CONVERSE INC, 424B1, 1997-05-16

CONVERSE INC
424B1, 1997-05-16
RUBBER & PLASTICS FOOTWEAR

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<PAGE>

RULE NO. 424(b)(1)
REGISTRATION NO. 333-23791

PROSPECTUS
$70,000,000
CONVERSE INC.

7% CONVERTIBLE SUBORDINATED NOTES DUE 2004
INTEREST PAYABLE JUNE 1 AND DECEMBER 1

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

The 7% Convertible Subordinated Notes due 2004 (the "Notes") offered hereby
(the "Offering") are convertible into Common Stock of Converse Inc.
("Converse" or the "Company") at any time at or before maturity, unless
previously redeemed, at a conversion price of $21.83 per share, subject to
adjustment in certain events. The Common Stock of the Company is traded on the
New York Stock Exchange under the symbol "CVE." On May 15, 1997, the last
reported sale price of the Common Stock on the New York Stock Exchange was $17
3/4 per share.

The Notes do not provide for a sinking fund. The Notes are redeemable, at
the option of the Company, in whole or in part, at any time on or after June
5, 2000 at the redemption prices set forth in this Prospectus, together with
accrued interest. The Notes are subject to purchase by the Company at the
option of the holder upon a Change of Control (as defined herein) at 100% of
the principal amount thereof, plus accrued interest. See "Description of
Notes."

The Notes are unsecured obligations of the Company and are subordinated to
all present and future Senior Indebtedness (as defined herein) of the Company
and will be effectively subordinated to all indebtedness and other liabilities
of subsidiaries of the Company. On a pro forma basis, after giving effect to
the Offering and the application of the net proceeds therefrom, at March 29,
1997 borrowings of the Company constituting Senior Indebtedness would have
been approximately $91 million, and indebtedness and other liabilities of
subsidiaries would have been approximately $30 million. The Indenture will not
restrict the incurrence of any other indebtedness or liabilities by the
Company or its subsidiaries. See "Description of Notes--Subordination."

The Notes have been authorized for listing on the New York Stock Exchange.

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

SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC (1) AND COMMISSIONS (2) COMPANY (3)
- --------------------------------------------------------------------
<S> <C> <C> <C>
Per Note 100% 3.25% 96.75%
- --------------------------------------------------------------------
Total(4) $70,000,000 $2,275,000 $67,725,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from May 21, 1997.
(2) For information regarding indemnification of the Underwriters, see
"Underwriting."
(3) Before deducting expenses estimated at $1,000,000 payable by the Company.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
$10,000,000 principal amount of additional Notes solely to cover over-
allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $80,000,000, $2,600,000 and $77,400,000,
respectively.

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

The Notes are being offered by the several Underwriters named herein,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. It is expected that delivery of the Notes will be made in book-
entry form through the facilities of The Depository Trust Company on or about
May 21, 1997.

SMITH BARNEY INC. ------------

DILLON, READ & CO. INC.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

GOLDMAN, SACHS & CO.

May 15, 1997
<PAGE>

[THE CONVERSE ALL STAR LOGO APPEARS ON THE PROSPECTUS COVER]

BASKETBALL

Converse(R) All Star(R) is the American performance brand with authentic sports
heritage. As the creator of the original basketball shoe in 1917, it's only
natural that today's Converse basketball products offer all of the innovative
design and technology features made possible by 80 years of experience.

[Picture of All Star 91 Shoe]

ATHLEISURE

The shoe that started it all provides the Converse brand with its heritage and
authenticity. As the original basketball shoe, the canvas All Star with its
world-famous ankle patch is now worn by athletes off the court, along with the
numerous other authentic athleisure products whose origins are rooted in sports.

[Picture of Chuck Taylor(R) All Star Shoe]

CHILDREN'S

Converse offers a full range of performance athletic footwear for each new
generation of young athletes who aspire to be great. Whether it's playing pee
wee basketball or hanging out in the park, Converse kids' products are worn by
small athletes around the world.

[Picture of All Star Desire Shoe]

CROSS TRAINING

The product category designed for the multiple sport athlete who wants a
versatile performance shoe to meet the demanding needs of his/her workout no
matter how diverse the fitness regimen.

[Picture of Fit Star(TM) Shoe]

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

CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE MARKET PRICE OF THE NOTES,
THE COMMON STOCK, OR BOTH. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN
CONNECTION WITH THE OFFERING, MAY BID FOR, AND PURCHASE, THE NOTES, THE COMMON
STOCK, OR BOTH, IN THE OPEN MARKET AND MAY IMPOSE PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>

[Pictures of Professional Basketball Players Appear Here]

<PAGE>

PROSPECTUS SUMMARY

The following is a summary of certain information appearing elsewhere in this
Prospectus. Reference is made to, and this summary is qualified in its entirety
by, the more detailed information and financial statements, including the notes
thereto, contained elsewhere or incorporated by reference in this Prospectus.
As used in this Prospectus, unless the context indicates otherwise, the
"Company" or "Converse" refers to Converse Inc. and its subsidiaries. Unless
otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised. The Company's fiscal year
end is the Saturday closest to December 31 in each year. The results of
operations will periodically include a 53 week fiscal year. For purposes of
financial information concerning the Company, First Quarter 1997 refers to the
three months ended March 29, 1997, First Quarter 1996 refers to the three
months ended March 30, 1996, 1996 refers to the 52-week period ended December
28, 1996, 1995 refers to the 52-week period ended December 30, 1995 and 1994
refers to the 52-week period ended December 31, 1994.

THE COMPANY

Converse is a leading global designer, manufacturer and marketer of high
quality athletic footwear for men, women and children. The Company is also a
global licensor of sports apparel, accessories and selected footwear. The
Company, founded in 1908, began establishing its authentic footwear heritage
with the introduction of its original canvas Chuck Taylor(R) basketball shoe in
1923. Throughout its nearly 90-year history, Converse has achieved a high level
of brand name recognition due to its reputation for high performance products,
quality, value and style. Through its well-known Converse(R) All Star(R) brand,
the Company has consistently maintained its position as the American
performance brand with authentic sports heritage.

The Company's footwear is focused on four core categories: basketball,
athleisure, children's and cross training, which represented approximately 34%,
31%, 22% and 8%, respectively, of the Company's 1996 net sales. The basketball
category is comprised of high performance footwear for athletes and typically
features Converse's proprietary REACT(R) shock absorption technology.
Converse's athleisure footwear offerings are centered on the Converse Chuck
Taylor All Star canvas athletic shoe, which management believes is the world's
all time best-selling athletic shoe with over 550 million pairs sold since its
introduction. Converse's rapidly growing children's category consists of
children's-sized versions of the Company's basketball, athleisure and cross
training shoes, as well as certain styles designed exclusively for children.
Cross training, which is the fastest growing category in the athletic footwear
industry, consists of high performance athletic shoes used for sports training
and fitness.

The Company's products are distributed in over 90 countries to approximately
9,000 customers, which include speciality athletic, sporting goods, department
and shoe stores, as well as to 37 Company-operated retail outlet stores. In
1996, the Company's reported net sales were $349.3 million. However, this
figure understates the total worldwide presence of Converse-branded products
since a large portion is sold through licensees, and the Company recognizes
only the percentage of these sales which it records as royalty income. Global
wholesale sales of Converse-branded products, which include direct sales by the
Company to retailers, sales by Converse distributors and sales of licensed
products by Converse licensees, were approximately $800 million in 1996, of
which over $560 million, or approximately 70%, were international sales.
Although the Company's reported net sales declined from 1995 to 1996, global
wholesale sales of Converse-branded products increased approximately 11% during
this period.

3
<PAGE>

substantial sales increases in each of its four product categories of
basketball, athleisure, children's, and cross training of approximately 105%,
26%, 66% and 61%, respectively, compared to First Quarter 1996. The Company's
gross profit margin also improved to 31.0% of net sales for First Quarter 1997
from 25.0% for First Quarter 1996. In addition, selling, general and
administrative expenses, although increasing by $10.5 million in First Quarter
1997 compared to First Quarter 1996, decreased as a percentage of net sales to
27.0% from 30.4%. The foregoing factors enabled the Company to record earnings
from operations of $12.3 million for First Quarter 1997 as compared to $0.2
million for First Quarter 1996. Converse's global backlog increased
approximately 47% to $220.1 million at March 29, 1997 from $149.3 million at
March 30, 1996. The backlog increases were approximately 32%, 83%, 40% and 14%,
respectively, in the Company's categories of basketball, athleisure, children's
and cross training.

THE 1996 REPOSITIONING

. Establishing a New Management Team. Since April 1996, the Company has
recruited a new management team with proven experience in the athletic
footwear and sporting goods industries. The Company appointed Glenn N.
Rupp as Chairman and Chief Executive Officer, James E. Solomon as Senior
Vice President, Marketing and Edward C. Frederick as Senior Vice
President, Research and Development. Previously, Mr. Rupp was at Wilson
Sporting Goods Co. for eight years and served as President from 1985 to
1991 and Chief Executive Officer from 1987 to 1991. From 1985 to 1991,
net sales at Wilson more than doubled and operating performance
significantly improved. Mr. Solomon had previously been President and
Chief Operating Officer of Dansk International and, prior to holding that
position, had significant experience in the athletic footwear industry
with companies such as Avia and New Balance. Dr. Frederick has previously
held senior product design and development positions at Nike and adidas.
The Company believes that the strategies executed by the new management
team have contributed significantly to the recent improvement in the
Company's performance.

. Focusing on Four Core Product Categories. The Company is focused on four
core product categories: basketball, athleisure, children's and cross
training. These four categories represented, industry-wide, over $7
billion in domestic retail athletic footwear sales in 1996, and
management believes that each of these categories has strong growth
potential for Converse All Star-branded products. During 1996, the
Company completed its exit from the football, baseball, running, walking,
tennis and outdoor categories. The decision to concentrate on the
basketball and cross training categories was driven by management's
belief that these categories are the two most important athletic footwear
categories to the Company's target consumers, males and females ages 12
to 24. The decision to concentrate on the athleisure and children's
categories was based on the Company's historic success in these two
categories. The Company believes that its increased marketing,
advertising, product development and selling focus on its four core
product categories will lead to increased market share and profitability.

