CONVERSE INC, 10-Q, 1996-08-09

CONVERSE INC
10-Q, 1996-08-09
RUBBER & PLASTICS FOOTWEAR

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 29, 1996

COMMISSION FILE NUMBER 1-13430

CONVERSE INC.
(Exact name of registrant as specified in its charter)

DELAWARE 04-1419731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

ONE FORDHAM ROAD 01864
NORTH READING, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (508) 664-1100

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 Act of
1934 during the preceding 12 months (or for such shorter period that 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.

AS OF JUNE 29, 1996, 16,692,156 SHARES OF COMMON STOCK WERE OUTSTANDING.
<PAGE>

TABLE OF CONTENTS

PAGE
<S> <C>
PART I: FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements
A. Condensed Consolidated Balance Sheets 1
B. Condensed Consolidated Statements of
Operations 2
C. Condensed Consolidated Statements of
Cash Flows 3
D. Notes to Condensed Consolidated
Financial Statements 4

Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9

PART II: OTHER INFORMATION

Item 1. Legal Proceedings 15
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17

SIGNATURE 18

</TABLE>

<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>

DECEMBER 30, JUNE 29,
1995 1996
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......... $ 2,738 $ 4,031
Restricted cash.................... 443 889
Receivables, less allowances of
$2,237 and $1,715 respectively.... 61,688 73,485
Inventories (Note 3)............... 81,903 97,209
Refundable income taxes............ 11,377 ---
Prepaid expenses and other current
assets............................ 21,059 22,647
-------- --------
Total current assets............ 179,208 198,261
-------- --------
Asset held for sale (Note 7)............ 3,066 ---
Net property, plant and equipment....... 15,521 17,058
Other assets............................ 26,712 24,884
-------- --------
$224,507 $240,203
======== ========
Liabilities and Stockholders' Equity
(Deficiency)
Current liabilities:
Short-term debt (Note 4)........... 13,906 19,721
Current maturities of long-term
debt.............................. 6,324 5,987
Accounts payable................... 34,208 50,027
Accrued expenses................... 33,295 27,251
Income taxes payable............... 1,795 2,237
-------- --------
Total current liabilities....... 89,528 105,223
Long-term debt, less current maturities
(Note 4)............................... 112,824 121,088
Current assets in excess of
reorganization value................... 34,454 33,415
Deferred postretirement benefits other
than pensions.......................... 10,386 10,284
Stockholders' equity (deficiency):
Common stock, $1.00 stated
value, 50,000,000 shares
authorized, 16,692,156
shares issued and
outstanding....................... 16,692 16,692
Preferred stock, no par value,
authorized 10,000,000 shares,
none issued and outstanding....... --- ---
Additional paid in capital......... 3,528 3,528
Retained earnings (deficit)........ (41,830) (48,833)
Foreign currency translation (1,075) (1,194)
adjustment........................ -------- --------
Total stockholders' equity
(deficiency)................... (22,685) (29,807)
-------- --------
$224,507 $240,203
======== ========

</TABLE>
See accompanying notes to condensed consolidated financial statements.

<PAGE>

CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- -----------------------------
JULY 1, 1995 JUNE 29,1996 JULY 1, 1995 JUNE 29, 1996
------------- ------------- ------------- --------------

<S> <C> <C> <C> <C>
Net sales............................... $ 89,324 $79,907 $220,520 $166,458
Cost of sales........................... 59,509 57,020 145,037 121,954
---------- ------- -------- --------
Gross profit............................ 29,815 22,887 75,483 44,504
Selling, general and administrative
expenses............................... 42,673 29,129 74,560 55,435
Royalty income.......................... 4,448 6,317 7,751 11,245
Restructuring expense (credit) (Note 7). 1,000 (2,209) 1,000 (2,209)
---------- ------- -------- --------
Earnings (loss) from operations......... (9,410) 2,284 7,674 2,523
Loss on investment in unconsolidated
subsidiary (Note 5).................... 41,599 515 41,599 515
Interest expense........................ 3,042 4,256 5,993 8,093
Other (income) expense, net............. (1,584) 621 (1,517) 1,497
---------- ------- -------- --------
Earnings (loss) before income tax....... (52,467) (3,108) (38,401) (7,582)
Income tax expense (benefit)............ (20,114) 635 (14,558) (580)
---------- ------- -------- --------
Net earnings (loss)..................... ($ 32,353) $(3,743) $(23,843) $ (7,002)
========== ======= ======== ========
Net earnings (loss) per share........... $(1.94) $(0.22) $(1.43) $(0.42)
========== ======= ======== ========
Weighted average number of common 16,692 16,692 16,692 16,692
shares (Note 2)........................ ========== ======= ======== ========

</TABLE>

See accompanying notes to condensed consolidated financial statements.

2
<PAGE>

CONVERSE INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>

SIX MONTHS ENDED
--------------------------------
JULY 1, 1995 JUNE 29, 1996
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................. $(23,843) $ (7,002)
Adjustments to reconcile net earnings
(loss) to net cash provided by
(required for) operating activities:
Loss on investment in
unconsolidated subsidiary....... 41,599 515
Provision for (reversal of)
restructuring actions........... 1,000 (2,209)
Depreciation of property, plant
and equipment................... 1,386 1,630
Amortization of intangible assets 164 222
Amortization of current assets
in excess of reorganization
value........................... (1,039) (1,039)
Deferred income taxes............ (5,143) (3,337)
Changes in assets and liabilities:
Receivables...................... (21,986) (11,797)
Inventories...................... (11,053) (15,306)
Refundable income taxes.......... (11,612) 11,377
Prepaid expenses and other current
assets.......................... (1,309) 1,295
Accounts payable and accrued
expenses........................ 15,189 9,250
Income taxes payable............. (1,573) 442
Other long-term assets and
liabilities..................... 709 1,393
-------- --------
Net cash required for
operating activities......... (17,511) (14,566)
-------- --------
Cash flows from investing activities:
Advances to unconsolidated
subsidiary...................... (8,563) ---
Proceeds from disposal of assets. --- 5,101
Additions to property, plant and
equipment....................... (4,655) (2,984)
-------- --------
Net cash provided (used)
by investing activities..... (13,218) 2,117
-------- --------
Cash flows from financing activities:
Net proceeds from debt.............. 31,491 13,742
-------- --------
Net cash provided by
financing activities......... 31,491 13,742
Net increase in cash and cash
equivalents............................ 762 1,293
Cash and cash equivalents at beginning
of period.............................. 4,992 2,738
-------- --------
Cash and cash equivalents at end of
period................................. $ 5,754 $ 4,031
======== ========

</TABLE>

See accompanying notes to condensed consolidated financial statements.

3
<PAGE>

CONVERSE INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation:

In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation. This
interim financial information and notes hereto should be read in conjunction
with the Company's annual report on Form 10-K for the year ended December 30,
1995. The Company's consolidated results of operations for the three months
ended June 29, 1996 are not necessarily indicative of the results to be
expected for any other interim period or the entire fiscal year.

2. NET EARNINGS (LOSS) PER COMMON SHARE

Net earnings (loss) per common share is computed based on the number of
common shares outstanding for the applicable period.

3. INVENTORIES

Inventories are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 30, JUNE 29,
1995 1996
------- -------
<S> <C> <C>
Retail merchandise............. $ 5,766 $ 7,845
Finished products.............. 67,835 82,278
Work in process................ 4,226 3,447
Raw materials.................. 4,076 3,639
------- -------
$81,903 $97,209
======= =======

</TABLE>

4
<PAGE>

4. DEBT

As more fully described in Note 9 to the consolidated financial statements
for the year ended December 30, 1995 included within the Company's annual
report on Form 10-K, the Company maintains a $175,000 secured credit facility
(comprising an "A Facility" for $135,000 and a "B Facility" for $40,000) (the
"Credit Facility") with a group of participating lenders (the "Banks"). The
amount of credit available to the Company under the A Facility at any time is
determined by reference to the Company's borrowing base set forth in the
Credit Facility, consisting primarily of domestic accounts receivable and
inventory. In addition, in conjunction with certain amendments to the Credit
Facility in November 1995 and February 1996, the Company has the ability to
borrow an additional $25,000 under the A Facility as a result of Apollo
Investment Fund, L.P. ("Apollo"), which, together with its affiliates, is the
beneficial owner of approximately 67.3% of the Company's outstanding common
stock, having caused a standby letter of credit (the "Collateral Letter of
Credit") to be provided to the Banks in the amount of $25,000. This additional
$25,000 of availability to the Company under the A Facility will expire on
March 1, 1997.

As of June 29, 1996, the maximum available borrowing base under the A
Facility, inclusive of borrowings made available as a result of the Collateral
Letter of Credit, was approximately $111,561. Utilization under the A
Facility as of June 29, 1996, inclusive of the Collateral Letter of Credit,
consisted of revolving loans of $72,069 and bankers acceptances of $13,089.
In addition, outstanding letters of credit of $12,194 as of June 29, 1996 were
reserved against the maximum available borrowing base, as defined. As a
result, $14,209 of the maximum available borrowing base remained unutilized as
of June 29, 1996. As of June 29, 1996, the B Facility had loans outstanding of
$32,273 and pursuant to the terms of the Credit Facility the Company may not
increase its borrowings under the B Facility. At June 29, 1996, $5,987 of the
outstanding Credit Facility debt has been classified as short-term in
accordance with the terms of the Credit Facility.

