<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, 1997
                            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      National Association of Securities Dealers, Inc.
     $.50 per share           Automated Quotation System - Small Cap Market
--------------------------------------------------------------------------------
   (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 December 22, 1997, the aggregate market value of the voting stock
held by non-affiliates was approximately $5,121,000 (based on the closing price
on that date of $2.3125 per share).

         As of December 22, 1997, 833,333 shares of Series NB Preferred Stock
and 3,004,367 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 20, 1998, 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 Arnold Palmer and First Flight golf equipment, and Hot-Z
golf bags and luggage. APGC owns, subject to certain exceptions, the exclusive
worldwide right to the Arnold Palmer trade name in connection with the Company's
manufacture, sale and distribution of golf products. For purposes of this
report, "fiscal 1997, 1996, and 1995" refer to the fiscal years ended September
30, 1997, March 2, 1996 and February 25, 1995, 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 1997. 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
       Summitt/Intro-Union Trading Limited         Iron heads, Metal wood heads
       Exel                                        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 "License
Agreement") with Arnold Palmer Enterprises, Inc. ("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.


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<PAGE>   3

The License 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 License Agreement to sublicense to third parties
the right to use the licensed trademarks. The License 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 Enterprises as a
royalty a specified percentage of net sales 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 License Agreement also sets
forth the manner in which the Company and Enterprises divide sublicensing
royalties. In addition to the foregoing, the License 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.

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 carry significant amounts of
finished goods inventory during the winter months to meet customer demands in
the spring and summer months.

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, Sears, Roebuck and Company, KMart
Corporation, and Wal-Mart Stores Inc., accounted for 6.3%, 6.0% and 4.8%,
respectively, of the Company's total sales during fiscal 1997.

Backlogs
With regard to continuing operations, the Company's backlog of unshipped orders
was approximately $2,391,000 on September 30, 1997, and approximately $2,115,000
on September 30, 1996.

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.



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<PAGE>   4



Competitive Conditions
The principal methods of competition of the Company 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
No material amount was spent by the Company during fiscal 1997, 1996, 1995 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 229 people as of September 30, 1997.

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
1997, 1996, 1995 and the 1996 transition period. Foreign sales are not expected
to be material during the fiscal year ending September 30, 1998.

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. The property is used for
                  manufacturing golf clubs and warehousing finished goods and
                  raw materials. A portion of the property also houses the
                  Company's corporate offices.

         (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 bags
                  and warehousing raw materials.


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<PAGE>   5

         (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 is idle and
                  currently for sale.

         (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, and the
                  Company is seeking to sublease the building for the remainder 
                  of the lease term.

         (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.

         (f)      3300 Ruckriegel Parkway, Louisville, Kentucky, is a leased
                  building of cinder block and concrete construction containing
                  approximately 4,600 square feet. This building is used to
                  house the administrative offices of the Company's National
                  Golf Suppliers division.

Item 3. Legal Proceedings

Except as set forth below, 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.

On March 25, 1996, Richard E. Wenz, the former CEO of the Company, filed a
lawsuit against Arthur P. Becker, formerly Chairman of the Board and formerly a
Board member of the Company, in the United States District Court for the
Southern District of New York. The lawsuit arose out of the publication in the
June 12, 1995 edition of Fortune magazine of certain statements relating to Mr.
Wenz's relationship with the Company which were attributed to Mr. Becker.

The complaint alleged a cause of action against Mr. Becker for defamation per se
and sought compensatory damages of at least $10 million, plus punitive damages
in an unspecified amount. Pursuant to the provisions of the Amended and Restated
By-Laws of the Company and the applicable provisions of the Tennessee Business
Corporation Act, the Company agreed to indemnify Mr. Becker from liability which
he might have incurred as a result of the lawsuit. The Company also agreed to
advance certain costs of defense of the lawsuit to Mr. Becker.

On May 21, 1996, Mr. Wenz amended his complaint by adding Time Inc., the
publisher of Fortune magazine, as an additional defendant in the lawsuit. The
cause of action alleged against Time Inc. was also for defamation per se, which
arose out of the same June 12, 1995 article, and also sought compensatory
damages of at least $10 million.

On April 15, 1996, Mr. Becker filed his answer to the original complaint. The
answer denied all allegations of wrongdoing and set forth 15 affirmative
defenses. On June 11, 1996, Mr. Becker filed his answer to the amended
complaint, repeating his denials of all wrongdoing and repeating the

5
<PAGE>   6

15 affirmative defenses. On or about June 12, 1996, Time Inc. filed its answer,
also denying all wrongdoing, and setting forth nine affirmative defenses.

The lawsuit filed by Mr. Wenz has been settled in exchange for a payment by the
Company to Mr. Wenz of $75,000.

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

No matters were submitted during the fourth quarter of fiscal 1997 to a vote of
security holders, through the solicitation of proxies or otherwise.

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<PAGE>   7
                                     PART II


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

MARKET PRICES 

The Company's common shares trade on The Nasdaq Stock Market under the symbol
"APGC." Based upon transfer agent records, the Company's common shares were held
by approximately 1,600 shareholders as of December 22, 1997. The Nasdaq Stock
Market has notified the Company that under its revised continued listing
requirements, the Company will no longer qualify for continued listing on the
Nasdaq Stock Market as of February 23, 1998. The Company's Series NB Preferred
Stock is currently held by an affiliate of the Company's Chairman and Chief
Executive Officer and is not publicly traded.