. Creating a Single Brand Identity. Management has created a single new
marketing and brand positioning statement that focuses the Company's
global marketing efforts on the concept "Converse All Star is the
American performance brand with authentic sports heritage." The Company
believes that the Converse All Star brand name and the Chuck Taylor patch
logo command significant consumer brand awareness generated by their
nearly 80-year history. In addition, the Converse All Star brand is
enhanced by the Company's position as the originator of the first
basketball shoe, the canvas Chuck Taylor All Star. In an effort to
capitalize on the Converse All Star brand's significant consumer
recognition and authentic heritage, the Company will focus its marketing,
advertising and product development to promote this single brand
identity. Prior to 1996, the Company's products had been marketed under
multiple brand names and logos with different marketing and advertising
strategies for each brand. The Company's new singular focus on building
one brand has resulted in higher consumer demand in relation to the
Company's advertising and marketing expenditures.

4
<PAGE>

every six to eight weeks, as compared to generally having introduced new
products semi-annually in the past. The Company's consumer research is
integral to the development of both the Company's new products and its
advertising campaigns and in-store point of purchase materials. Each of
the Company's products is now fully supported by a consistent, integrated
marketing program, responsive to the demands
of the Company's target customers. Management attributes the success of
its Spring 1997 basketball line to its improved marketing and product
development. Management believes that the Company's top four selling
Spring 1997 basketball shoes will generate net sales in excess of $40
million, a level more than double the net sales of the Company's top four
basketball shoes in any prior Spring basketball line.

. Streamlining Operations. Due to the elimination of non-core categories,
the creation of a single brand marketing strategy and the reduction of
infrastructure, the Company's expenses declined substantially during
1996. Selling, general and administrative expenses in 1996 were $114.9
million, or 32.9% of net sales, as compared to $146.3 million, or 35.9%
of net sales, in 1995.

GROWTH STRATEGIES

. Increasing Penetration in Core Categories. The Company continues to
aggressively pursue market share increases from its strong base in each
of Converse's four core categories, and the Company's Spring 1997
footwear offerings achieved significant market share gains in each
category. Management believes that the Company's integrated marketing and
product support programs, more frequent product introductions and
increased depth of product offering will enable the Company to build on
the recent market share gains achieved by Spring 1997 products such as
the All Star 2000 canvas, the All Star Springfield, the All Star Tourney
and the Dr. J 2000. As a result of the increasing penetration in each of
Converse's four core categories in First Quarter 1997, the Company
experienced increases in total business (net sales for First Quarter 1997
plus global backlog at March 29, 1997 compared to net sales for First
Quarter 1996 plus global backlog at March 30, 1996) in its four core
categories of basketball, athleisure, children's and cross training of
approximately 53%, 57%, 49% and 29%, respectively.

. Enhancing Retail Distribution. The Company views specialty athletic
retailers as one of the most important outlets to reach the Company's
target consumers. These retailers often showcase Converse-branded head-
to-toe footwear and apparel products thereby strengthening the Converse
All Star brand. These specialty athletic retailers include Athlete's
Foot, Champs, Finish Line, FOOTACTION USA and Foot Locker, among others.
Strong consumer demand for the Converse All Star brand has enabled the
Company to dramatically increase its sales to this channel. As a result
of the Company's increased focus on sales to specialty athletic
retailers, the Company's net sales for First Quarter 1997 plus backlog at
March 29, 1997 with these five retailers was more than six times greater
than net sales for First Quarter 1996 plus backlog at March 30, 1996 with
these five retailers. Management believes there are significant
opportunities to further increase sales to specialty athletic retailers.

. Improving Margins. Increased demand for the Company's products resulting
from the successful 1996 Repositioning should enable Converse to realize
higher prices, thereby improving gross margins. Due to changes in product
mix and less discounting, the Company's average domestic suggested retail
price for its Spring basketball line increased from $57 for Spring 1996
to $69 for Spring 1997. The Company's gross profit margin improved to
31.0% for First Quarter 1997 from 25.0% for First Quarter 1996. In
addition, management expects to improve its operating margins through the
realization of operating leverage as the Company grows its sales more
rapidly than its fixed expenses. As a result, selling, general and
administrative expenses increased by $10.5 million in First Quarter 1997
compared to First Quarter 1996, but decreased as a percentage of net
sales to 27.0% from 30.4%. Furthermore, the Company has improved the
percentage of orders taken in advance of delivery. This higher percentage
of future orders to sales, combined with more frequent product
introductions, should lead to better inventory management and fewer
discounts. Management believes that over time the Company will achieve
margins more consistent with those of its competitors.

5
<PAGE>

. Continuing Focus on Licensing Opportunities. Through the licensing of
sports apparel, accessories, and selected footwear, the Company
anticipates strong Converse brand sales growth. Through its licensees,
the Company provides consumers with Converse-branded products from head-
to-toe. Management believes that the integrated apparel offerings
provided by Converse's licensees enhance the sales of the Company's
footwear and that Converse has strong long-term relationships with its
licensees. Management attributes the growth in licensee royalty income
from $17.3 million in 1995 to $27.6 million in 1996 and from $4.9 million
in First Quarter 1996 to $6.4 million in First Quarter 1997 primarily to
the strong consumer demand for Converse-branded apparel in the Pacific
region. The Company believes that the strong consumer demand for
Converse-branded apparel in the Pacific region is primarily attributable
to the underlying strength of Converse's branded footwear sales in the
region. Coordinating the licensed apparel effort more closely on a global
basis should result in improved distribution of licensed products and
increased royalty income.

. Increasing International Sales. International wholesale sales of
Converse-branded products by the Company and its distributors and
licensees were over $560 million in 1996, representing approximately 70%
of the approximately $800 million total Converse-branded global wholesale
sales in 1996. Although the Company's reported international net sales
declined from 1995 to 1996, such net sales increased $3.6 million in
First Quarter 1997 from First Quarter 1996, representing an 8.4%
increase. International wholesale sales of Converse-branded products
increased 12% from approximately $500 million in 1995 to approximately
$560 million in 1996. International wholesale sales of Converse-branded
products increased 18% from approximately $118 million in First Quarter
1996 to approximately $139 million in First Quarter 1997. Management
believes that the Company is well-positioned to continue to take
advantage of additional growth opportunities in Europe and the Pacific
Rim, as well as opportunities in the developing markets of Latin America
and Eastern Europe. The Company also plans to target international
consumers directly by customizing its products to suit specific customer
needs and tastes in different markets.

Management believes that with its experienced management team and focused
marketing, product development and selling strategies in place, the Company
will continue to build upon the momentum of its recent product successes in
order to improve market share and profitability.

6
<PAGE>

RECENT DEVELOPMENTS

RECENT FINANCIAL RESULTS

In the first four months of 1997, the Company's net sales were $163.5
million, a 48% increase from the comparable period of 1996, with substantial
increases in all four core categories. The Company's global backlog increased
to a record high of $227.9 million as of April 26, 1997, a 50% increase from
$152.2 million as of April 27, 1996. Management attributes the improved
performance of the Company to the 1996 Repositioning as well as the initial
implementation of the Company's growth strategies.

COMMITMENT FOR NEW CREDIT FACILITY

On April 30, 1997, the Company accepted a commitment letter of BT Commercial
Corporation to supply a new $150 million revolving credit facility (the "New
Credit Facility"). The New Credit Facility will replace the Company's existing
credit facility, will have a term of five years, will provide for borrowings
and other credit accommodations in a manner similar to the existing credit
facility and will be secured by substantially the same assets as the existing
credit facility. Borrowings will initially bear interest at the rate currently
provided for under the A Facility (as defined under "Use of Proceeds"), but
such interest rate will be reduced in the event that the Company achieves
certain financial ratios. The completion of the New Credit Facility is
conditional upon completion of the Offering and other customary matters.
However, the Offering is not conditioned on the New Credit Facility and no
assurance can be given that the New Credit Facility will be completed.

FAVORABLE RESOLUTION OF OUTSTANDING LITIGATION; CANCELLATION OF NOTES AND
WARRANTS

In January 1997, a New York State Supreme Court jury ruled unanimously in
favor of Converse and awarded damages against certain former owners of Apex
One, Inc. ("Apex") in a lawsuit between Converse and such former owners.
Following this jury award, the Company was able to settle substantially all
claims with the former owners of Apex. As part of these settlements, the former
owners delivered to Converse $10.2 million of subordinated notes (discounted to
approximately $8.9 million) and warrants to purchase 1.75 million shares of
Converse Common Stock at $11.40 per share (valued at the time of issuance at
approximately $3.5 million) and canceled $5.4 million of other contractual
obligations, all of which Converse issued in connection with its 1995
acquisition of Apex. In addition, one former owner made a cash payment to
Converse of $2.0 million. In February 1997, the United States Bankruptcy Court
confirmed a plan of liquidation in connection with the Apex bankruptcy pursuant
to which Converse made payments of approximately $4.5 million to the Apex
estate and certain creditors of Apex. As a result of the litigation settlements
and the bankruptcy plan confirmation, Converse recorded a net pretax gain of
$13.1 million in First Quarter 1997. See "Business--Legal Proceedings."

7
<PAGE>

THE OFFERING

Securities Offered.......... $70,000,000 aggregate principal amount of 7%
Convertible Subordinated Notes due 2004 (the
"Notes").

Maturity.................... June 1, 2004

Payment of Interest......... June 1 and December 1, commencing on December 1,
1997.

Conversion.................. The Notes are convertible at any time prior to
maturity, unless previously redeemed, into Common
Stock of the Company, at the option of the
holder, at a conversion price of $21.83 per
share, subject to certain adjustments. See
"Description of Notes-- Conversion Rights."

Optional Redemption......... The Notes will be redeemable, in whole or in
part, at the option of the Company at any time on
or after June 5, 2000 at the redemption prices
set forth herein plus accrued interest to the
date of redemption. See "Description of Notes--
Optional Redemption."