At June 29, 1996, revolving loans outstanding under the A Facility and
loans outstanding under the B Facility bore interest at 8.01% and 10.47%,
respectively, based upon (i) the weighted average of the prime and Adjusted
LIBOR rates and (ii) the Adjusted LIBOR rate as defined in the Credit
Facility, respectively. Obligations outstanding under the Credit Facility are
secured by a first priority lien on substantially all of the Company's U. S.
assets. In addition, the Credit Facility contains certain financial and other
covenants. The Company was in compliance with all such covenants at June 29,
1996.

5
<PAGE>

Subsidiaries of the Company maintain asset based financing arrangements in
certain European countries with various lenders. In general, these financing
arrangements allow the subsidiaries to borrow against varying percentages of
eligible customer receivable balances based on pre-established credit lines,
along with varying percentages of inventory, as defined, at varying interest
rates. As of June 29, 1996, total short-term borrowings outstanding under
these financing arrangements totaled $19,721. The obligations are secured by a
first priority lien on the respective European assets being financed. In
addition, Converse Inc. has provided guarantees of these borrowings
outstanding in certain of the European countries.

In conjunction with the Company's acquisition of 100% of the outstanding
common stock of Apex One Inc. ("Apex") (see Note 5), Converse issued
promissory notes in the face amount of $11,000, discounted at a rate of 12%
to $9,644. The notes bear interest at the rate of 8% per annum for the first
three years and increase to 10% and 12% in 1998 and 1999, respectively.

5. LOSS ON INVESTMENT IN UNCONSOLIDATED SUBSIDIARY

As more fully described in Note 3 to the consolidated financial statements
for the year ended December 30, 1995 included within the Company's annual
report on Form 10-K, on August 11, 1995 the Company ceased funding the
operations of its unconsolidated subsidiary, Apex. At December 30, 1995, an
accrual of $10,225 remained, which represented the Company's estimates of its
liabilities relating to Apex. At June 29, 1996, the total accrual remaining
was $8,657, with the $1,568 decrease primarily relating to payments of
contractual obligations and professional fees made during the first six months
of 1996.

6
<PAGE>

6. RESTRUCTURING

As more fully described in Note 4 to the consolidated financial
statements for the year ended December 30, 1995 included within the Company's
annual report on Form 10-K, during 1995 the Company recorded restructuring
charges relating primarily to initiatives aimed at reducing future operating
costs. The following table presents the restructuring reserves remaining at
June 29, 1996:

<TABLE>
<CAPTION>
DECEMBER 30, 1995 CHARGES/ JUNE 29, 1996
----------------- ---------- -------------
BALANCE WRITE-OFFS BALANCE
----------------- ---------- -------------
<S> <C> <C> <C>
Contract termination costs...... $5,735 $2,328 $3,407
Employee severance and
related costs............... 1,687 531 1,156
Lease termination costs......... 1,453 656 797
------ ------ ------
$8,875 $3,515 $5,360
====== ====== ======
</TABLE>

The remaining liabilities are expected to be paid or settled during 1996.

7. ASSET HELD FOR SALE

The Company recorded restructuring charges during 1995 which included a
charge for the writedown of certain assets which the Company plans to dispose
of. One such asset, a distribution center located in Chester, S.C., was sold
during the six months ended June 29, 1996. The sale of this asset resulted in
proceeds in excess of the Company's estimates and as a result a gain of $2.2
million was recorded as an offset to restructuring expense in the Second
Quarter, 1996.

8. COMMITMENTS AND CONTINGENCIES

As a result of the Company's decision to cease funding of Apex and Apex's
subsequent filing of a voluntary petition for Chapter 11 bankruptcy
protection, various lawsuits have been filed by Apex creditors since the Third
Quarter of 1995 alleging that the Company is liable for the debts of Apex.
Claims to date in connection with these lawsuits total approximately $6,500.
The Company believes that it has valid defenses to the claims made and intends
to contest them vigorously. On June 28, 1996 a proposed plan of orderly
liquidation (the "Plan") was filed in the Apex Chapter 11 bankruptcy
proceeding. The Plan includes a proposed settlement between the Company and
the Apex One, Inc. Official Committee of Unsecured Creditors (the "Proposed
Settlement"). The Proposed Settlement, which is subject to approval of the
unsecured creditors of Apex and the Bankruptcy Court, contemplates a $4
million payment by Converse to the Apex estate and the relinquishment of the
Company's claims against the Apex estate. In return, Converse would be
granted a release of all claims held by the Apex estate and individual
creditors of Apex. In addition, pursuant to the Proposed Settlement the Court
would

<PAGE>

grant an injunction against any Apex Creditors from commencing or continuing
any lawsuit against the Company or its agents relating in any way to Apex.

As a result of significant operational and financial difficulties
discovered subsequent to the acquisition of Apex, the Company investigated
potential breaches of representations and warranties by Apex and its former
owners. In conjunction with this investigation, in November 1995 and May 1996
the Company paid into escrow, as opposed to paying the former owners directly,
the first two semi-annual interest payments aggregating $889 pertaining to the
subordinated notes issued in conjunction with the Apex purchase price. As a
result of this action, certain of the former owners filed a lawsuit against
the Company seeking a declaratory judgment that they are entitled to payment
of this interest and the related notes. The Company believes it has valid
defenses against this lawsuit. In March 1996, the Company filed counter claims
against the former owners based upon the results of the investigation.

On May 17, 1996, the Company filed suit against several of the sellers of
Apex seeking damages for federal securities law violations and other claims in
connection with the acquisition of Apex. On the same day certain sellers of
Apex filed suit against the Company and several of its officers, directors and
stockholders seeking damages for federal securities law violations and certain
other claims. The Company believes that it has valid defenses to the claims
made and intends to contest them vigorously.

The Company believes the ultimate outcome of the above proceedings will
not have a material adverse effect on its financial position or results of
operations.

9. STOCK OPTION AMENDMENT

At its 1996 Annual Meeting of Stockholders the Company's stockholders
approved certain amendments to the Converse Inc. 1994 Stock Option Plan (the
"1994 Plan"). The amendments: (i) increased the maximum number of shares
with respect to which stock options may be granted to any individual during
any calendar year from 150,000 to 500,000; (ii) increased the maximum number
of shares with respect to which stock options may be granted to any individual
during the term of the 1994 Plan from 300,000 to 750,000; (iii) increased from
1,600,000 to 2,300,000 the number of shares of the Company's common stock
authorized for issuance under the 1994 Plan; and (iv) authorized the granting
of stock options and issuance of shares to consultants of the Company.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

COMPARISON OF THREE MONTHS ENDED JUNE 29, 1996 TO JULY 1, 1995

The following table sets forth certain items relating to the Company's
operating results as a percentage of net sales for the three months ended June
29, 1996 (the "Second Quarter 1996") and the three months ended July 1, 1995
(the "Second Quarter 1995").
<TABLE>
<CAPTION>

Three Months Ended
---------------------------------------------
JULY 1, 1995 % JUNE 29, 1996 %
------------ ------ ------------- ------
<S> <C> <C> <C> <C>

Net sales............................... $ 89.3 100.0 $79.9 100.0
Gross profit............................ 29.8 33.4 22.9 28.6
Selling, general and administrative
expenses............................... 42.7 47.8 29.1 36.5
Earnings (loss) from operations......... (9.4) (10.5) 2.3 2.9
Net earnings (loss)..................... (32.4) (36.2) (3.7) (4.6)

</TABLE>

NET SALES

Net sales for the Second Quarter decreased 10.5% to $79.9 million from
$89.3 million for the Second Quarter. The $9.4 million reduction in net sales
was attributable to a 19.1% decrease in its athleisure sales, a 23.6% decrease
in the Company's basketball category and a 27.3% reduction in its cross
training category, partially offset by an increase of 21.9% in the Company's
childrens sales. Volume decreases accounted for the majority of the total net
sales reduction over the prior year period as unit sales of footwear decreased
7.3% over this period. Net sales in the United States decreased to $47.6
million from $52.0 million, a reduction of $4.4 million or 8.5%.
International sales decreased to $32.3 million from $37.3 million, a $5.0
million or 13.4% reduction. Based on geographic location, net sales in the
Pacific region decreased 31.1% over the prior year period, net sales in Latin
America decreased 51.0% and net sales in Canada declined 25.5%. Net sales in
Europe, Middle East and Africa were comparable to prior year. Net sales
globally were negatively impacted by increased competition in the athleisure
market as well as lessened consumer acceptance of the Company's 1996 spring
basketball products.

GROSS PROFIT

Gross profit for the Second Quarter 1996 decreased 23.2% to $22.9 million
from $29.8 million for the Second Quarter 1995. The Company's gross profit as
a percentage of net sales decreased to 28.6% for the Second Quarter 1996 as
compared to 33.4% for the prior year. Volume reductions accounted for the
majority of the total gross profit decrease, with increases in other product
costs and price reductions accounting for the remainder of the decrease. Gross
profit percentage was affected by: (i) poor retail sell-through of basketball
and athleisure product, making price reductions necessary; (ii)

9
<PAGE>

unfavorable inventory purchasing variances; and (iii) reduced manufacturing
utilization and efficiencies; partially offset by reductions in global
distribution expenses.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the Second Quarter 1996
decreased 31.9% to $29.1 million from $42.7 million for the Second Quarter
1995. As a percentage of net sales, such expenses decreased to 36.5% for the
Second Quarter 1996 from 47.8% for the prior year period. The $13.6 million
decrease in selling, general and administrative expenses was a direct result
of the Company's initiative announced during 1995 to reduce operating costs.
This expense reduction consisted of decreases in United States advertising,
sports marketing expenditures, research and development costs, and
international operating expenses and an overall reduction in administrative
overhead partially offset by an increase in expenses related to the Company's
retail outlet stores to support additional stores.