A quarterly summary of the high and low market prices per common share for
fiscal 1997, 1996 and the 1996 transition period as reported by Nasdaq is shown
below:

<TABLE>
<CAPTION>

                                                          1996
                               Fiscal 1997           Transition Period             Fiscal 1996
                           -------------------    ----------------------         ---------------
Quarter:                     High        Low           High       Low            High       Low
                             ----        ---           ----       ---            ----       ---       
<S>                        <C>         <C>        <C>             <C>            <C>        <C>

     First                  $4.250     $3.875         $6.125     $4.250          $8.500    $5.000
     Second                  4.500      4.250          7.500      4.625           5.750     3.750
     Third                   3.750      3.375          6.625      5.500           6.000     3.500
     Fourth                  3.250      2.9375            --         --           6.500     3.750
</TABLE>

During fiscal 1997, the Company's first, second, third and fourth quarters ended
in December, March, June and September respectively. In fiscal 1996, the
Company's first, second, third and fourth quarters ended in May, August,
November and February respectively. During the 1996 transition period, the
Company's first and second quarter ended in May and August. Due to the change in
year end to September 30, 1996, the third quarter for the 1996 transition period
includes only the month of September.

DIVIDENDS 

Payment of dividends 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 1997, 1996 and the 1996 transition period.

Item 6. Selected Financial Data.


                             SELECTED FINANCIAL DATA

   FOR FISCAL 1997, 1996, 1995, 1994, AND 1993, AND THE 1996 TRANSITION PERIOD

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                      FISCAL YEAR ENDED                        1996
                                                 --------------------------------------------------------   Transition
                                                   1997        1996        1995        1994        1993       Period
                                                 --------    --------    --------    --------    --------    --------
<S>                                              <C>         <C>         <C>         <C>         <C>         <C>     
STATEMENT OF OPERATIONS INFORMATION:
    Net sales                                    $ 28,454     $21,185     $24,621     $24,726     $18,697     $18,456
    Net loss from continuing operations          $(11,228)    $(5,625)    $(9,460)    $(1,054)    $(1,016)    $(2,294)
BALANCE SHEET INFORMATION:
    Total assets                                 $ 22,753     $18,560     $31,271     $40,258     $36,435     $24,934
    Long-term obligations and redeemable
       preferred stock                           $ 31,264     $ 4,671     $ 7,473     $ 3,621     $   572     $20,996
PER COMMON SHARE DATA:
    Net loss per share from continuing
       operations                                $  (3.77)    $ (2.15)     $(3.73)    $  (.42)    $  (.42)    $  (.80)
    Common shares outstanding at end of period      3,004       2,635       2,539       2,537       2,517       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 1997, 1996, 1995, 1994,
and 1993 relates to the years ended September 30, 1997, March 2, 1996, February
25, 1995, February 26, 1994, and February 27, 1993.

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.

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

Results of Operations

Comparison of the Twelve Months Ended September 30, 1997 and September 30, 1996


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<PAGE>   8


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


                              Sales By Product Line
                                ($'s in millions)

<TABLE>
<CAPTION>
                                      1997                  1996              % Change
                                      -----                 -----             --------
  <S>                                 <C>                   <C>               <C> 
  Clubs                               $14.1                 $13.5                4.8%
  Bags                                 11.0                  10.6                3.4%
  Apparel                               0.2                   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                  *
  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 division, National Golf Suppliers, in June 1996,
therefore prior year component sales are 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. 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 partially 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 remainder of the write-downs were taken for club raw materials and finished
goods which will require significant price reductions to generate demand for the
products in the market place. The Company believes the write downs are necessary
as it will 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


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<PAGE>   9

$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 previously 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.

Due to operating losses for fiscal 1997, no tax provision was necessary.


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<PAGE>   10



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 $.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 

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<PAGE>   11

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 $.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 $.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 $.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 $.3 million.

Comparison of Years Ended March 2, 1996, and February 25, 1995

Net sales from continuing operations for fiscal year 1996 decreased by $3.4
million, to $21.2 million, compared with fiscal year 1995. Club sales decreased
$2.4 million or 19.6% for fiscal year 1996 compared to fiscal year 1995. The
decrease in club sales was attributable primarily to the retail line of golf
equipment, due to a decrease in demand for these products from mass
merchandisers during fiscal 1996. Pro club sales were relatively unchanged from
fiscal 1995. Sales of golf bags decreased approximately $1.0 million in fiscal
1996 compared to fiscal 1995. The decrease in bag sales was primarily in our pro
line, which is sold to on-course golf shops and off-course golf equipment
stores. In early fiscal 1996, the decision was made by former management to
import a greater portion of our pro bag line. The features and quality of the
imported bags were not consistent with the bags historically manufactured by the
Company. As a result, the bags were not well received in the market place, thus
the decline in the pro segment of our bag line. During the latter part of fiscal
1996, the Company returned to domestic production of its high end pro bags.
Gross profit as a percent of net sales increased to 15.1% from 13.1% in fiscal
1995. The increase resulted primarily from reductions in manufacturing
variances. Losses from continuing operations were $5.6 million on net sales of
$21.2 million in fiscal 1996, compared to losses from continuing operations of
$9.5 million on net sales of $24.6 million in fiscal 1995.

Selling expenses decreased by $1.8 million or 28.4% for fiscal year 1996
compared to the previous year. When the Company sold its Duckster apparel
division in May 1995, the sales force became employees of Duckster. However,
through a sales representative agreement between Duckster and the Company, they
continued to sell the Company's pro line of golf clubs and bags with
compensation being on a commission basis. The result for the Company was
substantially reduced expenses for salaries and fringe benefits. Other selling
expenses such as royalties, were less due to 

11
<PAGE>   12

reduced sales volume in fiscal 1996. Additionally, lower expenditures for
advertising and promotions were factors in the decrease in selling expenses.

General and administrative expenses decreased $1.9 million or 43.1% in fiscal
1996. Most of the decrease was related to lower salaries and fringe benefits due
to the disposal of Duckster, which necessitated a reduction in general and
administrative overhead. Other components of the decrease were reduced legal
fees and other professional services.