Repurchase upon Change of Upon a Change of Control (as defined herein),
Control.................... holders of the Notes will have the right, subject
to certain conditions and restrictions, to
require the Company to purchase all or part of
their Notes at 100% of the principal amount
thereof, plus accrued interest. See "Risk
Factors--Certain Change of Control Matters" and
"Description of Notes--Purchase of Notes at the
Option of the Holder Upon a Change of Control."

Subordination............... The Notes are subordinated to all existing and
future Senior Indebtedness (as defined herein)
and will be effectively subordinated to all
indebtedness and other liabilities of all
subsidiaries of the Company. The Indenture
governing the Notes will not restrict the
incurrence of Senior Indebtedness or other
indebtedness by the Company or its subsidiaries.
On a pro forma basis after giving effect to the
Offering and the application of the proceeds
therefrom, at March 29, 1997, borrowings of the
Company constituting Senior Indebtedness would
have been approximately $91 million, and
indebtedness and other liabilities of
subsidiaries would have been approximately $30
million. See "Risk Factors--Subordination of
Notes," "Capitalization" and "Description of
Notes--Subordination."

Use of Proceeds............. The net proceeds from the Offering will be used
to repay outstanding indebtedness. See "Use of
Proceeds."

Listing..................... The Notes have been authorized for listing on the
New York Stock Exchange.

Common Stock Trading........ The Common Stock is traded on the New York Stock
Exchange under the symbol "CVE."

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Information contained or incorporated by reference in this Prospectus
contains "forward-looking statements" which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy. See, e.g., "The
Company--The 1996 Repositioning," "The Company--Growth Strategies" and "Recent
Developments" in this Prospectus Summary, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," "Business--The 1996
Repositioning" and "Business--Growth Strategies." No assurance can be given
that the future results covered by the forward-looking statements will be
achieved. The Risk Factors beginning on page 12 constitute cautionary
statements identifying important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to vary materially from the future results covered in such forward-
looking statements. Other factors could also cause actual results to vary
materially from the future results covered in such forward-looking statements.
The Company undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect any future events or occurrences.

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

The Company is incorporated in Delaware, its principal executive offices are
located at One Fordham Road, North Reading, Massachusetts 01864, and its
telephone number at such location is (508) 664-1100.

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

The following summary historical and pro forma financial data of Converse are
derived from and should be read in conjunction with Converse's consolidated
financial statements and the notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
------------------------------------------------------------ ---------------------------------
DECEMBER 28, 1996 MARCH 29, 1997
-------------------- --------------------
JANUARY 1, DECEMBER 31, DECEMBER 30, PRO MARCH 30, PRO
1994 1994 1995 ACTUAL FORMA(1) 1996 ACTUAL FORMA(1)
---------- ------------ ------------ -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................. $380,427 $437,307 $407,483 $349,335 $349,335 $ 86,551 $135,969 $135,969
Gross profit.............. 126,089 150,752 113,535 86,237 86,237 21,617 42,160 42,160
Selling, general and
administrative expenses.. 108,059 128,876 146,332 114,888 114,888 26,306 36,765 36,765
Royalty income............ 10,808 14,212 17,257 27,638 27,638 4,928 6,377 6,377
Earnings (loss) from
operations............... 28,838 36,088 (29,722) 164 164 239 12,336 12,336
Interest expense.......... 7,501 7,423 14,043 17,776 13,503 3,837 2,679 2,003
Net earnings (loss)....... 12,104 17,596 (71,747) (18,435) (15,871) (3,260) 12,680(2) 13,086(2)
Net earnings (loss) per
share.................... $ -- (3) $ 1.05 $ (4.30) $ (1.10) $ (0.95) $ (0.20) $ 0.71(2) $ 0.73(2)
Weighted average number of
shares of common stock... -- (3) 16,692 16,692 16,761 16,761 16,692 17,862 17,862
OTHER OPERATIONS DATA:
Gross margin.............. 33.1% 34.5% 27.9 % 24.7 % 24.7 % 25.0 % 31.0% 31.0%
Selling, general and
administrative expenses
(as a percentage of net
sales)................... 28.4% 29.5% 35.9 % 32.9 % 32.9 % 30.4 % 27.0% 27.0%
Earnings (loss) from
operations (as a
percentage of net
sales)................... 7.6% 8.3% (7.3)% 0.0 % 0.0 % 0.3 % 9.1% 9.1%
EBITDA(4)................. $ 27,387 $ 35,652 $(80,745) $ 3,087 $ 3,087 $ 646 $ 25,846 $ 25,846
EBITDA margin............. 7.2% 8.2.% (19.8)% 0.9 % 0.9 % 0.7 % 19.0% 19.0%
Ratio of earnings to fixed
charges(5)............... 3.17x 2.65x -- (6) -- (6) -- (6) -- (6) 7.52x 2.80x
BALANCE SHEET DATA
(AT PERIOD END):
Working capital........... $111,080 $131,400 $ 89,680 $(32,648) $ 32,145 $ 91,054 $(32,323) $ 31,669
Total assets.............. 179,954 223,726 224,507 222,603 225,706 230,210 255,834 260,312
Long-term debt, including
current maturities(7).... 70,313 77,087 119,148 127,409 132,616 123,420 154,777 160,785
Total stockholders'
equity (deficiency)(8)... 10,270 44,987 (22,685) (38,868) (40,972) (25,962) (29,286) (30,816)
</TABLE>

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11
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RISK FACTORS

Prospective investors should carefully consider the following factors,
together with other information contained and incorporated by reference in
this Prospectus, in evaluating an investment in the shares of Common Stock.

RECENT OPERATING LOSSES

The Company sustained an operating loss of $29.7 million in 1995 and an
operating gain of $0.2 million in 1996. The Company had an accumulated
stockholders' deficit of $29.3 million at March 29, 1997. Although the
earnings that the Company achieved in First Quarter 1997 and the improvements
in backlog are encouraging, there can be no assurance that the Company's
recent profitability will be maintained.

LEVERAGE

As of March 29, 1997, after giving pro forma effect to this Offering and the
application of the net proceeds therefrom, the Company's consolidated long-
term indebtedness, including current maturities, would have been $160.8
million, and the Company would have had a total consolidated stockholders'
deficit of $30.8 million. On a pro forma basis, after giving effect to the New
Credit Facility and the application of the estimated net proceeds of the
Offering, at March 29, 1997 the Company's unutilized borrowing availability
under the New Credit Facility would have been approximately $32 million. The
Company's leveraged financial position poses substantial risks to holders of
the Notes, including the risks that (i) a substantial portion of the Company's
cash flow from operations will be dedicated to the payment of interest on the
Notes, borrowings under then existing credit facilities and other
indebtedness; (ii) the Company's leveraged position may impede its ability to
obtain financing in the future; and (iii) the Company's leveraged financial
position may make it more vulnerable to economic downturns and may limit its
ability to withstand competitive pressures. See "Use of Proceeds" and
"Capitalization."

COMPETITION; CHANGES IN CONSUMER PREFERENCES

The branded athletic footwear industry is highly competitive. Although
worldwide industry data is unavailable, Nike, Inc. ("Nike"), Reebok
International Ltd. ("Reebok") and adidas AG ("adidas") are considered the
largest athletic footwear companies. Nike generates U.S. footwear revenues in
excess of $2.5 billion annually and controls over 30% of the U.S. athletic
footwear market. Reebok has U.S. footwear revenues in excess of $1.2 billion
annually and controls over 15% of the U.S. athletic footwear market. These two
companies, as well as a number of other companies, have full lines of product
offerings, compete with Converse in the Far East for manufacturing sources and
spend substantially more on product advertising than Converse. In addition,
the general availability of offshore athletic shoe manufacturing capacity
allows for rapid expansion by competitors and new entrants in the athletic
footwear market. See "Business--Competition."

The Company's success depends in part on its ability to anticipate and
respond to changing merchandise trends and consumer preferences and demands in
a timely manner. Accordingly, any failure by the Company to anticipate and
respond to changing merchandise trends and consumer preferences and demands
could materially adversely affect consumer acceptance of the Company's brand
name and product lines, which in turn could materially adversely affect the
Company's business, financial condition or results of operations.

FOREIGN PRODUCTION

Approximately 70% of the Company's footwear is manufactured to its
specifications by independent producers located in the Far East, particularly
China, Taiwan, Macau, Indonesia, Vietnam and the Philippines. The Company also
operates a facility in Mexico for the stitching of canvas uppers for certain
athleisure category footwear. As a result of the Company's continuing use of
foreign manufacturing facilities, the Company's operations are subject to the
customary risks of doing business abroad, including fluctuations in the value
of currencies, import and export duties and trade barriers (including quotas),
restrictions on the transfer of funds, work stoppage and, in certain parts of
the world, political instability. To date, these factors have not had an
adverse impact on the Company's operations. See "Business--Sourcing and
Manufacturing."

12
<PAGE>

ECONOMIC CONDITIONS AND SEASONALITY

Converse and the footwear industry in general are dependent on the economic
environment and levels of consumer spending which affect not only the ultimate
consumer, but also retailers, Converse's primary direct customers. As a
result, Converse's results may be adversely affected by downward trends in the
economy or the occurrence of events that adversely affect the economy in
general. There can be no assurance that any prolonged economic downturn would
not have a material adverse effect on Converse. Sales of Converse's footwear
products are somewhat seasonal in nature with the strongest sales generally
occurring in the first and third quarters. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

INTERNATIONAL SALES AND CURRENCY EXCHANGE

International sales accounted for approximately 32%, 49%, 44% and 34% of
Converse's net sales in 1994, 1995, 1996 and First Quarter 1997, respectively.
Because a significant portion of Converse's international sales, particularly
those in the Pacific region, are made through international distributors,
Converse's future operating results will depend, in part, on the relationships
with these companies. Additionally, Converse's international sales may be
affected by changes in demand resulting from fluctuations in currency exchange
rates. All foreign distributor agreements are denominated in U.S. dollars. As
of the date of this Prospectus, all international sales are denominated in
U.S. dollars, and an increase in the value of the U.S. dollar relative to
foreign currencies could make Converse products less competitive in those
markets. Converse does not currently engage in the use of currency hedges or
any other derivative products in foreign currency exchange transactions,
although it may engage in such activity in the future. International sales and
operations may also be subject to risks such as the imposition of governmental
controls, export license requirements, political instability, trade
restrictions, changes in tariffs and difficulties in staffing and managing
international operations and managing accounts receivable. In addition, the
laws of certain countries do not protect Converse's products and intellectual
property rights to the same extent as the laws of the United States. There can
be no assurance that these factors will not have an adverse effect on
Converse's future international sales and, consequently, on Converse's
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Sales and Distribution--
International."