ROYALTY INCOME

Royalty income for the Second Quarter 1996 increased 40.0% to $6.3
million from $4.5 million for the Second Quarter 1995. As a percentage of net
sales royalty income increased to 7.9% for the Second Quarter from 5.0% for
the Second Quarter 1995. The $1.8 million increase was primarily attributable
to a $1.3 million improvement in royalty income in the Pacific region mainly
attributable to increased sales of licensed apparel in Japan.

RESTRUCTURING EXPENSE

The Company recorded restructuring charges during 1995 which included a
charge for the writedown of certain assets which the Company plans to dispose
of. One such asset, a distribution center located in Chester, S.C., was sold
during the Second Quarter 1996. The sale of this asset resulted in proceeds
in excess of the Company's estimates and as a result a gain of $2.2 million
was recorded as an offset to restructuring expense in the Second Quarter 1996.

During the Second Quarter 1995, the Company decided to close its Mission,
Texas manufacturing facility. As a result of this plant closing, the Company
established a $1.0 million restructuring reserve related to its remaining
facility lease obligations, severance and various other exit costs. The plant
closing was completed in September, 1995.

10
<PAGE>

EARNINGS (LOSS) FROM OPERATIONS

The Company recorded income from operations for the Second Quarter 1996
of $2.3 million, compared to a loss from operations of $9.4 million for the
Second Quarter 1995 primarily as a result of the factors described above.

LOSS ON INVESTMENT IN UNCONSOLIDATED SUBSIDIARY

During 1995 the Company decided to cease operations and funding of Apex
One, Inc., an unconsolidated subsidiary. During the Second Quarter 1996 the
Company incurred $0.5 million in charges to the loss on investment. The
Company initially recorded a loss on its investment in Apex during the Second
Quarter 1995 of $41.6 million.

INTEREST EXPENSE

Interest expense for the Second Quarter 1996 increased 38.7% to $4.3
million from $3.1 million for the Second Quarter 1995. This increase is due
to (i) increased borrowings which reflect additional working capital
requirements; and (ii) higher average interest rates on borrowings under the B
Facility.

NET EARNINGS (LOSS)

The Company recorded a net loss for the Second Quarter 1996 of $3.7
million compared to a net loss of $32.4 million for the Second Quarter 1995
primarily as a result of the factors discussed above.

COMPARISON OF SIX MONTHS ENDED JUNE 29, 1996 TO JULY 1, 1995

The following table sets forth certain items relating to the Company's
operating results as a percentage of net sales for the six months ended June
29, 1996 and the six months ended July 1, 1995.
<TABLE>
<CAPTION>

Six Months Ended
---------------------------------------------
JULY 1, 1995 % JUNE 29, 1996 %
------------- ------ -------------- ------
<S> <C> <C> <C> <C>

Net sales............................... $220.5 100.0 $166.5 100.0
Gross profit............................ 75.5 34.2 44.5 26.7
Selling, general and administrative
expenses............................... 74.6 33.8 55.4 33.3
Earnings (loss) from operations......... 7.7 3.5 2.5 1.5
Net earnings (loss)..................... (23.8) (10.8) (7.0) (4.2)

</TABLE>

NET SALES

Net sales for the six months ended June 29, 1996 decreased 24.5% to
$166.5 million from $220.5 million for the six months ended July 1, 1995. The
$54.0 million

<PAGE>

reduction in net sales was attributable to a 32.4% decrease in the Company's
athleisure category, a 31.2% reduction in its basketball category and a 36.0%
decrease in its cross training sales, as well as the impact of the Company's
decision to reduce its product offerings during 1996. These decreases were
partially offset by an increase of 12.8% in the Company's childrens category.
Volume decreases accounted for the majority of the total net sales reduction
over the prior year period as unit sales of footwear decreased 19.8% over this
period. Net sales in the United States decreased to $91.1 million from $119.4
million, a reduction of $28.3 million or 23.7%. International sales decreased
to $75.4 million from $101.1 million, a $25.7 million or 25.4% reduction.
Based on geographic location, net sales in Europe, Middle East and Africa
decreased 18.1% from the prior year period, Pacific region sales decreased
23.9%, Canada sales decreased 57.1% and sales in Latin America decreased
46.8%. Net sales globally were negatively impacted by increased competition in
the athleisure market as well as lessened consumer acceptance of the Company's
1996 spring basketball products.

GROSS PROFIT

Gross profit for the six months ended June 29, 1996 decreased 41.0% to
$44.5 million from $75.5 million for the six months ended July 1, 1995. The
Company's gross profit as a percentage of net sales decreased to 26.7% for the
six months ended June 29, 1996 as compared to 34.2% for the prior year.
Volume reductions accounted for the majority of the gross profit decrease
with the remaining decrease due to increases in other product costs and price
reductions. Gross profit percentage was affected by: (i) poor retail sell-
through of basketball and athleisure product, making price reductions
necessary; (ii) unfavorable inventory purchasing variances; (iii) reduced
manufacturing utilization and efficiencies; and (iv) unfavorable changes in
inventory valuation amounts; which was partially offset by reductions in
global distribution expenses.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the six months ended
June 29, 1996 decreased 25.7% to $55.4 million from $74.6 million for the six
months ended July 1, 1995. As a percentage of net sales, such expenses
decreased to 33.3% for the six months ended June 29, 1996 from 33.8% for the
prior year period. The $19.2 million reduction in selling, general and
administrative expenses was a direct result of the Company's initiative
announced during 1995 to reduce operating costs. This expense reduction
consisted of decreases in United States advertising, sports marketing
expenditures, research and development costs, international operating expenses
and an overall reduction in administrative overhead, partially offset by an
increase in expenses related to the Company's retail outlet stores to support
the net addition of six stores.

12
<PAGE>

ROYALTY INCOME

Royalty income for the six months ended June 29, 1996 increased 43.6% to
$11.2 million from $7.8 million for the six months ended July 1, 1995 . As a
percentage of net sales royalty income increased to 6.7% for the six months
ended June 29, 1996 from 3.5% for the six months ended July 1, 1995. The $3.4
million increase was mainly attributable to a $3.0 million improvement in
royalty income in the Pacific region which was mainly attributable to
increased sales of licensed apparel in Japan.

RESTRUCTURING EXPENSE

During the Second Quarter of 1995, the Company decided to close its
Mission, Texas manufacturing facility. As a result of this plant closing, the
Company established a $1.0 million restructuring reserve related to its
remaining facility lease obligations, severance and various other exit costs.
The plant closing was completed in September, 1995.

EARNINGS FROM OPERATIONS

Earnings from operations for the six months ended June 29, 1996 decreased
67.1% to $2.5 million from $7.7 million for the six months ended July 1, 1995
primarily as a result of the factors described above. Earnings from
operations as a percentage of net sales decreased to 1.5% for the six months
ended June 29, 1996 from 3.5% for the prior year period.

LOSS ON INVESTMENT IN UNCONSOLIDATED SUBSIDIARY

During 1995 the Company decided to cease operations and funding of Apex
One, Inc., an unconsolidated subsidiary. During the six months ended June 29,
1996 the Company incurred $0.5 million in charges to the loss on investment.
The Company initially recorded a loss on its investment in Apex during the six
months ended July 1, 1995 of $41.6 million.

INTEREST EXPENSE

Interest expense for the six months ended June 29, 1996 increased 35.0%
to $8.1 million from $6.0 million for the six months ended July 1, 1995. This
increase of $2.1

13
<PAGE>

million is due to: (i) increased borrowings which reflect additional working
capital requirements; and (ii) higher average interest rates on borrowings on
the B Facility.

NET EARNINGS (LOSS)

As a result of the factors discussed above the Company recorded a net
loss for the six months ended June 29, 1996 of $7.0 million as compared to a
net loss of $23.8 million for the six months ended July 1, 1995.

LIQUIDITY AND CAPITAL RESOURCES

As of June 29, 1996, the Company's balance sheet reflects working
capital (net of cash) of $89.0 million as compared to $86.9 million as of
December 30, 1995. Accounts receivable increased $11.8 million primarily
related to Second Quarter shipments. Refundable income taxes were reduced by
$11.4 million as income tax refunds due to the Company were received during
the period. Accounts payable increased $15.8 million as the Company's
inventory position increased $15.3 million, a result of inventory purchases
made to satisfy third quarter shipments.

Borrowings under the Company's credit facilities increased to $146.8
million at June 29, 1996 from $133.1 million at December 30, 1995, reflecting
the seasonal increase in inventory and accounts receivable (see Note 4 of
Notes to Condensed Consolidated Financial Statements).