Interest expense increased 119%, or $1.6 million, in fiscal 1996 compared to
fiscal 1995. Substantially all the increase was non-cash interest related to
amortization of subordinated debt discounts, subordinated notes and accrued
interest thereon.

Other income increased $1.1 million in fiscal year 1996 compared to fiscal year
1995. Royalty income increased by $.4 million, gain on asset dispositions
increased $.4 million, and the Company reported $.1 million of rental income
during fiscal 1996.

Due to operating losses for fiscal 1996, no tax provision was necessary.

Liquidity and Capital Resources

Subsequent to September 30, 1997, the Company entered a new financing
arrangement which converted $10.0 million of the Company's borrowings under its
$12.0 million line of credit to a two year term loan. As a result, as of
September 30, 1997 the Company had working capital of $10.5 million and a
current ratio of 3.8 to one. This compares to working capital of $10.7 million
and a current ratio of three to one as of September 30, 1996.

Total borrowings from the Company's bank were $22.2 million as of September 30,
1997 compared to $12.8 million at September 30, 1996. The increase in borrowings
was used to fund operating losses of $11.2 million and $1.0 million for capital
expenditures. The Company generally relies upon internally generated cash and
short-term borrowings to satisfy working capital and capital expenditure
requirements. Generally, borrowings under the line increase from December to
April, because the Company builds inventory through the winter to support its
spring shipping season.

The new $10.0 million term loan matures on December 31, 1999, and will bear
interest at the fixed rate of LIBOR plus 2.0% at December 31, 1997 (7.85% at
December 22, 1997), with interest payable monthly in arrears. In addition to
converting $10.0 million of existing indebtedness from the line of credit to a
two year term loan, the bank will extend the maturity date on the $12.0 million
revolving credit facility to December 31, 1998. At the option of the borrower,
this revolving credit facility will bear interest at prime minus 0.50% or one,
two or three month LIBOR plus 2.0% (8.0% at September 30, 1997). The Company has
an existing term loan with the bank of $12.0 million which matures on December
31, 1999 and bears interest at the fixed rate of 8.25% with interest payable
monthly in arrears.

Both term loans and the revolving credit facility require no financial
covenants, and are unconditionally guaranteed by the Company's Chairman and
Chief Executive Officer (the "Guarantor"). The Company anticipates that this new
financing arrangement totaling $34.0 million will satisfy working capital and
capital expenditure requirements through 1998. The Company's Board of Directors
is considering appropriate compensation to be paid to the Guarantor in
consideration of his guarantee of the new credit facility.


12
<PAGE>   13
Subsequent to September 30, 1997, certain executives left the Company under
severance agreements. Additionally, the Company anticipates further work force
reductions will occur in fiscal 1998. The Company expects to record a charge of
$625,000 in the first quarter of fiscal 1998 related to these items.

Impact of Inflation and Changing Prices

Management believes that the impact of inflation and other changes in prices
during fiscal 1997, 1996 and 1995 and the 1996 transition period, had no
material effect on the Company's financial condition or operating results.

Recent Accounting Pronouncements

In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No. 128 "Earnings Per Share" ("SFAS 128"). SFAS 128 changes
the criteria for reporting earnings per share ("EPS") by replacing primary EPS
with basic EPS and fully diluted EPS with diluted EPS. The Company is required
to adopt SFAS 128 for periods ending after December 15, 1997, and all prior
periods EPS data must be restated. The impact of adopting SFAS 128 will not have
a material impact on EPS for any period presented.

Item 8. Financial Statements and Supplementary Data.

Index to Financial Statements and Schedules

         Report of Independent Public Accountants

         Balance Sheets as of September 30, 1997 and September 30, 1996

         Statements of Operations for the Years Ended September 30, 1997, March
         2, 1996, February 25, 1995 and the Seven-Month Period Ended September
         30, 1996

         Statements of Stockholders' Equity (Deficit) for the Years Ended
         September 30, 1997, March 2, 1996, February 25, 1995 and the
         Seven-Month Period Ended September 30, 1996.

         Statements of Cash Flows for the Years Ended September 30, 1997, March
         2, 1996, February 25, 1995 and the Seven-Month Period Ended September
         30, 1996.

         Notes to Financial Statements

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

13
<PAGE>   14
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and
Stockholders of 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, 1997 and 1996 and the
related statements of operations, stockholders' equity (deficit) and cash flows
for the year ended September 30, 1997, the seven-month period ended September
30, 1996, and the years ended March 2, 1996 and February 25, 1995. 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, 1997 and 1996, and the results of its operations and its
cash flows for the year ended September 30, 1997, the seven-month period ended
September 30, 1996, and the years ended March 2, 1996 and February 25, 1995, in
conformity with generally accepted accounting principles.


                                                             ARTHUR ANDERSEN LLP



Chattanooga, Tennessee
December 23, 1997


14
<PAGE>   15


                         THE ARNOLD PALMER GOLF COMPANY

                                 BALANCE SHEETS

                           SEPTEMBER 30, 1997 AND 1996

                  (DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                     ASSETS                                        1997           1996
                                     ------                                      -------        -------
<S>                                                                              <C>            <C>    
   CURRENT ASSETS:
       Cash                                                                      $   703        $    47
       Accounts receivable, less allowance for doubtful accounts of $843 and
          $720 at September 30, 1997 and 1996                                      5,311          5,630
       Inventories                                                                 7,375          9,491
       Prepaid expenses and other                                                    847            913
                                                                                 -------        -------
                    Total current assets                                          14,236         16,081
                                                                                 -------        -------
   PROPERTY, PLANT, AND EQUIPMENT, NET                                             1,493          1,445
                                                                                 -------        -------
   OTHER ASSETS:
       Investment in Nevada Bob's Holdings, Inc.                                   5,000          5,000
       Property held for sale                                                        170            271
       Goodwill, net                                                                 502            532
       Other                                                                       1,352          1,605
                                                                                 -------        -------
                    Total other assets                                             7,024          7,408
                                                                                 -------        -------
                                                                                 $22,753        $24,934
                                                                                 =======        =======


               LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                      1997           1996
               ----------------------------------------------                    -------        -------

CURRENT LIABILITIES:
    Current maturities of long-term obligations                                 $    102        $   112
    Short-term borrowings from bank                                                  150            796
    Accounts payable                                                               2,121          2,139
    Accrued liabilities                                                            1,370          2,288
                                                                                --------        -------
                 Total current liabilities                                         3,743          5,335
                                                                                --------        -------
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES                                  26,162         15,884
                                                                                --------        -------
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; 3,004,367 and
       2,926,805 shares issued and outstanding at September 30, 1997 and 1996      1,502          1,463
    Additional paid-in capital                                                     6,313          5,991
    Accumulated deficit                                                          (19,967)        (8,739)
                                                                                --------        -------
                 Total stockholders' equity (deficit)                            (12,152)        (1,285)
                                                                                --------        -------
                                                                                $ 22,753        $24,934
                                                                                ========        =======
</TABLE>


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


15
<PAGE>   16



                         THE ARNOLD PALMER GOLF COMPANY

                            STATEMENTS OF OPERATIONS

                               FOR THE YEARS ENDED

            SEPTEMBER 30, 1997, MARCH 2, 1996, FEBRUARY 25, 1995, AND

                 THE SEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1996

                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                            Fiscal Years                1996
                                                  --------------------------------   Transition
                                                    1997        1996        1995       Period
                                                  --------    --------    --------    --------

<S>                                               <C>         <C>         <C>         <C>     
NET SALES                                         $ 28,454    $21,185     $24,621     $18,456
COST OF SALES                                       26,447     17,983      21,280      13,301
                                                  --------    -------     -------     -------
       Gross profit                                  2,007      3,202       3,341       5,155

SELLING EXPENSES                                     7,479      4,559       6,368       4,466
GENERAL AND ADMINISTRATIVE EXPENSES                  4,955      2,573       4,520       2,405
                                                  --------    -------     -------     -------
                                                   (10,427)    (3,930)     (7,547)     (1,716)
                                                  --------    -------     -------     -------
OTHER INCOME (EXPENSE):

    Interest expense, net                           (2,212)    (2,965)     (1,354)     (1,129)
    Royalty and sub-license income, net              1,402        974         569         937
    Other, net                                           9        296        (393)        508
    Writedown of note receivable                         0          0           0        (894)
                                                  --------    -------     -------     -------
                                                      (801)    (1,695)     (1,178)       (578)
                                                  --------    -------     -------     -------
       Loss from continuing operations before
           income taxes                            (11,228)    (5,625)     (8,725)     (2,294)
PROVISION FOR INCOME TAXES                               0          0        (735)          0
                                                  --------    -------     -------     -------
LOSS FROM CONTINUING OPERATIONS                    (11,228)    (5,625)     (9,460)     (2,294)
                                                  --------    -------     -------     -------
DISCONTINUED OPERATIONS (NOTE 13):
    Income (loss) from discontinued operations           0        348      (6,082)          0
    Loss on disposal of discontinued operations          0          0      (1,244)          0
                                                  --------    -------     -------     -------
                                                         0        348      (7,326)          0
                                                  --------    -------     -------     -------
NET LOSS                                          $(11,228)   $(5,277)   $(16,786)    $(2,294)
                                                  ========    =======    ========     =======
NET INCOME (LOSS) PER SHARE FROM:
  Continuing operations                           $  (3.77)   $ (2.15)   $  (3.73)    $  (.80)
  Discontinued operations                              .00        .13       (2.88)        .00
                                                  --------    -------    --------     -------
                                                  $  (3.77)   $ (2.02)   $  (6.61)    $  (.80)
                                                  ========    =======    ========     =======
</TABLE>

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


16
<PAGE>   17



                         THE ARNOLD PALMER GOLF COMPANY

                  STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

                               FOR THE YEARS ENDED

              SEPTEMBER 30, 1997, MARCH 2, 1996, FEBRUARY 25, 1995,

               AND THE SEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1996

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>             
                                                                           RETAINED
                                                COMMON STOCK   ADDITIONAL  EARNINGS
                                              ---------------   PAID-IN  (ACCUMULATED
                                              SHARES   AMOUNT   CAPITAL    DEFICIT)      TOTAL
                                              ------   ------   -------    --------    --------
                                                                         
<S>                                           <C>      <C>      <C>        <C>         <C>     
BALANCE AT FEBRUARY 26, 1994                   2,537   $1,268   $2,295     $ 15,618    $ 19,181

    Net loss                                       0        0        0      (16,786)    (16,786)
    Exercise of stock options                      2        2       17            0          19
    Issuance of warrants for 1,158 shares of                             
       common stock                                0        0    1,806            0       1,806
                                               -----   ------   ------     --------    --------
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)
                                               =====   ======   ======     ========    ========
</TABLE>                                                               