NATURE OF ENDORSEMENT CONTRACTS

A key element of Converse's marketing strategy has been to obtain
endorsements from prominent athletes, and management believes that this has
proven to be an effective way to gain global brand exposure. See "Business--
Marketing." These endorsement contracts generally have three to five-year
terms, and there can be no assurance that they will be renewed or that
endorsers signed by the Company will continue to be effective promoters of the
Company's products. If Converse were unable in the future to secure suitable
athletes to endorse its products on terms it deemed reasonable, it would be
required to modify its marketing plans and could have to rely more heavily on
other forms of advertising and promotion, which might not prove to be as
effective as endorsements.

CONTROLLING STOCKHOLDERS

Apollo Investment Fund, L.P. ("Apollo") and its affiliate Lion Advisors,
L.P., on behalf of an investment account under management ("Lion"; Apollo and
Lion together being referred to herein as the "Apollo Stockholders"), together
beneficially owned approximately 65.1% of the outstanding Common Stock of the
Company at March 29, 1997. By reason of their ownership of shares of Common
Stock, the Apollo Stockholders have the power effectively to control or
influence control of the Company, including in elections of the Board of
Directors and other matters submitted to a vote of the Company's stockholders,
including extraordinary corporate transactions such as mergers. The Apollo
Stockholders may exercise such control from time to time. A majority of the
Board of Directors consists of individuals associated with affiliates of
Apollo and Lion. See "Management" and "Security Ownership of Certain
Beneficial Owners and Management."

13
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

The Company had 17,250,056 shares of Common Stock outstanding as of March
29, 1997. The Company, certain of its directors and officers and the Apollo
Stockholders have agreed with the Underwriters that they will not, without the
prior written consent of Smith Barney Inc., sell any Common Stock for a period
of 90 days after the date of this Prospectus, subject to certain limited
exceptions. See "Underwriting." Following the expiration of the lock-up
period, the Apollo Stockholders could cause Converse to register the shares of
Common Stock that they own pursuant to a registration rights agreement. See
"Certain Transactions." Following the Offering, future sales of shares, or the
availability of shares for future sale, could adversely affect the prevailing
market prices of the Notes and the underlying Common Stock.

SUBORDINATION OF NOTES

The Notes are subordinated to all existing and future Senior Indebtedness
(as defined in the Indenture) of the Company and will be effectively
subordinated to all indebtedness and other liabilities of any subsidiaries of
the Company. Both the Credit Facility and the New Credit Facility would
constitute Senior Indebtedness. Furthermore, the Notes would be effectively
subordinated to the indebtedness outstanding under the Credit Facility and the
New Credit Facility because such indebtedness is secured by substantially all
of the Company's U.S. assets. On a pro forma basis, after giving effect to the
Offering and the application of the net proceeds therefrom, at March 29, 1997
borrowings of the Company constituting Senior Indebtedness would have been
approximately $91 million, and indebtedness and other liabilities of
subsidiaries would have been approximately $30 million. Moreover, the
Indenture governing the Notes does not restrict the incurrence of Senior
Indebtedness or other indebtedness by the Company or its subsidiaries. As a
result of such subordination, in the event of insolvency of the Company,
holders of Senior Indebtedness will be entitled to be paid in full prior to
any payment to the holders of the Notes, and other creditors of the Company
also may recover more, ratably, than the holders of the Notes. Although the
occurrence of an event of default under any Senior Indebtedness could result
in a default under the Indenture governing the Notes, such event could also
result in the Company being prevented from paying principal or interest on the
Notes. In addition, an event of default under the Indenture governing the
Notes may trigger defaults under Senior Indebtedness of the Company, in which
case the holders of such Senior Indebtedness will have the power to demand
payment in full and to be paid prior to any payment to the holders of the
Notes. Moreover, the absence of limitations in the Indenture on the issuance
of Senior Indebtedness could increase the risk that sufficient funds will not
be available to pay holders of the Notes after payment of amounts due to the
holders of Senior Indebtedness. See "Description of Notes--Subordination."

LACK OF PUBLIC MARKET

The Notes are authorized for listing on the New York Stock Exchange.
However, the Notes are a new issue of securities, have no established trading
market and may not be widely distributed. The Company has been advised by the
Underwriters that they currently intend to make a market in the Notes.
However, such entities are not obligated to do so, and any market making may
be discontinued at any time without notice. There can be no assurance as to
whether an active trading market for the Notes will develop.

CERTAIN CHANGE OF CONTROL MATTERS

The Indenture governing the Notes provides that in the event of a "Change of
Control" (as defined in the Indenture), holders of the Notes will have the
right, subject to certain conditions and restrictions, to require the Company
to purchase all or part of their Notes at 100% of the principal amount
thereof, plus accrued interest. In the event of any such Change of Control,
there can be no assurance that the Company will have sufficient funds to pay
the repurchase price for all Notes tendered for repurchase, or that such a
repurchase would not constitute a default under Senior Indebtedness (as
defined in the Indenture) entitling the holders of Senior Indebtedness to be
paid in full prior to any payment on the Notes. The Company is obligated under
the Indenture to comply with any applicable federal securities laws relating
to tender offers in the event of any Note repurchase following a Change of
Control. To the extent the Change of Control repurchase obligation of the
Company increases the

14
<PAGE>

costs to, or presents additional burdens upon, any third party seeking to
acquire a controlling interest in the Company, such repurchase obligation
would have the effect of discouraging a takeover of the Company. See
"Description of Notes--Purchase of Notes at the Option of the Holder Upon a
Change of Control."

ANTI-TAKEOVER PROVISIONS

The Company's Restated Certificate of Incorporation contains certain
provisions, including authorization to issue "blank check" preferred stock
("Preferred Stock"), prohibition of stockholder action by written consent and
the requirement of 75% ("supermajority") stockholder vote to alter, amend,
repeal or adopt certain provisions of the Restated Certificate of
Incorporation. In addition, the Company's Restated Certificate of
Incorporation contains provisions limiting the ability of any person who is
the beneficial owner of more than 10% of the outstanding voting stock to
effect certain transactions involving the Company unless approved by a
majority of the Disinterested Directors (as defined in the Restated
Certificate of Incorporation of the Company). Such provisions could impede any
merger, consolidation, takeover or other business combination involving the
Company or discourage a potential acquiror from making a tender offer or
otherwise attempting to obtain control of the Company. See "Description of
Capital Stock."

USE OF PROCEEDS

The net proceeds to Converse from the sale of the Notes offered hereby are
estimated to be $66.7 million ($76.4 million if the Underwriters' over-
allotment option is exercised in full) after deducting the estimated expenses
of the Offering and underwriting discounts and commissions. Converse will use
a portion of these funds to repay all of the outstanding borrowings under the
"B" portion (the "B Facility") of the Company's existing secured credit
facility (the "Credit Facility") with BT Commercial Corporation ("BTCC"), as
agent, and certain other institutional lenders (the "Banks"). At March 29,
1997, outstanding borrowings under the B Facility were $26.5 million. The
remaining net proceeds will be used to reduce borrowings under the "A" portion
(the "A Facility") of the Credit Facility, which at March 29, 1997 were $128.3
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources--Financing
Arrangements." Borrowings under the Credit Facility bear interest at floating
rates that at March 29, 1997 were 8.26% for the A Facility and 11.24% for the
B Facility. Indebtedness under the Credit Facility matures on November 17,
1997, subject to the right of the Company to extend it for an additional two
years as long as the B Facility has been paid in full and no event of default
exists. However, the Company anticipates replacing the Credit Facility with
the New Credit Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources--Financing Arrangements." On a pro forma basis giving effect to the
Offering and the New Credit Facility, interest expense of the Company for 1996
would have been reduced by approximately $4.3 million. See "Selected
Consolidated Historical and Pro Forma Financial Information."

15
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company at March
29, 1997 on a historical basis and as adjusted to reflect the sale by the
Company of the Notes offered hereby, the application of the net proceeds
therefrom and the execution and delivery of the New Credit Facility. See "Use
of Proceeds." The information set forth in the table should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto included elsewhere in this Prospectus. See "Selected
Consolidated Historical and Pro Forma Financial Information" and "Index to
Consolidated Financial Statements."

<TABLE>
<CAPTION>
MARCH 29, 1997
--------------------------
ACTUAL AS ADJUSTED
----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt, including current maturities:
Credit facility................................... $ 154,777 $ 90,785
7% Convertible Subordinated Notes due 2004........ -- 70,000
----------- -----------
Total long-term debt.............................. 154,777 160,785
----------- -----------
Stockholders' equity (deficiency):
Common Stock, $1.00 stated value, 50,000,000
shares authorized, 17,250,056 shares issued and
outstanding...................................... 17,250 17,250
Additional paid-in capital and retained earnings
(deficit)........................................ (46,536) (48,066)
----------- -----------
Total stockholders' equity (deficiency)......... (29,286) (30,816)
----------- -----------
Total capitalization................................ $ 125,491 $ 129,969
=========== ===========
</TABLE>

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "CVE." The following table sets forth the range of high and low
sales prices for the Common Stock as reported by the New York Stock Exchange
for the periods indicated.

<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995
First Quarter............................................ $11 3/4 $ 9 3/8
Second Quarter........................................... 9 7/8 6 5/8
Third Quarter............................................ 8 5/8 5 3/8
Fourth Quarter........................................... 5 3/4 3 1/2
1996
First Quarter............................................ $ 7 1/8 $ 4 1/8
Second Quarter........................................... 5 1/2 3 7/8
Third Quarter............................................ 6 7/8 4 1/8
Fourth Quarter........................................... 15 3/4 6
1997
First Quarter ........................................... $28 $13 7/8
Second Quarter (to May 15, 1997)......................... 18 7/8 12 3/4
</TABLE>

On May 15, 1997, the last reported sale price of the Common Stock on the New
York Stock Exchange was $17 3/4 per share. As of March 29, 1997, there were
approximately 2,300 holders of record of the Company's Common Stock.