For the six months ended June 29, 1996 and July 1, 1996 net cash required
for operating activities was $14.6 million and $17.5 million respectively.
During these periods cash was used predominately to fund the Company's
accounts receivable and purchases of inventory. During both periods cash
flows from financing activities reflected cash inflows from seasonal
borrowings under the credit facilities. For the six months ended June 29,
1996 cash flows provided from financing activities totaled $13.7 million, a
$17.8 million decrease over the prior year period.

BACKLOG

At June 29, 1996, the Company's global backlog of firm orders was $126
million, compared to $139 million at July 1, 1995. The amount of unfilled
orders at a particular time is affected by a number of factors, including the
scheduling of the introduction of new products and the timing of the
manufacturing and shipping of the Company's products, as well as the
referenced impact of international orders as the Company's business shifts
from distributors to direct operating units. Accordingly, a comparison of
unfilled orders as of two different dates is not necessarily meaningful.

14
<PAGE>

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Except as discussed below, there have been no material changes from the
information previously reported under Item 3 of the Company's Annual Report on
Form 10-K for the fiscal year ended December 30, 1995 and in the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March 30, 1996.

On May 17, 1996, the Company filed a lawsuit against certain of the
former owners of Apex One, Inc. ("Apex") seeking damages for violations of
certain federal securities laws, common law fraud, and breaches of contractual
obligations arising out of the acquisition of Apex by Converse. The suit,
entitled Converse Inc. v. Prudential Private Equity Investors III, L.P., et
------------------------------------------------------------------
al, was filed in the United States District Court, Southern District of New
--
York. The Company's complaint states that the sellers of Apex made a series
of misrepresentations and omissions of material information in connection with
the acquisition of Apex and seeks damages in excess of $50 million and a
declaratory judgment that Converse has no obligation to the defendants under
the promissory notes and guarantees that were issued to the defendants and
canceling the Converse stock warrants held by the defendants. In a separate
lawsuit filed the same day in the United States District Court for the
Southern District of New York, entitled Prudential Private Equity Investors
-----------------------------------
III, et al v. Converse Inc., et al, several sellers of Apex asserted certain
----------------------------------
federal securities law and other claims including negligent misrepresentation,
common law fraud, constructive discharge and defamation against Converse and
certain other parties including certain of Converse's officers, directors and
stockholders. This lawsuit seeks damages in excess of $150 million and
relates to the acquisition of Apex by Converse and the operations of Apex
following the acquisition. Converse believes that it has valid defenses to
each of the foregoing claims and intends to contest them vigorously.

On June 28, 1996 a proposed plan of orderly liquidation (the "Plan") was
filed in the Apex Chapter 11 Bankruptcy proceeding, In re: Apex One, Inc. case
---------------------
number 95-36520, United States bankruptcy Court for the District of New
Jersey. The Plan includes a proposed settlement between Converse and the Apex
One, Inc. Official Committee of Unsecured Creditors (the "Proposed
Settlement"). The Proposed Settlement, which is subject to approval by the
unsecured creditors of Apex and confirmation by the Bankruptcy Court,
contemplates a $4 million payment by Converse to the Apex estate and the
relinquishment of Converse's claims against the Apex estate. In return,
Converse would be granted a release of any and all claims against it that may
be held by the Apex estate and the individual creditors of Apex. In addition,
pursuant to the Proposed Plan the Court would grant an injunction against any
Apex creditors from commencing or continuing any lawsuit against Converse or
its agents relating in any way to Apex. The Proposed Settlement does not
affect the litigation between Converse and the Sellers of Apex discussed in
the preceding paragraph.

15
<PAGE>

ITEM 2. CHANGES IN SECURITIES.

Not Applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not Applicable.

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

On May 29, 1996 the Company conducted its Annual Meeting of Stockholders
pursuant to due notice. A quorum being present either in person or by proxy,
the stockholders voted on the following matters:

1. To elect thirteen directors to hold office until the next
annual meeting and until their successors are elected and
qualified.

2. To approve the Converse Inc. 1994 Stock Option Plan, as
amended and restated.

3. To ratify the selection of Price Waterhouse LLP as the
Company's independent auditors for the next fiscal year.

No other matters were voted upon. The votes cast were as follows:

1. Election of Directors. The following directors were elected
to the Company's Board:
<TABLE>
<CAPTION>

Number of votes cast Number of votes
Name of Director FOR WITHHELD
- - ------------------- -------------------- ---------------
<S> <C> <C>

Donald J. Barr 15,169,218 154,405
Michael C. Bell 15,169,843 153,780
Leon D. Black 14,903,546 420,077
Julius W. Erving 15,169,194 154,429
Robert H. Falk 15,164,715 158,908
Gilbert Ford 15,156,398 167,225
Michael S. Gross 15,164,680 158,943
John J. Hannan 15,164,915 158,708
Joshua J. Harris 15,162,992 160,631
John H. Kissick 15,163,015 160,608
Richard B. Loynd 15,162,626 160,997
Glenn N. Rupp 15,169,619 154,004
Michael D. Weiner 15,162,635 160,988
</TABLE>

16
<PAGE>

2. Approval of Converse Inc. 1994 Stock Option Plan, as amended
and restated
<TABLE>
<CAPTION>

For Against Abstain
--- --------- -------
<S> <C> <C>

13,840,583 1,431,883 51,157
</TABLE>
3. Ratification of selection of Price Waterhouse LLP as the
Company's independent auditors
<TABLE>
<CAPTION>

For Against Abstain
--- ------- -------
<S> <C> <C>

15,255,680 39,014 28,929

</TABLE>
ITEM 5. OTHER INFORMATION.

Not Applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits. The following exhibits are contained in this report:

10.1 Employment Agreement between Converse and Glenn N. Rupp.

10.2 Converse Inc. 1994 Stock Option Plan, as Amended and
Restated

27 Financial Data Schedule

(b) Reports on Form 8-K.

Not Applicable.

17
<PAGE>

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: August 9, 1996

Converse Inc.

/s/ Donald J. Camacho
By: ________________________
Donald J. Camacho
Senior Vice President and
Chief Financial Officer

18
<PAGE>

EXHIBIT INDEX

Exhibit No. Description
----------- -----------

10.1 Employment Agreement between Converse and Glenn N. Rupp

10.2 Converse Inc. 1994 Stock Option Plan, as Amended and
Restated

27 Financial Data Schedule

<PAGE>

EMPLOYMENT AGREEMENT
--------------------

EMPLOYMENT AGREEMENT (the "Agreement") dated as of April 11, 1996 by
and between CONVERSE INC., a Delaware corporation ("Company"), and GLENN N. RUPP
("Employee").

W I T N E S S E T H :
- - - - - - - - - -

WHEREAS, Company desires to have the benefit of Employee's knowledge
and experience for the benefit of Company and its subsidiaries; and

WHEREAS, Employee desires to be employed upon the terms and conditions
hereinafter set forth; and

WHEREAS, the Company Board (as hereinafter defined) has duly
authorized the execution and delivery of this Agreement;

NOW, THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:

1. Employment. Company hereby employs Employee, and Employee hereby
----------
accepts such employment and agrees to perform Employee's duties and
responsibilities hereunder, in accordance with the terms and conditions
hereinafter set forth.

1.1 Employment Term. The employment term of this Agreement (the
---------------
"Employment Term") shall commence on April 15, 1996 and shall continue until
April 15, 1999 unless earlier terminated in accordance with Section 8 hereof.

1.2 Duties and Responsibilities. During the Employment Term,
---------------------------
Employee shall serve as Chairman of the Board and Chief Executive Officer of
Company and in such other officer positions of Company and its subsidiaries as
may be designated by the Board of Directors of Company (the "Company Board").
Employee shall perform all duties and accept all responsibilities

<PAGE>

incidental to such position or positions and consistent with Employee's position
as Chairman of the Board and Chief Executive Officer of Company as may be
designated by the Company Board. Employee's principal office shall be located in
North Reading, Massachusetts or at another location in the Greater Boston area,
and he shall not be required to relocate to another area without his consent.

1.3 Extent of Service. During the Employment Term, Employee shall
-----------------
use Employee's best efforts in the business of Company, and Employee shall
devote substantially all of Employee's full time, attention and energy to the
business of Company and to the performance of Employee's services and the
discharge of Employee's duties and responsibilities hereunder. Except as
provided in Section 5 hereof, the foregoing shall not be construed as preventing
Employee from making investments in other businesses or enterprises, except that
Employee agrees not to become engaged in any other business activity that may
materially interfere with Employee's ability to discharge Employee's duties and
responsibilities hereunder. Employee further agrees not to work either on a
part time or independent contractual basis for any other business or enterprise
during the Employment Term without the prior written approval of the Company
Board.

1.4 Compensation. For all the services rendered during the
------------
Employment Term by Employee hereunder, Employee shall be entitled to the
following compensation and benefits:

(a) Company shall pay Employee a salary (the "Base Compensation") at
the annual rate of $450,000, less withholding required by law or agreed to by
Employee, payable in installments at such times as Company customarily pays its
other officers (but in no event less often than monthly). Such salary may be
increased from time to time during the Employment Term in the sole discretion of
Company, but at no time during the Employment Term shall Employee have the right
to receive or continue to receive an annual salary greater than that specified
above nor shall Base Compensation be increased for purposes of this Agreement
unless expressly stated by Company in writing.