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


17
<PAGE>   18


                         THE ARNOLD PALMER GOLF COMPANY

                            STATEMENTS OF CASH FLOWS

    FOR THE YEARS ENDED SEPTEMBER 30, 1997, MARCH 2, 1996, FEBRUARY 25, 1995,

               AND THE SEVEN-MONTH PERIOD ENDED SEPTEMBER 30, 1996

                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                            Fiscal Years              1996
                                                                                  -------------------------------  Transition
                                                                                    1997       1996        1995      Period
                                                                                  --------    -------    --------    -------
<S>                                                                               <C>         <C>        <C>         <C>     
OPERATING ACTIVITIES:
    Net loss                                                                      $(11,228)   $(5,277)   $(16,786)   $(2,294)
    Adjustments to reconcile net loss to net cash used in operating activities:
          Depreciation                                                                 407        400         761        140
          Amortization                                                                 364      1,674          71        433
          Deferred income tax provision                                                  0          0         476          0
          (Gain) loss on disposal of property, plant, and equipment                    (11)      (100)        114        (98)
          Loss on disposal of discontinued operations                                    0          0       1,244          0
          Writedown of note receivable                                                   0          0           0        894
          Writedown of property, plant and equipment                                   727          0           0          0
          Other                                                                          0          0         348          0
          Changes in operating assets and liabilities, net of effects from
              purchase of National Golf Suppliers:
                 Accounts receivable                                                   319      3,409       4,909     (1,778)
                 Income taxes receivable                                                 0          0         259          0
                 Inventories                                                         2,116      2,479         605        489
                 Prepaid expenses and other                                            254        452       1,117       (481)
                 Accounts payable                                                      (18)    (2,400)        (40)       251
                 Accrued liabilities                                                  (557)    (1,577)      1,420        (12)
                                                                                  --------    -------    --------    -------
                     Net cash used in operating activities                          (7,627)      (940)     (5,502)    (2,456)
                                                                                  --------    -------    --------    -------

INVESTING ACTIVITIES:
    Additions to property, plant, and equipment                                     (1,041)      (150)       (400)      (291)
    Proceeds from sale of property, plant, and equipment                                23      3,855         117        125
    Investment in Nevada Bob's Holdings, Inc.                                            0          0           0     (5,000)
    Payments received on note receivable                                                 0      1,600           0          0
                                                                                  --------    -------    --------    -------
                    Net cash provided by (used in) investing activities             (1,018)     5,305        (283)    (5,166)
                                                                                  --------    -------    --------    -------

FINANCING ACTIVITIES:
    Net increase (decrease) in short-term borrowings from bank                       9,354     (1,733)      1,168      2,700
    Proceeds from debt issuance and related warrants                                     0          0       5,000          0
    Proceeds from debt obligations                                                   1,109          0           0          0
    Principal payments on debt obligations                                          (1,162)    (2,656)       (418)       (41)
    Issuance of common stock                                                             0          0          19          0
    Issuance of redeemable preferred stock                                               0          0           0      5,000
                                                                                  --------    -------    --------    -------
                    Net cash provided by (used in) financing activities              9,301     (4,389)      5,769      7,659
                                                                                  --------    -------    --------    -------
NET INCREASE (DECREASE) IN CASH                                                        656        (24)        (16)        37

CASH, BEGINNING OF PERIOD                                                               47         34          50         10
                                                                                  --------    -------    --------    -------
CASH, END OF PERIOD                                                               $    703    $    10    $     34    $    47
                                                                                  ========    =======    ========    =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
       Cash payments (refunds) during the period for:
          Interest                                                                $  1,810    $ 1,085    $  1,088    $   613
                                                                                  ========    =======    ========    =======

          Income taxes, net                                                       $      0    $    (5)   $   (534)   $     0
                                                                                  ========    =======    ========    =======
</TABLE>

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


18
<PAGE>   19



                         THE ARNOLD PALMER GOLF COMPANY

                          NOTES TO FINANCIAL STATEMENTS

(For purposes of these financial statements and notes to these financial
statements, "fiscal 1997" relates to the year ended September 30, 1997, while
"fiscal 1996 and 1995" pertains to the years ended March 2, 1996 and February
25, 1995, respectively. The "1996 transition period" relates to the seven-month
period ended September 30, 1996. All monetary amounts are expressed in thousands
of dollars unless contrarily evident.)

  1.  NATURE OF OPERATIONS

      The Arnold Palmer Golf Company (the "Company") manufactures, markets and
      distributes golf products, including Arnold Palmer and First Flight golf
      equipment and Hot-Z 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 trade name 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 retail customers accounted for 17%, 25%, 32%, and
      36% of net sales from continuing operations for fiscal 1997, the 1996
      transition period, and fiscal 1996 and 1995, 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.



19
<PAGE>   20


      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, 1997 and 1996:

<TABLE>
<CAPTION>
                                                            1997       1996
                                                           -------    -------
          <S>                                              <C>        <C>    
          Land                                             $    70    $    70
          Buildings and improvements                           595        661
          Machinery and equipment                            2,936      2,764
          Furniture and fixtures                               630        425
          Construction in progress                             234        275
                                                           -------    -------
                                                             4,465      4,195

          Less accumulated depreciation and amortization    (2,972)    (2,750)
                                                           -------    -------
                                                           $ 1,493    $ 1,445
                                                           =======    =======
</TABLE>

      Included in property held for sale at September 30, 1997 and 1996 is the
      Company's idle Lumberton, North Carolina plant, which is for sale and
      stated at its estimated net realizable value.

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

      GOODWILL

      Goodwill of $85 relates to a business acquired before November 1, 1970,
      and is not required to be amortized. The remaining goodwill is being
      amortized on a straight-line 


20
<PAGE>   21


      basis over 15 years. The Company continually evaluates whether subsequent
      events and circumstances have occurred that indicate that the remaining
      estimated useful life of goodwill may warrant revision or that the
      remaining balance may not be 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 1997 and accumulated amortization at
      September 30, 1997 is $30.

      ADVERTISING EXPENSES

      The Company expenses production costs of advertising the first time the
      advertising takes place, except for direct-response advertising, which is
      capitalized and amortized over its expected period of future benefit.

      At September 30, 1997 and 1996, the Company reported $86 and $61,
      respectively, of prepaid advertising in the accompanying balance sheets.
      Advertising expense for fiscal 1997, the 1996 transition period, and
      fiscal 1996 and 1995 was $1,133, $883, $547, and $1,988, 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 and 1995 are based on a 52-53-week period
      ending on the Saturday closest to the end of February.