The Company has not paid any dividends on its Common Stock during the
periods indicated and does not anticipate paying any dividends on its Common
Stock in the foreseeable future. In addition, both the Credit Facility and the
New Credit Facility will restrict the payment of dividends. Any future payment
of dividends will depend upon the financial condition, capital requirements,
earnings and loan covenant restrictions of Converse, as well as upon other
factors that the Board of Directors may deem relevant.

16
<PAGE>

SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL INFORMATION

The following selected consolidated historical and pro forma financial
information of Converse should be read in conjunction with Converse's
historical consolidated financial statements and the notes thereto included
elsewhere in this Prospectus. The following selected historical consolidated
financial data has been derived from the historical consolidated financial
statements of Converse. Prior to the Distribution (as hereinafter defined)
effected on November 17, 1994, Converse was a wholly-owned subsidiary of
Furniture Brands (as hereinafter defined). The historical consolidated
financial statements of Converse for 1994 may not reflect the results of
operations or financial position that would have been obtained had Converse
been a separate, independent company during such period. The financial
statements at March 29, 1997 and for the three months ended March 30, 1996 and
March 29, 1997 are unaudited but include all adjustments, consisting of normal
recurring accruals, which management of the Company considers necessary for a
fair presentation. Results for the three months ended March 29, 1997 are not
necessarily indicative of the results to be expected for any other interim
period or for the full year. The pro forma information is presented for
comparative purposes only and is not necessarily indicative of what the
Company's financial position or results of operations would have been if the
Offering and the New Credit Facility had been completed on the dates
indicated.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------------------
DECEMBER 28, 1996
----------------------
JANUARY 1, DECEMBER 31, DECEMBER 30, PRO
1994 1994 1995 ACTUAL FORMA(1)
---------- ------------ ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales.......... $380,427 $437,307 $407,483 $349,335 $349,335
Cost of sales...... 254,338 286,555 293,948 263,098 263,098
-------- -------- -------- -------- --------
Gross profit....... 126,089 150,752 113,535 86,237 86,237
Selling, general
and
administrative expenses.. 108,059 128,876 146,332 114,888 114,888
Royalty income..... 10,808 14,212 17,257 27,638 27,638
Restructuring
expense (credit).. -- -- 14,182 (1,177) (1,177)
-------- -------- -------- -------- --------
Earnings (loss)
from operations... 28,838 36,088 (29,722) 164 164
Loss (credit) on
investment in
unconsolidated
subsidiary........ -- -- 52,160 (1,362) (1,362)
Interest expense... 7,501 7,423 14,043 17,776 13,627 (2)
Other expense,
net............... 1,904 504 3,966 6,319 6,319
-------- -------- -------- -------- --------
Earnings (loss)
before income tax
expense
(benefit)......... 19,433 28,161 (99,891) (22,569) (18,420)
Income tax expense
(benefit)......... 7,329 10,565 (28,144) (4,134) (2,474)(4)
-------- -------- -------- -------- --------
Net earnings
(loss)............ $ 12,104 $ 17,596 $(71,747) $(18,435) $(15,946)
======== ======== ======== ======== ========
Net earnings (loss)
per share......... $ -- (7) $ 1.05 $ (4.30) $ (1.10) $ (0.95)(8)
======== ======== ======== ======== ========
Weighted average
number of shares
of common stock... -- (7) 16,692 16,692 16,761 16,761
OTHER OPERATIONS
DATA:
Gross margin....... 33.1% 34.5% 27.9 % 24.7% 24.7%
Selling, general
and
administrative expenses
(as a percentage
of net sales)..... 28.4% 29.5% 35.9 % 32.9% 32.9%
Earnings (loss)
from operations
(as a percentage
of net sales)..... 7.6% 8.3% (7.3)% 0.0% 0.0%
EBITDA(9).......... $ 27,387 $ 35,652 $(80,745) $ 3,087 $ 3,087
EBITDA margin...... 7.2% 8.2% (19.8)% 0.9% 0.9%
Ratio of earnings
to fixed
charges(10)....... 3.17x 2.65x -- (11) -- (11) -- (11)
BALANCE SHEET DATA
(AT PERIOD END):
Working capital.... $111,080 $131,400 $ 89,680 $(32,648) $ 22,552 (12)
Total assets....... 179,954 223,726 224,507 222,603 225,299
Long-term debt,
including
current maturities(14).. 70,313 77,087 119,148 127,409 132,209
Total stockholders'
equity (deficiency)(16).. 10,270 44,987 (22,685) (38,868) (40,972)

<CAPTION>
THREE MONTHS ENDED
-----------------------------------
MARCH 29, 1997
--------------------
MARCH 30, PRO
1996 ACTUAL FORMA(1)
--------- -------- --------

<S> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales.......... $ 86,551 $135,969 $135,969
Cost of sales...... 64,934 93,809 93,809
-------- -------- --------
Gross profit....... 21,617 42,160 42,160
Selling, general
and
administrative expenses.. 26,306 36,765 36,765
Royalty income..... 4,928 6,377 6,377
Restructuring
expense (credit).. -- (564) (564)
-------- -------- --------
Earnings (loss)
from operations... 239 12,336 12,336
Loss (credit) on
investment in
unconsolidated
subsidiary........ -- (13,051) (13,051)
Interest expense... 3,837 2,679 2,033 (3)
Other expense,
net............... 877 2,090 2,090
-------- -------- --------
Earnings (loss)
before income tax
expense
(benefit)......... (4,475) 20,618 21,264
Income tax expense
(benefit)......... (1,215) 7,938 8,196 (5)
-------- -------- --------
Net earnings
(loss)............ $ (3,260) $ 12,680(6) $13,068 (6)
======== ======== ========
Net earnings (loss)
per share......... $ (0.20) $ 0.71(6) $ 0.73 (6)(8)
======== ======== ========
Weighted average
number of shares
of common stock... 16,692 17,862 17,862
OTHER OPERATIONS
DATA:
Gross margin....... 25.0% 31.0% 31.0%
Selling, general
and
administrative expenses
(as a percentage
of net sales)..... 30.4% 27.0% 27.0%
Earnings (loss)
from operations
(as a percentage
of net sales)..... 0.3% 9.1% 9.1%
EBITDA(9).......... $ 646 $ 25,846 $ 25,846
EBITDA margin...... 0.7% 19.0% 19.0%
Ratio of earnings
to fixed
charges(10)....... -- (11) 7.52x 2.95x
BALANCE SHEET DATA
(AT PERIOD END):
Working capital.... $ 91,054 $(32,323) $ 22,127 (12)
Total assets....... 230,210 255,834 259,854 (13)
Long-term debt,
including
current maturities(14).. 123,420 154,777 160,327 (15)
Total stockholders'
equity (deficiency)(16).. (25,962) (29,286) (30,816)(17)
</TABLE>

17
<PAGE>

- --------
(1) Pro forma information reflects consummation of the Offering, application
of the net proceeds thereof and execution and delivery of the New Credit
Facility as of the first day of the period presented for Statement of
Operations Data and Other Operations Data and December 28, 1996 and March
29, 1997 for Balance Sheet Data. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Result of Operations--
Liquidity and Capital Resources--Financing Arrangements."
(2) The pro forma interest expense reduction of $4,273 represents (i)
elimination of actual 1996 B Facility interest expense of $3,574, (ii)
elimination of actual 1996 A Facility interest expense of $2,706 based
upon the average borrowings outstanding under the A Facility during 1996,
(iii) elimination of actual 1996 Credit Facility fees and amortization of
certain fees totaling $4,061 no longer applicable by reason of the
termination of the Credit Facility, (iv) addition of interest payable
under the Notes of $4,900, (v) addition of $468 representing amortization
of estimated fees and expenses relating to the Notes and (vi) addition of
$700 representing amortization of estimated bank fees relating to the New
Credit Facility.
(3) The pro forma interest expense reduction of $676 represents (i)
elimination of actual First Quarter 1997 B Facility interest expense of
$743, (ii) elimination of actual First Quarter 1997 A Facility interest
expense of $826 based upon the average borrowings outstanding under the A
Facility during First Quarter 1997, (iii) elimination of actual First
Quarter 1997 Credit Facility fees and amortization of certain fees
totaling $599 no longer applicable by reason of the termination of the
Credit Facility, (iv) addition of interest payable under the Notes of
$1,225, (v) addition of $117 representing amortization of estimated fees
and expenses relating to the Notes and (vi) addition of $150 representing
amortization of estimated bank fees relating to the New Credit Facility.
(4) Reflects the pro forma tax effect of $1,709, at the estimated rate of
40%, of the pro forma interest expense reduction of $4,273 discussed in
Note (2) above.
(5) Reflects the pro forma tax effect of $270, at the estimated rate of 40%,
of the pro forma interest expense reduction of $676 discussed in Note (3)
above.
(6) Net earnings for First Quarter 1997, excluding the one-time gain related
to the Apex litigation settlements and bankruptcy plan confirmation, were
$4,654, or $0.26 per share, and, on a pro forma basis excluding such one-
time gain, would have been $5,060, or $0.28 per share.
(7) Reflects the period prior to the Distribution (as defined herein).
Converse was wholly-owned by Furniture Brands (as defined herein)
throughout the year ended January 1, 1994.
(8) Fully-diluted earnings per share calculated using the "if converted"
method, based on weighted average shares outstanding of 21,068 and based
on the initial conversion price of $21.83 per share, would have been
$0.66 on a pro forma basis for First Quarter 1997. Such calculation was
anti-dilutive on a pro forma basis for the Fiscal Year ended December 28,
1996.
(9) "EBITDA" represents net earnings (loss) before interest expense, income
taxes, depreciation and amortization and other income and expense. EBITDA
is presented as supplemental disclosure because it is a widely utilized
financial indicator of a company's ability to generate cash to meet debt
service and other obligations. However, EBITDA should not be construed as
an alternative to operating earnings or cash flows from operating
activities as determined in accordance with generally accepted accounting
principles as an indicator of the Company's operating performance.
Because all companies and analysts do not calculate EBITDA in an
identical manner, EBITDA as presented above is not necessarily comparable
to similarly-titled measures of other companies.
(10) For purposes of computing the ratio of earnings to fixed charges,
"earnings" consists of income before income taxes plus fixed charges.
"Fixed charges" consist of interest expense (including, in the case of
pro forma information, interest capitalized in connection with the New
Credit Facility and the Offering), amortization of deferred financing
costs and one-third of rental expense (the portion deemed representative
of the interest factor).
(11) Earnings did not cover fixed charges by $17,445, $19,466 and $4,235 for
the periods ended December 30, 1995, December 28, 1996 and March 30,
1996, respectively. Earnings did not cover fixed charges by $20,400 on a
pro forma basis for the Fiscal Year ended December 28, 1996.
(12) At March 29, 1997, the Company had current maturities of long-term debt
of $154,777, including all debt outstanding under the Credit Facility.
All borrowings under the New Credit Facility will be classified as
current maturities of long-term debt because the New Credit Facility is
expected to provide for both a lockbox arrangement (whereby payments by
the Company's customers are deposited in a lockbox controlled by the
lenders) and certain subjective clauses concerning the eligibility of
collateral that could cause a mandatory repayment. This classification is
required by Emerging Issues Task Force 95-22, "Balance Sheet
Classification of Borrowings Outstanding under Revolving Credit Agreement
that Includes both a Subjective Acceleration Clause and a Lockbox
Arrangement."
(13) Represents (i) the elimination of $1,530 of prepaid Credit Facility fees
no longer applicable as of March 29, 1997 on a pro forma basis, (ii) the
addition of $2,850 of prepaid fees pertaining to the New Credit Facility,
and (iii) the addition of $3,158 of prepaid issuance fees pertaining to
the Notes.
(14) Long-term debt at December 30, 1995 and December 28, 1996 includes $8,870
of Apex-related debt that was delivered to the Company during First
Quarter 1997 in satisfaction of the Company's indemnification claims
against substantially all of the former owners of Apex. Long-term debt at
March 29, 1997 excludes such amount. See "Business--Legal Proceedings."
(15) Represents additional pro forma debt incurred of $6,008 as of March 29,
1997 in conjunction with fees and issuance costs pertaining to the New
Credit Facility and the Notes.
(16) Total stockholders' equity (deficiency) at December 30, 1995 and December
28, 1996 includes warrants to purchase 1.75 million shares of Common
Stock at $11.40 per share (valued at the time of issuance at $3,528)
issued in connection with the acquisition of Apex that were delivered to
the Company during First Quarter 1997 in satisfaction of the Company's
indemnification claims against substantially all of the former owners of
Apex. Stockholders' equity (deficiency) at March 29, 1997 excludes
amounts relating to such warrants. See "Business--Legal Proceedings."
(17) Represents the elimination of $1,530 of prepaid Credit Facility fees as a
result of the New Credit Facility.