2
<PAGE>

(b) In addition to the Base Compensation, Employee shall be entitled
to earn an annual bonus of up to 70% of Base Compensation based upon attainment
of performance goals established by the Executive Compensation and Stock Option
Committee of the Company Board under the Converse Executive Incentive Plan as in
effect from time to time; provided, however, that the bonus for 1996 shall be at
-------- -------
an annual rate of not less than $160,000, and such minimum bonus shall be paid
in installments together with the Base Compensation.

(c) Contemporaneously with execution and delivery of this Agreement,
Employee shall be granted options to purchase 500,000 shares of common stock of
Company. Such options shall be for a term of ten years from the date hereof and
shall be at a price equal to $5.00 per share. Twenty percent (20%) of such
options shall vest and become exercisable on each anniversary of the date
hereof, except that if on or before April 15, 1999 Company does not offer to
extend the Employment Term on the terms set forth in this Agreement to a date
that is on or after April 15, 2000, all remaining unvested options shall vest
and become exercisable on April 15, 1999, and, if on or before April 15, 2000
Company does not offer to extend the Employment Term on the terms set forth in
this Agreement to a date that is on or after April 15, 2001, all remaining
unvested options shall vest and become exercisable on April 15, 2000. Further,
if Employee is required to relocate his principal office without his consent in
violation of Section 1.2, and he elects to terminate his employment, such
options shall immediately vest and become exercisable. Such options shall be
issued under and be subject to the terms of the Converse Inc. 1994 Stock Option
Plan as approved at the 1996 Annual Meeting of Stockholders. Shares issued
pursuant to the foregoing options shall be registered by Company on Form S-8,
and, if the resale of such shares by Employee would be constrained by the volume
limitations of Rule 144 under the Securities Act of 1933, as amended, Company
agrees to file at its expense an appropriate amendment to the S-8 containing a
reoffer prospectus so that the shares may be sold by Employee without volume
limitations. Employee shall provide such information concerning Employee and
his plan of distribution as may be required for the reoffer prospectus.

3
<PAGE>

(d) During the Employment Term, Employee shall be entitled to at least
four weeks annual paid vacation and to participate in such fringe benefit plans
of Company as may exist from time to time on the same basis as other senior
executive officers of Company, including one-half of the initiation fee and one-
half of the dues to a country club in the North Reading, Massachusetts vicinity.

2. Reimbursement of Expenses.
-------------------------

2.1 Company shall reimburse Employee for all ordinary and necessary
out-of-pocket business expenses, including travel expenses, incurred by Employee
in connection with the discharge of Employee's duties and responsibilities
hereunder during the Employment Term in accordance with expense approval
procedures then in effect and upon presentation of an itemized account and
written proof of such expenses.

2.2 Company shall pay Employee all reasonable relocation expenses
(including moving expenses for personal property and household goods, and meals,
transportation and lodging) from Lake Forest, Illinois, and reasonable closing
costs (including, without limitation, the broker's commission payable on the
sale of his house) for the sale of Employee's existing home and the purchase or
lease of a new home in the vicinity of North Reading, Massachusetts. Company
will also reimburse Employee for the federal and state income tax effect of
reimbursement pursuant to this Section 2.2 by paying Employee the difference
between Employee's federal and state tax liability, including reimbursement
under this Section, after giving effect to all deductions to which he is
entitled, and the tax liability that would have been incurred by him absent such
reimbursement.

2.3 Company shall reimburse Employee for his reasonable legal
expenses incurred in connection with this Agreement.

3. Developments. Employee shall disclose fully, promptly and in
------------
writing to Company any and all inventions, discoveries, improvements,
modifications and other intellectual property rights, whether patentable or not,
which Employee has conceived, made or developed, solely or jointly with others,

4
<PAGE>

while employed by Company and which (i) relate to the business, work or
activities of Company or (ii) result from or are suggested by the carrying out
of Employee's duties hereunder or from or by any information that Employee may
receive from Company while employed by Company. Employee hereby assigns,
transfers and conveys to Company all of Employee's right, title and interest in
and to any and all such inventions, discoveries, improvements, modifications and
other intellectual property rights and agrees to take all such actions as may be
reasonably requested by Company at any time and with respect to any such
invention, discovery, improvement, modification or other intellectual property
rights to confirm or evidence such assignment, transfer and conveyance.
Furthermore, at any time and from time to time, upon the request of Company,
Employee shall execute and deliver to Company any and all instruments, documents
and papers, give evidence and do any and all other acts that, in the opinion of
counsel for Company, are or may be necessary or desirable to document such
assignment, transfer and conveyance or to enable Company to file and prosecute
applications for and to acquire, maintain and enforce any and all patents,
trademark registrations or copyrights under United States or foreign law with
respect to any such inventions, discoveries, improvements, modifications or
other intellectual property rights or to obtain any extension, validation,
reissue, continuance or renewal of any such patent, trademark or copyright.
Company shall be responsible for the preparation of any such instruments,
documents and papers and for the prosecution of any such proceedings and shall
pay or reimburse Employee for all reasonable expenses incurred by Employee in
compliance with the provisions of this Section 3.

4. Confidential Information.
------------------------

4.1 Employee acknowledges that, by reason of Employee's employment by
Company, Employee will have access to confidential information of Company,
including, without limitation, information and knowledge pertaining to products,
inventions, discoveries, improvements, innovations, designs, ideas, trade
secrets, proprietary information, manufacturing, packaging, advertising,
distribution and sales methods, sales and profit figures, customer and client
lists and relationships between Company and dealers, distributors, sales
representatives,

5
<PAGE>

wholesalers, customers, clients, suppliers and others who have business dealings
with them ("Confidential Information"). Employee acknowledges that such
Confidential Information is a valuable and unique asset of Company and covenants
that, both during and after the Employment Term, Employee will not disclose any
Confidential Information to any person (except as may be required by law or as
Employee's duties as an officer of Company may require) without the prior
written authorization of the Company Board. The obligation of confidentiality
imposed by this Section 4 shall not apply to information that becomes generally
known in the industry through no act of Employee in breach of this Agreement.

4.2 Employee acknowledges that all documents, files and other
materials received from Company during the Employment Term (with the exception
of documents relating to Employee's compensation or benefits to which Employee
is entitled following the Employment Term) are for use of Employee solely in
discharging Employee's duties and responsibilities hereunder and that Employee
has no claim or right to the continued use or possession of such documents,
files or other materials following termination of Employee's employment by
Company. Employee agrees that, upon termination of employment, Employee will
not retain any such documents, files or other materials and will promptly return
to Company any documents, files or other materials in Employee's possession or
custody, except that Employee shall be entitled to retain a copy of
correspondence written by him so long as Company also has a copy and such
correspondence does not contain Confidential Information.

5. Non-Competition. During the Employment Term and for a period
---------------
thereafter expressly provided in Section 8 of this Agreement, Employee shall
not, unless acting pursuant hereto or with the prior written consent of the
Company Board, directly or indirectly, own, manage, operate, finance, join,
control or participate in the ownership, management, operation, financing or
control of, or be connected as an officer, director, employee, partner,
principal, agent, representative, consultant or otherwise with, or use or permit
Employee's name to be used in connection with any Competing Business (defined
below); provided, however, that notwithstanding the foregoing, this provision
-------- -------
shall not be construed to prohibit the ownership by Employee of not

6
<PAGE>

more than 1% of the capital stock of any corporation which is engaged in any of
the foregoing businesses having a class of securities registered pursuant to the
Exchange Act.

The term "Competing Business" shall mean any business or enterprise
engaged, within any state of the United States or the District of Columbia or
any foreign country in which Company or any of its subsidiaries engages in the
business of (i) designing, manufacturing, distributing, marketing or selling
athletic footwear or athleisure footwear or (ii) branded or licensed sportswear,
activewear, sports headwear or other sports apparel of such a type (in the case
of each type of apparel) that it is in direct competition with the apparel sold
or licensed by Company.

In the event that the provisions of this Section 5 should ever be
adjudicated to exceed the time, geographic, product or other limitations
permitted by applicable law in any jurisdiction, then such provisions shall be
deemed reformed in such jurisdiction to the maximum time, geographic, product or
other limitations permitted by applicable law.

6. Non-Disparagement. Each party to this Agreement agrees that it
-----------------
will refrain from issuing any communication, written, oral or otherwise, that
disparages, criticizes or otherwise reflects adversely upon the other party
(including in the case of Company, any of its officers, directors or employees)
or which encourages the taking of any action by any person or entity adverse to
the other party, unless required by law.

7. Equitable Relief. Employee acknowledges that the restrictions
----------------
contained in Sections 3, 4 and 5 hereof are, in view of the nature of the
business of Company and its subsidiaries, reasonable and necessary to protect
the legitimate interests of Company, and that any violation of any provision of
those Sections may result in irreparable injury to Company. Employee also
acknowledges that in the event of any such violation, Company shall be entitled
to preliminary and permanent injunctive relief, without the necessity of proving
actual damages and to an equitable accounting of all earnings, profits and other
benefits arising from any such violation, which rights shall be cumulative and
in addition to any other rights or remedies to which Company

7
<PAGE>

may be entitled. Employee agrees that in the event of any such violation, an
action may be commenced for any such preliminary and permanent injunctive relief
and other equitable relief in any federal or state court of competent
jurisdiction sitting in Middlesex County, Massachusetts or in any other court of
competent jurisdiction. Employee hereby waives, to the fullest extent permitted
by law, any objection that Employee may now or hereafter have to such
jurisdiction or to the laying of the venue of any such suit, action or
proceeding brought in such a court and any claim that such suit, action or
proceeding has been brought in an inconvenient forum. Employee agrees that
effective service of process may be made upon Employee by mail under the notice
provisions contained in Section 10 hereof.