      NET LOSS PER SHARE

      The computation of net loss per share is based on the weighted average
      number of common shares outstanding during the period after adding common
      stock equivalents having a dilutive effect. The weighted average number of
      shares and equivalents outstanding for fiscal 1997, the 1996 transition
      period, and for fiscal 1996 and 1995 are 2,978,099, 2,852,213, 2,615,619,
      and 2,537,876, 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
      Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
      123").


21
<PAGE>   22


      RECENT ACCOUNTING PRONOUNCEMENT

      In 1997, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standard No. 128 "Earnings Per Share" ("SFAS No.
      128"). SFAS No. 128 changes the criteria for reporting earnings per share
      ("EPS") by replacing primary EPS with basic EPS and fully diluted EPS with
      diluted EPS. The Company is required to adopt SFAS No. 128 for periods
      ending after December 15, 1997, and all prior periods EPS data must be
      restated. The impact of adopting SFAS No. 128 will not have a material
      impact on EPS for any period presented.

  3.  ACQUISITION 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, at a purchase price of $384.

      The acquisition of NGS has been 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 has been recorded as goodwill and is 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.

  4.  INVENTORIES

      Inventories as of September 30, 1997 and 1996 consisted of the following:

<TABLE>
<CAPTION>
                                            1997               1996
                                           ------             ------
<S>                                        <C>                <C>   
                Raw materials              $3,602             $4,344
                Work-in-process                14                221
                Finished goods              3,759              4,926
                                           ------             ------
                                           $7,375             $9,491
                                           ======             ======
</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.


22
<PAGE>   23


  6.  SHORT-TERM BORROWINGS

      Short-term borrowings consist of advances under a $12,000 line of credit
      agreement with a bank. The line of credit and long-term obligations
      are collateralized by accounts receivable, inventory and other business
      assets and are guaranteed by the Company's Chairman and Chief Executive 
      Officer (the "Guarantor").

      There are no financial covenants under the line of credit. Advances under
      the line of credit bear interest at the bank's prime rate less .5% (8% at
      September 30, 1997). Interest is payable monthly. At September 30, 1997,
      advances outstanding under the line of credit were $10,150, letters of
      credit outstanding were $450, and $1,400 was unused.

      The line of credit was scheduled to mature in December 1997. Subsequent to
      September 30, 1997, the maturity date of the line of credit was extended
      to December 31, 1998 and $10,000 of the line of credit was converted to
      term debt due December 31, 1999. As a result of this, $10,000 of the
      borrowings under the line of credit at September 30, 1997 has been
      classified in long-term obligations in the accompanying balance sheet. In
      fiscal 1997, the Company borrowed and repaid $1,100 from the Guarantor.

  7.  LONG-TERM OBLIGATIONS

      Long-term obligations consisted of the following at September 30, 1997 and
      1996:

<TABLE>
<CAPTION>
                                                                                    1997                1996
                                                                                   -------             -------

<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 the fixed rate of
           LIBOR plus 2% at December 31, 1997 (7.85% at December 22, 1997), 
           due December 31, 1999, (refinanced from line of credit to term 
           subsequent to September 30, 1997--Note 6)                                10,000                   0

       Subordinated notes ($5,000 face amount) to related parties, net of
           discount of $853 and $1,175 at September 30, 1997 and 1996, interest
           payable monthly at 6.0% (effective interest rate of 15.9%), due
           November 2, 1999                                                          4,147               3,825

       Other obligations                                                               117                 171
                                                                                   -------             -------
                                                                                    26,264              15,996
       Less: current maturities                                                       (102)               (112)
                                                                                   -------             -------
                                                                                   $26,162             $15,884
                                                                                   =======             =======
</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 





23
<PAGE>   24


      was recorded as additional paid-in capital.

      Future scheduled maturities of long-term obligations as of September 30,
      1997, were as follows:

<TABLE>
                   <S>                                    <C>
                   1998                                   $   102
                   1999                                        12
                   2000                                    26,150


</TABLE>

  8.  INCOME TAXES

      There was no current income tax provision or benefit recorded during
      fiscal 1997, the 1996 transition period, and fiscal 1996 and 1995 due to
      the losses sustained by the Company. The $735 provision for income taxes
      from continuing operations in fiscal 1995 resulted principally from
      recording a valuation allowance against previously recognized deferred tax
      assets due to the uncertainty of the realization of the related benefits.

      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, 1997 and 1996, are as follows:

<TABLE>
<CAPTION>
                                                     1997           1996
                                                   --------       --------
<S>                                                <C>            <C>     
      Deferred tax assets:
          Tax loss carryforwards                   $ 12,086       $  9,148
          Inventory and receivables reserves          1,221            288
          Other accruals and reserves                   550            772
                                                   --------       --------
                                                     13,857         10,208
                                                   --------       --------
      Deferred tax assets valuation allowance       (13,114)        (9,296)
                                                   --------       --------
                                             
      Deferred tax liabilities:
          Pension asset                                 417            398
          LIFO to FIFO change                           222            379
          Prepaid expenses                               32             63
          Excess tax depreciation                        72             72
                                                   --------       --------
                                                        743            912
                                                   --------       --------
      Net deferred tax asset                       $      0       $      0
                                                   ========       ========
</TABLE>

      At September 30, 1997, the Company had federal tax loss carryforwards of
      approximately $32,300 which expire in years 2009 through 2012 if not
      utilized earlier.



24
<PAGE>   25


      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
                                                      1997          1996          1995        Period
                                                     -------       -------       -------      ------
<S>                                                  <C>           <C>           <C>           <C>  
      Expected tax benefit                           $ 3,818       $ 1,913       $ 2,966       $ 780
      Change in valuation allowance                   (3,818)       (1,913)       (3,791)       (780)
      State income taxes, net of federal income
          tax benefit                                      0             0           349           0
      Other, net                                           0             0          (259)          0
                                                     -------       -------       -------       -----
             Provision for income taxes from
                 continuing operations
                                                     $     0       $     0       $  (735)      $   0
                                                     =======       =======       =======       =====
</TABLE>

      A valuation allowance was recorded related to the entire amount of losses
      from discontinued operations in fiscal 1995; accordingly, no income tax
      provision or benefit was recognized for discontinued operations in 1995.