18
<PAGE>

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

The following discussion is based upon and should be read in conjunction
with the consolidated financial statements and the notes thereto of the
Company included elsewhere herein.

GENERAL

Converse was founded in 1908, and operated as an independent family-owned
company until 1971, when it was acquired by Eltra Corporation, a diversified
holding company. In 1983, Converse became a publicly-traded company through an
initial public offering. In 1986, Furniture Brands International, Inc.
("Furniture Brands"), then named INTERCO INCORPORATED, acquired Converse. On
November 17, 1994, Furniture Brands distributed to its stockholders all of the
outstanding Common Stock of Converse (the "Distribution"), and Converse became
an independent publicly-traded company.

Converse is a leading global designer, manufacturer and marketer of high
quality athletic footwear for men, women and children. The Company is also a
global licensor of sports apparel, accessories and selected footwear.
According to independently compiled statistics, the Company is the seventh
largest manufacturer of branded athletic footwear based on 1996 U.S.,
international and licensed wholesale sales. Based on independent market
research, Converse was also ranked as one of the top four U.S. basketball
footwear brands in 1996 and the fourth largest brand in the Children's
footwear category. Although there are no independently prepared data available
for athleisure footwear, based on the Company's review of the published
results of its principal competitors in this category, the Company believes
that it is one of the largest sellers of athleisure footwear and the only
seller of athleisure footwear with significant manufacturing facilities in the
United States. The Company's products are distributed in over 90 countries to
approximately 9,000 customers, which include athletic specialty, sporting
goods, department and shoe stores, as well as to 37 Company-operated retail
outlet stores. The primary costs and expenses of the Company result from the
following: athletic products sourced from various Far East manufacturers,
employee salaries and fringe benefits, advertising and promotion expenses and
the purchase of raw materials used in the Company's manufacturing process.

COMPANY STRATEGIES

The Company has been repositioned based on a series of key business
strategies including: (i) establishing a new management team; (ii) focusing on
four core product categories; (iii) creating a single brand identity; (iv)
coordinating marketing and product development; and (v) streamlining
operations.

Strategies implemented by management during late 1995 and 1996 are beginning
to yield positive results. The Company believes that further growth will be
achieved through the execution of the following strategies: (i) increasing
penetration in core categories; (ii) enhancing retail distribution; (iii)
improving margins; (iv) continuing focus on licensing opportunities; and (v)
increasing international sales.

RESULTS OF OPERATIONS

The Company's fiscal year end is the Saturday closest to December 31 in each
year. The results of operations will periodically include a 53 week fiscal
year. For purposes of the Company's financial statements, First Quarter 1997
refers to the three months ended March 29, 1997 ("First Quarter 1997"), First
Quarter 1996 refers to the three months ended March 30, 1996 ("First Quarter
1996"), fiscal 1996 refers to the 52-week period ended December 28, 1996
("Fiscal 1996"), fiscal 1995 refers to the 52-week period ended December 30,
1995 ("Fiscal 1995"), and fiscal 1994 refers to the 52-week period ended
December 31, 1994 ("Fiscal 1994").

19
<PAGE>

COMPARISON OF FIRST QUARTER 1997 AND FIRST QUARTER 1996

The following table sets forth certain items related to operations and such
items as a percentage of net sales for First Quarter 1997 and First Quarter
1996.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------
MARCH 30, 1996 % MARCH 29, 1997 %
---------------------------- ----------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales............... $ 86,551 100.0 $135,969 100.0
Gross profit............ 21,617 25.0 42,160 31.0
Selling, general and
administrative
expenses............... 26,306 30.4 36,765 27.0
Royalty income.......... 4,928 5.7 6,377 4.7
Earnings from
operations............. 239 0.3 12,336 9.1
Loss (credit) on
investment in
unconsolidated
subsidiary............. -- -- (13,051) (9.6)
Interest expense........ 3,837 4.4 2,679 2.0
Net earnings (loss)..... (3,260) (3.8) 12,680 9.3
Earnings (loss) per
share.................. $ (0.20) $ 0.71
</TABLE>

Net Sales

Net sales for First Quarter 1997 increased to $136.0 million from $86.6
million for First Quarter 1996, a 57.0% increase. The $49.4 million
improvement in net sales was attributable to increases of 104.9%, 26.2%,
65.8%, and 61.3% for First Quarter 1997 in the four core categories of
basketball, athleisure, children's and cross training, respectively, as
compared to First Quarter 1996.

Net sales in the United States increased 105.3% to $89.3 million in First
Quarter 1997 from $43.5 million for First Quarter 1996. Net sales increased
8.4% internationally to $46.7 million for First Quarter 1997 from $43.1
million for First Quarter 1996. First Quarter 1997 Pacific region net sales
increased 61.0% from First Quarter 1996, partially offset by sales declines of
10.0% and 15.0% in Europe and Latin America, respectively.

Gross Profit

Gross profit increased to $42.2 million for First Quarter 1997 from $21.6
million for First Quarter 1996, a 95.4% improvement. Volume increases
accounted for the majority of the gross profit improvement over this period,
with the remaining improvement due to price increases, changes in product mix
and a strong emphasis on future orders resulting in improved inventory
controls. The Company's gross profit margin improved to 31% of net sales for
First Quarter 1996 compared to 25% for First Quarter 1996.

Selling, General and Administrative Expense

Selling, general and administrative expenses increased 39.9% to $36.8
million for First Quarter 1997 from $26.3 million for First Quarter 1996. As a
percentage of net sales, selling, general and administrative expenses
decreased to 27.0% for First Quarter 1997 from 30.4% for the prior year
period. This increase in selling, general and administrative expenses of $10.5
million was required to support the strong net sales growth and was primarily
attributable to: (i) a 135.2% increase in United States advertising, (ii) a
31.0% increase in United States selling expenses to support a sales increase
of approximately 105%, and (iii) a 22.7% increase in international sales and
marketing expenditures.

Royalty Income

Royalty income increased by 30.6% to $6.4 million in First Quarter 1997 from
$4.9 million in First Quarter 1996. Strong global demand for Converse apparel
accounted for the majority of this increase. As a percentage of net sales,
royalty income was 4.7% in First Quarter 1997 compared to 5.7% in First
Quarter 1996.

20
<PAGE>

Earnings from Operations

The Company recorded earnings from operations of $12.3 million for First
Quarter 1997 as compared to $0.2 million for First Quarter 1996. The
improvement in earnings from operations was mainly attributable to the factors
discussed above. As a percentage of net sales, First Quarter 1997 earnings
from operations were 9.1% as compared to 0.3% for First Quarter 1996.

Loss (Credit) on Investment in Unconsolidated Subsidiary

In First Quarter 1997, Converse recorded a pretax gain totaling $13.1
million relating to the settlement of certain Apex-related litigation and the
Apex bankruptcy plan confirmation. See Note 8 to the Company's March 29, 1997
Consolidated Financial Statements included herein.

Interest Expense

Interest expense for First Quarter 1997 decreased to $2.7 million from $3.8
million for First Quarter 1996, a 29% decline. The decrease is primarily
attributable to the reversal of $1.4 million of interest payments paid into
escrow relating to the subordinated notes issued to the former owners of Apex.
See Note 8 to the Company's March 29, 1997 Consolidated Financial Statements
included herein.