8. Termination.
-----------

8.1 Partial or Total Disability. If in the judgment of the Company
---------------------------
Board, Employee is unable to perform Employee's duties and responsibilities
hereunder by reason of illness, injury or incapacity for six consecutive months,
during which time Company shall continue to compensate Employee as provided in
Sections 1.4(a), (b) and (d) hereof (with such compensation to be reduced by the
amount of any disability or similar payment received by Employee for this time
period under any plan sponsored by Company), the Employment Term may be
terminated by Company, in which event Company shall not have any further
liability or obligation to Employee except for unpaid Base Compensation and
benefits accrued to the date of Employee's termination, for payment of any bonus
that may be payable under the Converse Executive Incentive Plan and for any
additional disability, severance or other benefits otherwise payable to Employee
under any applicable formal policy or plan which covers Employee at the time of
Employee's termination and is in effect at that time. Employee agrees, in the
event of any dispute under this Section 8.1 and if requested by Company, to
submit to a physical examination by a licensed physician selected by Company,
the cost of such examination to be paid by Company.

8.2 Death. In the event that Employee dies during the Employment
-----
Term, Company shall pay to Employee's executors, administrators or personal
representatives, as appropriate, an amount equal to the installment of
Employee's Base Compensation

8
<PAGE>

payable for the month in which Employee dies and payment of any bonus that may
be payable under the Converse Executive Incentive Plan. Thereafter, Company
shall not have any further liability or obligation hereunder to Employee's
executors, administrators, personal representatives, heirs, assigns or any other
person claiming under or through Employee.

8.3 Cause. The Employment Term may be terminated by the Company
-----
Board at any time for "cause." For purposes of this Agreement, "cause" shall
mean (i) conviction of a felony, (ii) repeated, serious infractions by Employee
of Company material rules or policies or (iii) willful material breach of the
terms of this Agreement by Employee. With respect to (ii) and (iii), Company
shall first be obliged to provide written notice to Employee of the particulars
and permit Employee thirty (30) days to address and rectify the conduct
complained of. Until such opportunity is afforded to Employee and in the event
that Employee rectifies the conduct complained of, "cause" as used herein shall
not become effective. In addition, following such thirty (30) day period, any
determination that Employee has failed to rectify the conduct complained of
shall only be made by the Company Board (without prejudice to Employee's right
to challenge the Company Board's determination by appropriate legal proceedings)
at a meeting at which Employee is permitted to attend, with counsel if he
desires, and address the particulars of the conduct complained of. It is
further understood that mere failure to achieve financial results shall not in
any respect be deemed "cause" for purposes of this Agreement. In the event of
such termination for cause, Company shall have no further liability or
obligation to Employee for compensation hereunder. Such termination shall be
effected by notice thereof delivered by Company to Employee pursuant to Section
10 hereof and shall be effective as of the date of such notice. In the event of
such termination for cause, Employee's obligations under Section 5 hereof shall
remain in full force and effect until the last day of the Employment Term
without regard to its early termination pursuant to this Section 8.3.

8.4 Without Cause. Company may terminate the Employment Term at any
-------------
time at Company's sole discretion and without specifying any cause for such
termination. In the event of termination by Company without cause, or in the
event of

9
<PAGE>

termination by Employee if he is required to relocate his principal
office without his consent in violation of Section 1.2, Employee shall be
entitled to receive each month as severance, payable on or before the last day
of such month, for the longer of (i) the balance of the Employment Term,
determined without regard to termination pursuant to this Section 8.4, or (ii)
two years from the date of termination an amount equal to one-twelfth of
Employee's average annual compensation (less withholding required by law).
Employee shall not be required to seek other employment or take other action to
mitigate Company's obligation to pay such severance, and no such employment or
other action shall affect Company's obligation to pay the severance hereunder.
In the event of such termination without cause, Employee's obligations under
Section 5 hereof shall remain in full force and effect for so long as such
severance is payable; provided, however, that Employee may elect not to receive
-------- -------
such severance payments and be relieved of his obligations under Section 5.

For purposes of the foregoing, the term "average annual compensation"
shall mean the annualized Base Compensation plus bonus paid during the twenty-
four month period (or such shorter period during which this Agreement is in
effect) preceding the date of termination without cause. For this purpose,
bonus that has been paid will be allocated ratably over the period to which it
relates.

8.5 Default by Company. Employee may terminate the Employment Term
------------------
at any time upon occurrence of any of the following events:

(a) Company shall fail to pay when due any amount payable to Employee
hereunder and continuance of such failure for a period of 15 days after
notice by Employee to Company; or

(b) Company shall breach in any material respect any of its other
obligations hereunder if such breach has not been cured within 30 days
after notice from Employee to Company; or

(c) Company shall commence voluntary proceedings under any bankruptcy,
insolvency or similar law or seek the appointment of a trustee, receiver,
liquidator,

10
<PAGE>

custodian or similar official for it or its property or consent
to any such relief or appointment of such an official in an involuntary
case or other proceeding commenced against the Company; or

(d) an involuntary case or other proceeding shall be commenced against
Company seeking liquidation, reorganization or other relief with respect to
Company or its debts under any bankruptcy, insolvency or similar law or
seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it or any substantial part of its property and
such involuntary case or other proceeding shall remain undismissed and
unstayed for a period of 60 days; an order for relief shall be entered
against Company under the Federal bankruptcy laws as now or hereinafter in
effect.

In the event of termination pursuant to this Section 8.5, Employee's
obligations under Section 5 hereof shall terminate.

9. Survival. Notwithstanding the expiration or termination of the
--------
Employment Term, except as expressly provided herein, the obligations of
Employee under Sections 3, 4, 5 and 6 shall survive and remain in full force and
effect, and the provisions for equitable relief against Employee in Section 7
hereof shall continue in force.

10. Notices. All notices and other communications required or
-------
permitted hereunder or necessary or convenient in connection herewith shall be
in writing and shall be deemed to have been given when hand delivered, in person
or by a recognized courier or delivery service, when telefaxed to the
recipient's correct telefax number (with receipt confirmed) or when mailed by
registered or certified mail, return receipt requested, as follows (provided
that notice of change of address shall be deemed given only when received):

If to Company, to:

Converse Inc.
One Fordham Road

11
<PAGE>

North Reading, MA 01864
Attn: Secretary
Telecopy: (508) 664-7579

If to Employee, to:

Glenn N. Rupp
One Fordham Road
North Reading, MA 01864
Telecopy: (508) 664-8763

with a copy to Employee at his residence as shown in the records of
Company and a further copy to:

Stephen A. Landsman, Esq.
Rudnick & Wolfe
203 North LaSalle Street
Suite 1500
Chicago, IL 60601

or to such other name or address as any designated recipient shall specify by
notice to the other designated recipients in the manner specified in this
Section 10.

11. Indemnification. Company agrees to indemnify Employee (including
---------------
his costs of defense) in his capacity as an officer, director or employee of
Company, and to the extent applicable, all subsidiaries as they may exist from
time to time, all to the fullest extent permitted under Delaware law.

12. Enforcement. In the event that Company fails to pay to Employee
-----------
any amount or benefits payable under this Agreement and Employee brings a
successful action against Company to recover such amount or benefit, Company
shall pay or reimburse Employee for his reasonable legal fees and legal expenses
incurred in connection with such action.

13. Governing Law. This Agreement shall be governed by and
-------------
interpreted under the laws of the Commonwealth of Massachusetts without giving
effect to any conflict of laws provisions.

12
<PAGE>

14. Contents of Agreement, Amendment and Assignment. This Agreement
-----------------------------------------------
sets forth the entire understanding between the parties hereto with respect to
the subject matter hereof, supersedes any prior employment agreement between the
parties and shall not be changed, modified or terminated except upon written
amendment executed by Company and Employee. All of the terms and provisions of
this Agreement shall be binding upon and inure to the benefit of and be
enforceable by the respective heirs, executors, administrators, personal
representatives, successors and assigns of the parties hereto, except that the
duties and responsibilities of Employee hereunder are of a personal nature and
shall not be assignable or delegable in whole or in part by Employee.

15. Severability. If any provision of this Agreement or application
------------
thereof to anyone or under any circumstances is adjudicated to be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect any other provision or application of this Agreement which can be given
effect without the invalid or unenforceable provision or application and shall
not invalidate or render unenforceable such provision or application in any
other jurisdiction.

16. Remedies Cumulative; No Waiver. No remedy conferred upon either
------------------------------
party by this Agreement is intended to be exclusive of any other remedy, and
each and every such remedy shall be cumulative and shall be in addition to any
other remedy given hereunder or now or hereafter existing at law or in equity.
No delay or omission by either party in exercising any right, remedy or power
hereunder or existing at law or in equity shall be construed as a waiver
thereof, and any such right, remedy or power may be exercised by such party from
time to time and as often as may be deemed expedient or necessary by such party
in such party's sole discretion.