  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.





25
<PAGE>   26


      Pension income for fiscal 1997, the 1996 transition period, and fiscal
      1996 and 1995 included the following components:
                     
<TABLE>
<CAPTION>

                                                  Fiscal Years                 1996
                                         -------------------------------    Transition
                                         1997         1996         1995       Period
                                         -----       -------       -----      -------

<S>                                      <C>         <C>           <C>         <C>  
      Service cost                       $  56       $    86       $  97       $  36
      Interest cost on projected
         benefit obligation                346           365         376         199
      Actual (return) loss on plan
         assets                           (864)       (1,047)        177        (342)
      Net amortization and deferral        161           430        (932)        (35)
      Net loss due to special early
         retirement benefits               251             0           0           0
                                         -----       -------       -----       -----
      Net pension income                 $ (50)      $  (166)      $(282)      $(142)
                                         =====       =======       =====       =====
</TABLE>


      The following table sets forth the funded status of the plan as of
      September 30, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                    1997          1996
                                                                   -------       -------
<S>                                                                <C>           <C>    
            Actuarial present value of benefit obligation:
                Vested benefit obligation                          $4,223        $4,347
                Nonvested benefit obligation                          110             0
                                                                   ------        ------
            Accumulated benefit obligation                         $4,333        $4,347
                                                                   ======        ======

            Projected benefit obligation                           $4,433        $4,429
            Plan assets at fair value                               6,103         5,972
                                                                   ------        ------
            Plan assets in excess of projected benefit
                obligation                                          1,670         1,543

            Unrecognized net gain                                    (451)         (229)
            Unrecognized prior service cost                           156           171
            Unrecognized initial net asset                           (277)         (378)
            Additional liability                                        0           (59)
                                                                   ------        ------

            Net pension asset recognized on the balance sheet      $1,098        $1,048
                                                                   ======        ======
         </TABLE>





26
<PAGE>   27


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

<TABLE>
<CAPTION>
                                                                 Fiscal Years              1996
                                                          --------------------------    Transition
                                                          1997        1996      1995      Period
                                                          -----       ----      ----       ----
<S>                                                       <C>         <C>       <C>        <C> 
     Discount rate used to determine the projected
         benefit obligation                                7.5%      7.25%      8.0%       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                                    9.0%       9.0%      9.5%       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
      1997, the 1996 transition period, and fiscal 1996 and 1995 were $38, $20,
      $39, and $91, respectively.

10.   CAPITAL STOCK

      STOCK ISSUANCES

      In fiscal 1997, the Company issued 77,562 common shares to certain
      playing pros as compensation under endorsement agreements.

      As consideration to the Guarantor for his guarantee of the 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.

      In March 1995, the Company entered into a revolving credit facility with
      the Guarantor (this line was subsequently replaced by the line of credit
      discussed in Note 6). 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.



27
<PAGE>   28


      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, 1997, the total number of shares available for options
      was as follows:

<TABLE>
          <S>                                            <C>    
          Reserved for:
              Outstanding stock options                    629,395
              Stock options authorized but not granted     484,537
                                                         ---------
                                                         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 1997, the 1996 transition period, and
      fiscal 1996 and 1995, was as follows:

<TABLE>
<CAPTION>
                                                           Weighted 
                                                            Average
                                                           Exercise 
                                               Shares        Price
                                              --------     --------
<S>                                           <C>          <C>    
          Outstanding at February 26, 1994     533,232       $ 8.90
              Granted at market price           40,000        10.19
              Exercised                         (2,500)        7.12
              Canceled or expired             (145,000)        9.92
                                              -------- 
          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
                                              ========
</TABLE>


      Of the options outstanding at September 30, 1997, 352,000 have exercise
      prices between $2.94 and $4.50, with a weighted average exercise price of
      $3.81 and a weighted average remaining contractual life of 8.8 years. Of
      these options, 66,667 are exercisable at a weighted average exercise price
      of $3.75. Options to exercise an additional 263,395 shares have exercise
      prices between $5.38 and $8.10, with a weighted average exercise price of
      



28

<PAGE>   29


      $7.55 and a weighted average remaining contractual life of 2.1 years. Of
      these options, 235,062 are exercisable at a weighted average exercise
      price of $7.82. The remaining 14,000 options have an exercise price of
      $10.93, and a weighted average remaining contractual life of 2.2 years.
      All of these options are exercisable.

      Of the options outstanding at September 30, 1997 and 1996, and March 2,
      1996, and February 25, 1995, total shares exercisable were 315,729,
      362,199, 348,865, and 385,732, respectively, with weighted average prices
      of $7.10, $8.11, $8.19, and $8.41, 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 transition 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             1996
                                                     ------------------------  TRANSITION
                                                        1997          1996       PERIOD
                                                     ----------    ----------   ---------
          <S>                       <S>              <C>           <C>          <C>       
          Net loss:                 As reported      $(11,228)     $(5,277)     $(2,294)
                                    Pro Forma         (11,335)      (5,364)      (2,490)

          Loss per share:           As reported      $  (3.77)     $ (2.02)     $ (0.80)
                                    Pro Forma           (3.81)       (2.05)       (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 1997, the 1996 transition period,
      and fiscal 1996, respectively: risk-free interest rates of 6.05, 6.30, and
      5.40 percent; expected dividend yields of 0 percent; expected lives of one
      year after vesting; expected volatility of 60%, 73%, and 73%. Using these
      assumptions, the fair value of the stock options granted in fiscal 1997,
      the 1996 transition period and fiscal 1996 is $264,000, $165,000, and
      $503,000, respectively, which would be amortized as compensation over the
      vesting period of the options. The weighted average fair value of options
      granted during fiscal 1997, the 1996 transition period, and fiscal 1996 is
      $1.74, $2.13, and $2.09, respectively.