Net Earnings (Loss)

Due to the factors described above, the Company recorded net earnings of
$12.7 million for First Quarter 1997 compared to a net loss of $3.3 million
for First Quarter 1996. Net earnings for First Quarter 1997 included a gain of
approximately $8,000, net of income taxes, pertaining to the settlement of
outstanding litigation relating to Apex and the Apex bankruptcy plan
confirmation. See Note 8 to the Company's March 29, 1997 Consolidated
Financial Statements included herein.

Earnings (Loss) Per Share

The Company recorded net earnings per share of $0.71 for First Quarter 1997
compared to a $0.20 loss per share for First Quarter 1996. Earnings per share
for First Quarter 1997 include $0.45 pertaining to the Apex litigation
settlements and bankruptcy plan confirmation referred to above.

COMPARISON OF FISCAL 1996 AND FISCAL 1995

The following table sets forth certain items related to operations and such
items as a percentage of net sales for Fiscal 1996 and Fiscal 1995:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------
DECEMBER 30, 1995 % DECEMBER 28, 1996 %
------------------------------ ------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales............... $ 407,483 100.0 $ 349,335 100.0
Gross profit............ 113,535 27.9 86,237 24.7
Selling, general and ad-
ministrative expenses.. 146,332 35.9 114,888 32.9
Royalty income.......... 17,257 4.2 27,638 7.9
Restructuring expenses
(credit)............... 14,182 3.5 (1,177) (0.3)
Earnings (loss) from op-
erations............... (29,722) (7.3) 164 0.0
Loss (credit) on invest-
ment in unconsolidated
subsidiary............. 52,160 12.8 (1,362) (0.4)
Interest expense........ 14,043 3.4 17,776 5.1
Income tax expense (ben-
efit).................. (28,144) (6.9) (4,134) (1.2)
Net earnings (loss)..... (71,747) (17.6) (18,435) (5.3)
Earnings (loss) per
share.................. $ (4.30) $ (1.10)
</TABLE>

21
<PAGE>

Net Sales

Net sales for Fiscal 1996 decreased to $349.3 million from $407.5 million
for Fiscal 1995, a decrease of 14.3%. The $58.2 million decrease in net sales
was attributable to declines in the athleisure (31%), cross training (22%) and
basketball (3%) categories. These declines were slightly offset by a 20%
improvement in the children's category. Fiscal 1996 net sales for the
Company's four core product categories decreased 12.5% from Fiscal 1995. This
decline was primarily attributable to decreased net sales in the core
categories in the first half of Fiscal 1996 and partially offset by increased
net sales in the second half of Fiscal 1996.

Total unit sales for Fiscal 1996 decreased by 13.8% for all categories. Unit
sales for the Company's basketball, athleisure and cross training categories
were down by a total of 3.1 million units, while the children's category
increased 1.0 million units. Volume decreases accounted for essentially all
the total net sales decrease over the prior fiscal year. The unit sales for
the Company's four core product categories decreased 11.2% over the prior
year.

During Fiscal 1996 net sales in the United States decreased to $194.1
million from $208.0 million in Fiscal 1995, a decrease of $13.9 million or
6.7%. The Company's international net sales decreased from $199.5 million to
$155.3 million over the same period, a decrease of $44.2 million or 22%.
Fiscal 1996 international sales declines over the prior year period were
recorded in the following geographic regions: Europe, Middle East and Africa
(18.4%), Pacific (12.6%) and the Americas (47.0%).

As a result of its decision to focus on its four core product categories,
during 1996, the Company discontinued manufacturing footwear in the football,
baseball, tennis, running, walking and outdoor categories (the "Non-Core
Categories"). Net sales of the discontinued Non-Core Categories decreased to
$2.8 million in Fiscal 1996 from $13.0 million in Fiscal 1995.

Gross Profit

Gross profit decreased to $86.2 million for Fiscal 1996 from $113.5 million
for Fiscal 1995, a 24.0% decline. The Company's gross profit margin decreased
to 24.7% for Fiscal 1996, as compared to 27.9% for the prior year. Weak sell-
throughs of certain products, manufacturing losses relating to production
declines and operating inefficiencies, the sell off of discontinued categories
and increased air freight costs all contributed to the decline in gross
profit. Gross profit on the discontinued Non-Core Categories decreased to a
loss of $1.0 million in Fiscal 1996 from a profit of $1.2 million in Fiscal
1995.

Selling, General and Administrative Expense

Selling, general and administrative expenses, which are primarily comprised
of advertising, promotion and selling expenses in addition to employee
salaries and benefits and other overhead costs, decreased to $114.9 million
for Fiscal 1996 from $146.3 million for Fiscal 1995, a 21.5% decline. The
decrease in selling, general and administrative expenses of $31.4 million is a
result of the expense reduction plan announced by the Company in November 1995
and was primarily attributable to: (i) a reduction in sports marketing
spending as a result of refocused endorsement efforts; (ii) a decrease in
worldwide advertising expenses; and (iii) a reduction in salary and benefit
expenses related to a streamlining of the Company's operations. As a
percentage of net sales, selling, general and administrative expenses
decreased to 32.9% for Fiscal 1996 from 35.9% for the prior year. As a result
of the discontinuation of the Non-Core Categories, selling, general and
administrative expenses directly related to the discontinued categories
decreased to $0.8 million in Fiscal 1996 from $5.0 million in Fiscal 1995.

Royalty Income

Despite the decrease in the Company's net sales in Fiscal 1996, there has
been a substantial increase in royalty income in Fiscal 1996 which management
primarily attributes to the strong consumer demand for Converse-branded
apparel in the Pacific region. Royalty income increased to $27.6 million for
Fiscal 1996 from

22
<PAGE>

$17.3 million for Fiscal 1995, an increase of $10.3 million or 59.5%. As a
percentage of net sales, royalty income grew to 7.9% for Fiscal 1996 from 4.2%
for Fiscal 1995. The $10.3 million growth was mainly attributable to a $7.7
million increase in royalty income in the Pacific Region and a $1.7 million
increase in royalty income in the United States primarily as a result of
growth in licensed apparel sales in these markets.

Restructuring Expenses (Credit)

The Company established restructuring reserves during 1995 which included
the sale of certain idle assets of the Company. One such asset, a distribution
center in Chester, South Carolina was sold at a gain of $2.2 million in June
1996. The gain on the sale of this asset was partly offset by additional
restructuring charges for severance and additional asset write-offs. See Note
4 to the Company's December 28, 1996 Consolidated Financial Statements
included herein.

Earnings (Loss) from Operations

The Company recorded earnings from operations in Fiscal 1996 of $0.2
million, compared to a loss of $29.7 million in Fiscal 1995. This change was
primarily due to the factors discussed above.

Loss (Credit) on Investment in Unconsolidated Subsidiary

In the fourth quarter of 1996, Converse reversed certain accruals totaling
$1.9 million relating to the settlement of certain Apex-related obligations.
These reversals were partly offset by other Apex-related expenses. See Notes 3
and 16 to the Company's December 28, 1996 Consolidated Financial Statements
included herein.

Interest Expense

Interest expense for Fiscal 1996 increased to $17.8 million from $14.0
million in Fiscal 1995, a 27.1% increase. The increase is primarily
attributable to (i) increased borrowing levels under the A Facility to finance
normal business activities; (ii) an increase in the interest rate charged for
the B Facility; (iii) interest paid into escrow on the subordinated notes
delivered in connection with the purchase of Apex; and (iv) fees paid in
conjunction with certain amendments to the Credit Facility. These increases
were partly offset by an interest expense reduction due to decreased borrowing
levels on the B Facility. See Note 9 to the Company's December 28, 1996
Consolidated Financial Statements included herein.

Income Tax Benefit

Income tax benefit recorded for Fiscal 1996 was $4.1 million as compared to
an income tax benefit for Fiscal 1995 of $28.1 million. Deferred income tax
assets have been established for net operating loss carryforwards and net
temporary differences between the book and the tax basis of assets and
liabilities. Based on the review of operating forecasts, historical operating
results and the significant net operating loss carryforwards, the Company has
recorded a valuation allowance of $11.6 million against these tax assets.
Approximately $107.0 million of future taxable income will be necessary to
realize the Company's net deferred tax assets of $35.0 million. See Note 10 to
the Company's December 28, 1996 Consolidated Financial Statements included
herein.

Net Loss

Due to the factors described above, the Company recorded a net loss of $18.4
million for Fiscal 1996, compared to a $71.7 million net loss in the prior
year.

Loss Per Share

The Company recorded a loss per share of $1.10 in Fiscal 1996 versus a loss
per share of $4.30 in Fiscal 1995. The weighted average number of shares
outstanding in Fiscal 1996 was 16,760,620 compared to 16,692,156 in Fiscal
1995.

23
<PAGE>

COMPARISON OF FISCAL 1995 AND FISCAL 1994

The following table sets forth certain items related to operations and such
items as a percentage of net sales for Fiscal 1995 and Fiscal 1994:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------------
DECEMBER 31, 1994 % DECEMBER 30, 1995 %
----------------------------- ------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net sales............... $ 437,307 100.0 $ 407,483 100.0
Gross profit............ 150,752 34.5 113,535 27.9
Selling, general and ad-
ministrative expenses.. 128,876 29.5 146,332 35.9
Royalty income.......... 14,212 3.2 17,257 4.2
Restructuring expenses.. -- -- 14,182 3.5
Earnings (loss) from op-
erations............... 36,088 8.3 (29,722) (7.3)
Loss on investment in
unconsolidated subsidi-
ary.................... -- -- 52,160 12.8
Interest expense........ 7,423 1.7 14,043 3.4
Income tax expense (ben-
efit).................. 10,565 2.4 (28,144) (6.9)
Net earnings (loss)..... 17,596 4.0 (71,747) (17.6)
Earnings (loss) per
share.................. $ 1.05 $ (4.30)
</TABLE>

Net Sales

Net sales for Fiscal 1995 decreased to $407.5 million from $437.3 million
for Fiscal 1994, a 6.8% decrease. The $29.8 million reduction in net sales was
attributable to a 31.6% decrease in the Company's basketball category and a
4.5% decrease in its athleisure sales, partially offset by a 165.8%
improvement in its cross training category, an 8.9% increase in its children's
line, as well as $9.3 million of revenues realized from Converse's sale of
inventory acquired from Apex. Volume decreases accounted for virtually all of
the total net sales decrease over the prior year period, as unit sales of
footwear decreased 6.0% over this period.

