -----------                                ---------        --------     -----------   -------------       ------
<S>                                                          <C>              <C>          <C>           <C>               <C> 
For the year ended September 30, 1998:
    Allowance for doubtful accounts                            $  843           $389           $ 1           $(256)           $977
                                                               ======           ====           ===           =====            ====
For the year ended September 30, 1997:
    Allowance for doubtful accounts                            $  720           $533           $62           $(472)           $843
                                                               ======           ====           ===           =====            ====
For the seven-month period ended September 30, 1996:
    Allowance for doubtful accounts                            $  758           $373           $35           $(446)           $720
                                                               ======           ====           ===           =====            ====
For the year ended March 2, 1996:
    Allowance for doubtful accounts                            $1,049           $  0           $20           $(311)           $758
                                                               ======           ====           ===           =====            ====
</TABLE>


(l) Recoveries on accounts written off.

(2) Accounts written off.




40
<PAGE>   41




                                   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 who are duly authorized to do so.

                                        THE ARNOLD PALMER GOLF COMPANY


Date:  December 18, 1998                By   /s/ Cynthia L. Davis       
                                             -----------------------------------
                                             (Cynthia L. Davis)
                                             President & Chief Executive Officer


Date:  December 18, 1998                By   /s/ David J. Kirby                 
                                             -----------------------------------
                                             (David J. Kirby)
                                             Vice President Finance 
                                             (Chief Financial Officer)




41

<PAGE>   42


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


Date:  December 18, 1998                   /s/ John T. Lupton       
                                   ---------------------------------------------
                                   (John T. Lupton)        Chairman of the Board

Date:  December 18, 1998                   /s/ Cynthia L. Davis                 
                                   ---------------------------------------------
                                   (Cynthia L. Davis)                   Director

Date:  December 18, 1998                   /s/ David S. Gonzenbach              
                                   ---------------------------------------------
                                   (David S. Gonzenbach)                Director

Date:  December 18, 1998                   /s/ James L.E. Hill                  
                                   ---------------------------------------------
                                   (James L.E. Hill)                    Director

Date:  December 18, 1998                   /s/ Richard J. Horton                
                                   ---------------------------------------------
                                   (Richard J. Horton)                  Director

Date:  December 18, 1998                   /s/ Nancy Lopez                      
                                   ---------------------------------------------
                                   (Nancy Lopez)                        Director

Date:  December 18, 1998                   /s/ Charles S. Mechem, Jr.           
                                   ---------------------------------------------
                                   (Charles S. Mechem, Jr.)             Director

Date:  December 18, 1998                   /s/ Arnold D. Palmer                 
                                   ---------------------------------------------
                                   (Arnold D. Palmer)                   Director

Date:  December 18, 1998                   /s/ Joel W. Richardson, Jr.          
                                   ---------------------------------------------
                                   (Joel W. Richardson, Jr.)            Director



42
<PAGE>   43







                         THE ARNOLD PALMER GOLF COMPANY
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit       
Number                    Description
-------                   -----------
<S>              <C>
  3.1*           Amended and Restated Charter of The Arnold Palmer Golf Company

  3.2**          Amended and Restated Bylaws of ProGroup, Inc.

  10.1           Licensing Agreement dated March 30, 1997 by and between the 
                 Company and Nancy Lopez Enterprises, Inc.

  10.2           Option Agreement dated April 12, 1997 by and between the 
                 Company and Nancy Lopez Enterprises, Inc.

  22***          Subsidiaries of the Company

  23             Consent of Arthur Andersen LLP, independent public accountants

  27             Financial Data Schedule
</TABLE>


*        Incorporated by reference herein from the Company's Form 10-Q for the 
         quarter ended August 31, 1996.

**       Incorporated by reference herein from the Company's Form 10-K for the 
         year ended February 25, 1995.

***      Incorporated by reference herein from the Company's Form 10-K for the
         transition period ended February 22, 1992.





43