17. Company Stockholder Approval. The grant of stock options
----------------------------
pursuant to Section 1.4(c) is subject to approval by the stockholders of Company
at the 1996 Annual Meeting of Stockholders, to be held on or before June 18,
1996, of changes to the 1994 Stock Option Plan. In the event such stockholder
approval is not obtained, this Agreement may be terminated by Employee without
obligation except for the obligation of Company

13
<PAGE>

to pay Employee his Base Compensation and guaranteed bonus accrued to the date
of termination and Employee's obligations under Sections 3 and 4 hereof.

18. Publicity. Employee shall have the right to approve the text of
---------
Company's press release announcing his election as Chairman of the Board.

IN WITNESS WHEREOF, Company and Employee have executed this Agreement
as of the date first above written.

CONVERSE INC.

By: /s/ MICHAEL C. BELL
-------------------------------
Michael C. Bell
President

/s/ GLENN N. RUPP
-------------------------------
GLENN N. RUPP

<PAGE>

CONVERSE INC.
1994 STOCK OPTION PLAN
(As Amended and Restated as of April 1, 1996)

1. Objectives of the Plan.

The Converse Inc. 1994 Stock Option Plan (the "Plan") of Converse Inc.
(the "Corporation") is intended to encourage and provide opportunities for
ownership of the Corporation's Common Stock by such key employees (including
officers) of the Corporation and any subsidiaries of the Corporation, and
persons providing bona fide consulting or advisory services to the Corporation
and any subsidiaries (other than in connection with the offer or sale of
securities of the Corporation in a capital raising transaction) ("consultants")
as the Board of Directors of the Corporation (the "Board") or a committee
thereof constituted for this purpose may from time to time determine. The Plan
is also intended to provide incentives for such employees and consultants to put
forth maximum efforts for the successful operation of the Corporation and its
subsidiaries. By extending to such key employees and consultants the
opportunity to acquire proprietary interests in the Corporation and to
participate in its success, the Plan may be expected to benefit the Corporation
and its shareholders by making it possible for the Corporation and its
subsidiaries to attract and retain the best available talent and by providing
such key employees and consultants with added incentives to increase the value
of the Corporation's stock.

2. Stock Subject to the Plan.

There are reserved for issue under the Plan 2,300,000 shares of the
Common Stock, without nominal or par value, of the Corporation (the "Shares").
Such Shares may be, in whole or in part, as the Board shall from time to time
determine, authorized but unissued Shares, or issued Shares which shall have
been reacquired by the Corporation. The maximum number of Shares with respect
to which options may be granted to any individual during any calendar year is
500,000 and the maximum number of Shares with respect to which options may be
granted to any individual during the term of the Plan is 750,000.

<PAGE>

3. Administration.

Subject to the express provisions of the Plan, the Plan shall be
administered by the Executive Compensation and Stock Option Committee of the
Board (the "Committee"), and the Committee shall have plenary authority, in its
discretion, to determine the individuals to whom, and the time or times at
which, options, if any, shall be granted, the type of option to be granted
(e.g., incentive or nonqualified) and the number of Shares to be subject to an
option. Subject to the express provisions of the Plan, the Committee shall also
have plenary authority to interpret the Plan, to prescribe, amend and rescind
rules and regulations regarding it, and to take whatever action is necessary to
carry out the purposes of the Plan. The Committee's determinations on matters
referred to in this Section 3 shall be conclusive.

4. The Committee.

The Committee shall consist of three or more members of the Board. The
Committee shall be appointed by the Board, which may from time to time designate
the number to serve on the Committee, appoint members of the Committee in
substitution for members previously appointed and fill vacancies, however
caused, in the Committee. No member of the Board while a member of the Committee
shall be eligible to receive an option under the Plan. The Committee shall elect
one of its members as its Chairman and shall hold its meetings at such times and
places as it may determine. A majority of the members shall constitute a quorum.
Any determination reduced to writing and signed by all the members of the
Committee shall be fully as effective as if it had been made by a majority vote
at a meeting duly called and held. The Committee may appoint a secretary, shall
keep minutes of its meetings and shall make such rules and regulations for the
conduct of its business as it shall deem advisable.

5. Eligibility.

Options may be granted only to key employees (which term as used
herein includes officers) of, and consultants to, the Corporation and of its
subsidiary corporations (the

<PAGE>

"subsidiaries") as the term "subsidiary corporation" is defined in Section
424(f) of the Internal Revenue Code of 1986, as amended, (the "Code"). For the
purposes of the Plan the term "employee" shall be an individual with an
"employment relationship" as defined in Section 421 (Treasury Regulation Section
1.421-7(h)) of the Code. A member of the Board or of the board of directors of a
subsidiary who is not also an employee of or consultant to the Corporation or of
one of its subsidiaries shall not be eligible to receive an option. Nothing
contained in the Plan shall be construed to limit the right of the Corporation
to grant options otherwise than under the Plan in connection with (i) the
employment of any person, (ii) the acquisition, by purchase, lease, merger,
consolidation or otherwise, of the business or assets of another corporation,
firm or association, including grants to employees thereof who become employees
of the Corporation or a subsidiary, or (iii) other proper corporate purposes.

6. Nonqualified Stock Options.

Unless it is designated an incentive stock option by the Committee,
any option granted under the Plan shall be nonqualified and shall be in such
form as the Committee may from time to time approve. Any such nonqualified
stock option shall be subject to the following terms and conditions and shall
contain such additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee shall deem desirable:

(a) Option Price. The option price of Shares purchasable under an option shall
-------------
be determined by the Committee in accordance with procedures established by
the Committee.

(b) Option Period. The term of an option shall be fixed by the Committee, but
--------------
no option shall be exercisable after the expiration of ten years from the
date the option is granted.

(c) Exercisability. Options shall be exercisable at such time or times as
---------------
determined by the Committee at or subsequent to grant; provided, however,
that except as provided in Subsections (f), (g) and (h) of this Section 6,
no option may be exercised at any time unless the holder is then a regular

<PAGE>

employee of, or consultant to, the Corporation or a subsidiary and has
continuously remained an employee or consultant at all times since the date
of granting of the option. If any option granted under the Plan shall
expire or terminate for any reason without ever having been exercised in
full, the unissued shares subject thereto shall again be available for the
purposes of the Plan. The proceeds of the sale of Shares subject to
options are to be added to the general funds of the Corporation.

(d) Method of Exercise. Options which are exercisable may be exercised in
-------------------
whole or in part at any time during the option period, by completing and
delivering to the Corporation an option exercise form provided by the
Corporation specifying the number of Shares to be purchased. Such form
shall be accompanied by payment in full of the purchase price in cash. No
shares shall be issued until full payment therefor has been made.

(e) Nontransferability of Options. No option shall be transferable by the
------------------------------
optionee otherwise than by will or by the laws of descent and distribution,
and such options shall be exercisable, during the optionee's lifetime, only
by the optionee.

(f) Termination by Reason of Death. If an optionee's employment, or engagement
-------------------------------
as a consultant, by the Corporation or any subsidiary terminates by reason
of death, as to those Shares with respect to which the option had become
exercisable (under the provisions of the particular option) on the date of
death, the stock option may thereafter be exercised by the legal
representative of the estate or by the legatee of the optionee under the
will of the optionee, during a period of six months from the date of such
death or until the expiration of the stated period of the option, whichever
period is shorter.

(g) Termination by Reason of Retirement or Permanent Disability. If an
------------------------------------------------------------
optionee's employment, or engagement as a consultant, by the Corporation or
any subsidiary terminates by reason of retirement or permanent disability,
as to those Shares with respect to which the option had become exercisable
(under the provisions of the particular option) on the date of termination
of employment, any stock option held by such optionee may thereafter be
exercised during a period of three months from

<PAGE>

the date of such termination of employment or engagement as a consultant or
the expiration of the stated period of the option, whichever period is
shorter; provided, however, that if the optionee dies within such three-
month period, any unexercised stock option held by such optionee shall
thereafter be exercisable, to the extent to which it was exercisable at the
time of death, for a period of six months from the date of such death or
for the stated period of the option, whichever period is shorter.

(h) Other Termination. If an optionee's employment, or engagement as a
------------------
consultant, terminates for any reason other than death, permanent
disability, or retirement, as to those Shares with respect to which the
option had become exercisable (under the provisions of the particular
option) on the date of termination of employment or engagement as a
consultant, any option held by such optionee may thereafter be exercised
during a period of one month from the date of such termination of
employment or the expiration of the stated period of the option, whichever
period is shorter; provided, however, that if the optionee dies within such
one-month period, any unexercised option held by such optionee shall
thereafter be exercisable, to the extent to which it was exercisable at the
time of death, for a period of six months from the date of such death or
for the stated period of the option, whichever period is shorter.

(i) Option Buyout. The Committee may at any time offer to repurchase an
--------------
option, other than an option which has been held for less than six months
by an optionee who is subject to Section 16(b) of the Securities Exchange
Act of 1934, the ("1934 Act"), based on such terms and conditions as the
Committee shall establish and communicate to the optionee at the time that
such offer is made.

7. Incentive Stock Options.

Any option granted under the Plan shall, at the discretion of the
Committee, qualify as an incentive stock option as defined in Section 422(b) of
the Code and shall be in such form as the Committee may from time to time
approve. Any such incentive stock option shall be subject to the following
terms and conditions in addition to those set forth in Section 6 and

<PAGE>

shall contain such additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee shall deem desirable.