      STOCK PURCHASE WARRANTS

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



29
<PAGE>   30


      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 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.

12.   COMMITMENTS AND CONTINGENCIES

      OPERATING LEASES

      The Company has entered into various operating leases for buildings and
      office equipment. Rent expense was approximately $768, $405, $433, and
      $355 for fiscal 1997, the 1996 transition period, and fiscal 1996 and
      1995, respectively. Approximate future minimum rental commitments for the
      next five years for noncancelable operating leases as of September 30,
      1997, were as follows:

             1998                                    $785
             1999                                     739
             2000                                     603
             2001                                     179
             2002                                      22

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

      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 




30
<PAGE>   31


      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 ranging from $700 in 1998 to $750
      in 2007. During fiscal 1997, the 1996 transition period, and fiscal 1996
      and 1995, the Company incurred royalty expense under this agreement of
      approximately $700, $442, $500, and $524, respectively.

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 has been included as a component of discontinued
      operations in 1995. Duckster revenues for fiscal 1996 and 1995 were $4,649
      and $15,485, respectively.

      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.

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.



31
<PAGE>   32


      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                           (0.80)      (0.55)
          Loss per share                           (0.80)      (0.42)
</TABLE>


15.  FAIR VALUE OF FINANCIAL INSTRUMENTS

      The fair 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 line of credit and term
      loan 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.

17.  SUBSEQUENT EVENT

      Subsequent to September 30, 1997, certain executives left the Company
      under severance agreements. Additionally, the Company anticipates further
      work force reductions will occur in fiscal 1998. The Company expects to
      record a charge of $625,000 in the first quarter of fiscal 1998 related to
      these items.

32
<PAGE>   33

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 1998 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 71. 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. Mr. Lupton is the former
         Chairman of JTL Corp., a bottler of Coca-Cola and related products, and
         a private investor.

         Claire V. Bradford. Age 43. Ms. Bradford has been Vice President -
         Sales and Staff Services since December, 1995. She joined the Company
         as Director of Human Resources in December 1992. Prior to joining the
         Company, Ms. Bradford was a consultant in human resources management
         for Suter & Associates, a private consulting firm, and Director of
         Human Resources for MEDCORP, a private medical management company from
         1991 to 1992.

         Dexter Scudder Graybeal. Age 57. Mr. Graybeal has been Vice President
         - Special Markets 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 48. 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 1998 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 1998 Proxy Statement is incorporated herein by
reference.


33
<PAGE>   34



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 1998 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 incorporated by
                      reference under Part II, Item 8 and are set forth in
                      the Index to Financial Statements and Schedules found
                      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 39 of this Form 10-K.

         (b)      The Registrant did not file any reports on Form 8-K during the
                  last quarter of fiscal 1997.


34

<PAGE>   35

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and
Stockholders of 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 23, 1997. 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.



                                                 ARTHUR ANDERSEN LLP




Chattanooga, Tennessee
December 23, 1997

35

<PAGE>   36
                                                                     SCHEDULE II

                         THE ARNOLD PALMER GOLF COMPANY

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

       FOR THE YEARS ENDED SEPTEMBER 30, 1997, MARCH 2, 1996, FEBRUARY 25,
            1995, 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 AT 
                                                         BEGINNING       COST AND      OTHER                      END OF          
            Description                                  OF PERIOD       EXPENSES    ACCOUNTS(1)  DEDUCTIONS(2)   PERIOD
            -----------                                  ---------       --------    -----------  -------------   ------

<S>                                                     <C>             <C>          <C>          <C>           <C>   
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
                                                            ======        ======        ====        =====         ======
For the year ended February 25, 1995:
    Allowance for doubtful accounts                         $  478        $1,226        $112        $(767)        $1,049
                                                            ======        ======        ====        =====         ======
</TABLE>

(l) Recoveries on accounts written off.

(2) Accounts written off.





36

<PAGE>   37




                                   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 23, 1997       By     /s/ John T. Lupton
                                 ---------------------------------------------
                                          (John T. Lupton)
                                     Chief Executive Officer


Date:  December 23, 1997       By    /s/ David J. Kirby
                                 ---------------------------------------------
                                           (David J. Kirby)
                                    Vice President Finance (Chief Financial 
                                    Officer)


37
<PAGE>   38


         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 23, 1997                  /s/ John T. Lupton
                                    -------------------------------------------
                                    (John T. Lupton)     Chairman of the Board

Date:  December 23, 1997                  /s/ David S. Gonzenbach
                                    -------------------------------------------
                                    (David S. Gonzenbach)             Director

Date:  December 23, 1997                  /s/ James L.E. Hill
                                    -------------------------------------------
                                    (James L.E. Hill)                 Director

Date:  December 23, 1997                  /s/ Richard J. Horton
                                    -------------------------------------------
                                    (Richard J. Horton)               Director

Date:  December 23, 1997                 /s/ Charles S. Mechem, Jr.
                                    -------------------------------------------
                                    (Charles S. Mechem, Jr.)          Director

Date:  December 23, 1997                 /s/ Arnold D. Palmer
                                    -------------------------------------------
                                    (Arnold D. Palmer)                Director

Date:  December 23, 1997                 /s/ Joel W. Richardson, Jr.
                                     ------------------------------------------
                                     (Joel W. Richardson, Jr.)        Director

38
<PAGE>   39







                         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.

  22***                    Subsidiaries of the Company

  23                       Consent of Arthur Andersen LLP, independent accountants

  27                       Financial Data Schedule


*        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.

</TABLE>



39