(a) Eligibility. Incentive stock options shall not be granted to any
------------
individual who, at the time the option is granted, owns stock possessing
more than ten percent of the total combined voting power of all classes of
stock of the Corporation or its parent corporation (as the term "parent
corporation" is defined in Section 424(e) of the Code) or its subsidiaries
(a "Ten Percent Shareholder") unless: 1) the option price is at least 110%
of the fair market value of the Shares subject to the option, and 2) the
option states that it is not exercisable after the expiration of five years
from the date the option is granted. Incentive stock options shall not be
granted to a person who is not a Ten Percent Shareholder unless the option
price is at least 100% of the fair market value of the Shares subject to
the option on the date the option is granted.

(b) Limitation on Exercise of Options. The maximum aggregate fair market value
----------------------------------
(determined at the time an option is granted) of the Shares with respect to
which incentive stock options are exercisable for the first time by any
optionee during any calendar year (under all plans of the Company and its
parent corporation and subsidiaries) shall not exceed $100,000. If the
foregoing $100,000 limit is exceeded with respect to an incentive stock
option on account of the acceleration of the exercise of the option
pursuant to Section 8 of the Plan, the portion of the incentive stock
option in excess of the $100,000 limit shall be treated as a nonqualified
stock option. If the provisions of this Section limit the exercisability
of certain incentive stock options which would otherwise become exercisable
on account of termination of employment, the Committee, in its sole
discretion, shall determine the times at which such incentive stock options
become exercisable so that the provisions of this Section 7(b) are not
violated; provided, that in no event shall any incentive stock option be
exercisable more than ten years from the date it is granted (five years in
the case of incentive stock options granted to Ten Percent Shareholders
(described in Section 7(a)).

8. Adjustment Upon Changes in Capitalization, Etc.

<PAGE>

The aggregate number and class of shares reserved under the Plan and
with respect to which options may be granted to any individual, the number and
class of shares subject to each option granted pursuant to the Plan and the
option price per Share payable under each such option shall be appropriately and
equitably adjusted in the event of: any reclassification or increase or decrease
in the number of the issued Shares of the Corporation by reason of a split-up or
consolidation of Shares; the payment of a stock dividend; a recapitalization; a
combination or exchange of Shares; a spin-off; or any like capital adjustment.

Subject to the next paragraph, if the Corporation shall be reorganized
or shall be merged with or into or consolidated with any other corporation, or
shall sell all or substantially all of its assets or effect a complete
liquidation, each option, if any, then outstanding under the Plan, shall
thereafter apply to such number and kind of securities, cash or other property
as would have been issuable by reason of such reorganization, merger,
consolidation, sale or liquidation to a holder of the number of Shares which
were subject to the option, if any, immediately prior to such transaction.

In the event of a proposed transaction of the type set forth in the
preceding paragraph, the Committee may determine that each option then
outstanding under the Plan, shall terminate as of a date to be fixed by the
Committee and approved by the Board upon not less than thirty days' written
notice to the optionee; and may further determine when and to the extent that,
any option granted at least six months prior to such event to any optionee who
has been an employee or consultant for one year or more prior to the date of
such notice, shall be accelerated and such optionee shall be entitled to
exercise such option without regard to any installment provision of the option
prior to the termination date fixed in said notice; provided, however, that in
no event shall the Committee have the right to make any determination provided
for in this paragraph, if doing so would make any transaction ineligible for
pooling of interest accounting treatment under APB No. 16 or any successor
provision that but for such determination would be eligible for such treatment.

<PAGE>

All adjustments under this Section 8 shall be made by the Committee,
subject to the approval of the Board, which action shall be final and
conclusive.

Anything to the contrary notwithstanding, upon a Change of Control (as
hereinafter defined) and, in the case of options granted on or after April 1,
1996, subsequent termination of an optionee's employment by the Corporation or
by the optionee as a result of a material breach by the Corporation of any
employment agreement between the optionee and the Corporation, each option
granted prior to such Change of Control shall become immediately exercisable in
full. As used herein, "Change of Control" shall mean any of the following
events:

(a) The acquisition (other than (i) from the Corporation or INTERCO
INCORPORATED or (ii) by Apollo (as hereinafter defined)) by any person, entity
or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act,
excluding, for this purpose, the Corporation or its subsidiaries, or any
employee benefit plan of the Corporation or its subsidiaries, of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of
20% or more of either the then outstanding Shares or the combined voting power
of the Corporation's then outstanding voting securities entitled to vote
generally in the election of directors if the beneficial ownership of such
person, entity or "group" exceeds the beneficial ownership of Shares and the
combined voting power of the Corporation's then outstanding securities entitled
to vote generally in the election of directors held by any person or entity that
acquired such Shares or securities having such voting power from the Corporation
and by Apollo; or

(b) Individuals who, as of the Effective Date (as defined in Section
12), constitute the Board (as of such date, the "Incumbent Board"), cease for
any reason to constitute at least a majority of the Board; provided, that any
person becoming a director subsequent to the first anniversary of the Effective
Date whose election, or nomination for election by the Corporation's
stockholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board (other than an election or nomination of an
individual whose initial assumption of office is in connection with an actual or

<PAGE>

threatened election contest relating to the election of the directors of the
Corporation, as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the 1934 Act) shall be considered as though such person were a member of
the Incumbent Board; or

(c) Approval by the stockholders of the Corporation of a
reorganization, merger or consolidation, in each case, with respect to which
persons who were the stockholders of the Corporation immediately prior to such
reorganization, merger or consolidation do not, immediately thereafter, own,
directly or indirectly, more than 50% of the combined voting power entitled to
vote generally in the election of directors of the reorganized, merged or
consolidated company's then outstanding voting securities, or a liquidation or
dissolution of the Corporation or the sale of all or substantially all of the
assets of the Corporation, in each case, unless the transaction was approved by
a majority of the directors then comprising the Incumbent Board.

For purposes of the definition of "Change of Control", the term
"Apollo" shall mean Apollo Advisors, L.P. and Lion Advisors, L.P. and any entity
that controls, is controlled by or is under common control with Apollo Advisors,
L.P. and Lion Advisors, L.P., including accounts under common management.

9. Amendments and Termination.

The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration, or discontinuation shall be made which would impair the rights of an
optionee under an option without the optionee's consent, or which without the
approval of the stockholders would, except as is provided in Section 8, increase
the total number of Shares reserved for the purpose of the Plan, change the
employees or class of employees and consultants eligible to participate in the
Plan, or extend the maximum option period under Section 6(b).

The Committee may amend the terms of any option theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights of
any optionee without the consent of the optionee. The Committee may also
substitute new

<PAGE>

options for previously granted options, including substitution for previously
granted options having higher option prices.

10. General Provisions.

(a) The Committee may require each person purchasing Shares pursuant
to an option under the Plan to represent to and agree with the Corporation in
writing that the optionee is acquiring the Shares without a view to distribution
thereof. The certificates for such Shares may include any legend which the
Committee deems appropriate to reflect any restrictions on transfer.

(b) All certificates for Shares delivered under the Plan shall be
subject to such stock-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations, and other requirements of the
Securities and Exchange Commission, any stock exchange upon which the Shares are
then listed, and any applicable federal or state securities law, and the
Committee may cause a legend or legends to be put on any such certificates to
make appropriate reference to such restrictions.

(c) Nothing contained in the Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to stockholder
approval if such approval is required; and such arrangements may be either
generally applicable or applicable only in specific cases.

11. Taxes.

Following exercise of an option, the optionee shall, no later than the
date as of which an amount related to the option exercise first becomes
includable in the gross income of the optionee for federal, state or local tax
purposes, pay to the Corporation, or make arrangements satisfactory to the
Corporation regarding payment of, any federal, state, or local taxes of any kind
required by law to be withheld with respect to such amount and the Corporation
and its subsidiaries shall, to the extent permitted by law, have the right to
deduct any such taxes from any payment of any kind otherwise due to the
optionee.

<PAGE>

12. Effective Date of Plan.

The Plan became effective on October 19, 1994 the date it was adopted
by the Board and by the Company's then sole stockholder (the "Effective Date").
The Plan as amended and restated shall be effective as of April 1, 1996, the
date as of which it is adopted by the Board, subject to stockholder approval.

13. Term of Plan.

No option shall be granted pursuant to the Plan more than 10 years
after the Effective Date, but options theretofore granted may extend beyond and
be exercised after that date.

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS CONTAINED IN ITS SECOND QUARTER FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> JUN-29-1996
<CASH> 4,920
<SECURITIES> 0
<RECEIVABLES> 75,200
<ALLOWANCES> 1,715
<INVENTORY> 97,209
<CURRENT-ASSETS> 198,261
<PP&E> 22,581
<DEPRECIATION> 5,523
<TOTAL-ASSETS> 240,203
<CURRENT-LIABILITIES> 105,223
<BONDS> 0
0
0
<COMMON> 16,692
<OTHER-SE> (46,499)
<TOTAL-LIABILITY-AND-EQUITY> 240,203
<SALES> 166,458
<TOTAL-REVENUES> 177,703
<CGS> 121,954
<TOTAL-COSTS> 177,389
<OTHER-EXPENSES> (197)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,093
<INCOME-PRETAX> (7,582)
<INCOME-TAX> (580)
<INCOME-CONTINUING> (7,067)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,002)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> 0

</TABLE>