Net sales in the United States decreased to $208.0 million from $297.8
million, a decrease of $89.8 million or 30.2%. Sales increased internationally
in 1995 over 1994, improving to $199.5 million from $139.5 million, an
increase of $60.0 million or 43.0%. Based on geographic location, net sales in
Europe, Middle East and Africa increased by 84.8% over the prior year
reflecting the success of the conversion to direct operating units of several
of the Company's foreign independent distributors and the benefits of offering
a complete product line in these markets. Net sales in the Pacific region
improved 53.3% as consumer demand for the Company's athleisure product
continued to increase. These international net sales improvements were
partially offset by weakness in the Latin American market.

Gross Profit

Gross profit decreased to $113.5 million for Fiscal 1995 from $150.8 million
in Fiscal 1994, a 24.7% reduction. The Company's gross profit margin decreased
to 27.9% for Fiscal 1995 as compared to 34.5% for the prior year. Price
decreases accounted for 39.1% of gross profit reduction over this period with
the decrease due to poor U.S. sell-throughs of basketball and athleisure
product making price reductions necessary, manufacturing losses related to
capacity losses and operating inefficiencies, increased distribution costs
incurred as a result of the international conversions of distributors to
direct operating units, inventory writedowns related to product reserved for
under a consumer product alert and unfavorable inventory purchasing variances.

Selling, General and Administrative Expense

Selling, general and administrative expenses increased to $146.3 million for
Fiscal 1995 from $128.9 million for Fiscal 1994, a 13.5% increase. The
increase in selling, general and administrative expenses of $17.4 million was
primarily attributable to: (i) an increase in spending to convert and support
international operations, as the Company supported the growth of its converted
distributorships; and (ii) an increase in sports marketing

24
<PAGE>

activities, in part related to expenses associated with Converse's designation
as the official shoe of the National Football League and subsequent conversion
of the arrangement to that of an authorized supplier of footwear to the NFL.
The increase in 1995 was partially offset by a reduction in United States
advertising expenses. As a percentage of net sales, such expenses increased to
35.9% of net sales for Fiscal 1995 from 29.5% for Fiscal 1994.

Royalty Income

Royalty income increased to $17.3 million for Fiscal 1995 from $14.2 million
for Fiscal 1994, a 21.8% increase. As a percentage of net sales, royalty
income increased to 4.2% for Fiscal 1995 from 3.2% for Fiscal 1994. The $3.1
million increase was mainly attributable to a $3.0 million improvement in
royalty income in the Pacific region.

Restructuring Expenses

During Fiscal 1995, the Company took steps to streamline its operations and
established reserves totaling $14.2 million related to the closing of its
Mission, Texas manufacturing facility, the consolidation of its Europe, Middle
East and Africa operations, worldwide reduction in workforce of 140 people,
the estimated losses on the sale of certain idle assets of the Company and the
refocusing of its marketing contractual spending. The Mission, Texas plant
closing was completed in September 1995. See Note 4 to the Company's December
28, 1996 Consolidated Financial Statements included herein.

Earnings (Loss) From Operations

The Company recorded a loss from operations of $29.7 million for Fiscal
1995, as compared to earnings from operations of $36.1 million for Fiscal
1994. The recognition of a loss from operations was mainly attributable to the
factors discussed above.

Loss on Investment in Unconsolidated Subsidiary

As a result of the acquisition of Apex and subsequent decision to cease
funding of Apex's operations, Converse recorded a loss on its investment in
Apex of $52.2 million during Fiscal 1995. See Notes 3 and 16 to the Company's
December 28, 1996 Consolidated Financial Statements included herein.

Interest Expense

Interest expense for Fiscal 1995 increased to $14.0 million from $7.4
million in Fiscal 1994, a 89.2% increase. The level of interest expense in
1995 reflects increased borrowing levels under the Company's principal
borrowing facilities and increased fees paid for maintaining these facilities
during the period.

Income Tax Expense (Benefit)

Income tax benefit recorded for Fiscal 1995 was $28.1 million as compared to
income tax expense for Fiscal 1994 of $10.6 million. Deferred income tax
assets have been established for net operating loss carryforwards and net
temporary differences between the book and the tax basis of assets and
liabilities. Based on the review of operating forecasts, historical operating
results and the significant net operating loss carryforwards, Converse
recorded a valuation allowance of $6.6 million against these tax assets.
Approximately $78.0 million of future taxable income will be necessary to
realize the Company's net deferred tax assets of $29.4 million. See Note 10 to
the Company's December 28, 1996 Consolidated Financial Statements included
herein.

Net Earnings (Loss)

Due to the factors described above, the Company recorded a net loss of $71.7
million for Fiscal 1995 as compared to net earnings of $17.6 million for
Fiscal 1994.

25
<PAGE>

Net Earnings (Loss) Per Share

The Company recorded a net loss per share of $4.30 for Fiscal 1995 compared
to net earnings per share of $1.05 for Fiscal 1994.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow

For First Quarter 1997 and First Quarter 1996, net cash required for
operating activities was $41.4 million and $4.4 million, respectively. During
these periods, cash was predominantly used to fund the Company's working
capital requirements. Net cash used by investing activities was $0.8 million
and $1.4 million for First Quarter 1997 and First Quarter 1996, respectively.
Cash invested was used for additions to property, plant and equipment. Net
cash provided by financing activities was $40.2 million and $5.3 million for
First Quarter 1997 and First Quarter 1996, respectively. Cash provided by
financing activities consisted almost entirely of net proceeds from the
Company's seasonal borrowings.

For Fiscal 1996 net cash required for operating activities was $8.0 million.
The major requirements for operating activities were a net loss of $18.4
million, a decrease in the reserve for loss on investment in unconsolidated
subsidiary of $4.8 million, a decrease in the reserve for restructuring
actions of $6.5 million, and an increase in net deferred tax assets of $5.6
million. Major components of cash provided by operating activities were a
decrease in refundable income taxes of $10.8 million and an increase in
accounts payable and accrued expenses of $16.9 million. For Fiscal 1995, the
net cash required for operating activities was $35.9 million due to a net loss
of $52.8 million after adjustments for non-cash expenses and an increase in
other long-term assets and liabilities of $1.0 million, offset by reductions
in working capital requirements of $17.9 million. Net cash required for
operating activities in Fiscal 1994 was $11.5 million due to increases in
working capital of $29.0 million offset by net earnings, after adjustments for
non-cash expenses, of $17.5 million.

Net cash used by investing activities was $0.2 million in Fiscal 1996.
Additions to property, plant and equipment of $5.3 million were offset by
proceeds of $5.1 million received from the disposal of a distribution facility
in Chester, South Carolina. Net cash used by investing activities was $5.8
million and $8.5 million for Fiscal 1995 and Fiscal 1994, respectively, to
fund additions to property, plant and equipment.

Net cash provided by financing activities of $10.9 million in Fiscal 1996 is
attributable to net proceeds from debt of $8.5 million and proceeds from the
exercise of stock options of $2.4 million. Net cash provided by financing
activities was $40.3 million and $21.7 million in Fiscal 1995 and Fiscal 1994,
respectively. In 1995, cash was provided entirely by net proceeds from debt.
In 1994, cash was provided by net proceeds from debt of $12.6 million and
capital contributed from Furniture Brands, prior to the Distribution, of $9.1
million.

Working Capital

As of March 29, 1997, the Company's working capital (net of cash) position
increased to a deficit of $36.2 million from a deficit of $38.6 million at
December 28, 1996. Accounts receivable increased $52.9 million as a result of
significantly higher shipments in First Quarter 1997. This increase was
financed in large part by a decrease in inventories of $8.5 million and an
increase in seasonal borrowings of $40.0 million.

The Company's working capital (net of cash) position decreased by $125.5
million from $86.9 million on December 30, 1995 to a deficit of $38.6 million
on December 28, 1996. The decrease is primarily attributable to an increase in
the current maturity of long-term debt of $111.4 million as a result of
reclassifying all debt outstanding as of December 28, 1996 under the Company's
Credit Facility to current. The Credit Facility matures in November 1997 with
a Company option to extend the expiration date an additional two years
provided certain conditions are met, including payment in full of the B
Facility on or prior to November 17, 1997. The Company intends to repay the B
Facility in full with a portion of the proceeds from the Offerings and to
replace the Credit Facility with a new credit facility. See "Financing
Arrangements" below.

26
<PAGE>

As of December 28, 1996, total current assets (net of cash) were $170.7
million, a decrease of $5.8 million from prior year. The decrease was due
primarily to the reduction in refundable income taxes by $10.8 million for
federal income tax refunds received with respect to net operating loss
carryback claims and overpayment of estimated taxes. Receivables decreased by
$0.1 million from the prior year due to a reduction in trade receivables of
$4.5 million as a result of a decrease in trade sales in the fourth quarter of
Fiscal 1996 offset by an increase in licensee receivables of $4.4 million as a
result of strength in licensee revenues. Offsetting these asset reductions
were an increase in inventories of $4.9 million to $86.8 million, primarily to
support a significant increase in customer orders for delivery in the first
quarter of 1997, and an increase in prepaid expenses and other current assets
of $0.2 million. Accounts payable increased $15.3 million due primarily to
increased inventory purchases from foreign contract manufacturers. Accrued
expenses decreased $8.2 million to $25.1 million due in large part to
reductions in the provision for restructuring actions by $4.4 million and the
provision for loss on investment in unconsolidated subsidiary by $4.8 million.
Income taxes payable increased $1.6 million and short-term debt from the
Company's foreign borrowing facilities decreased $0.5 million in 1996.

The Company's sales to customers are somewhat seasonal in nature with peak
shipments occurring in the first quarter for the spring season and in the
third quarter for the back-to-school season. As a result, year-end or quarter-
end levels of receivables and inventories are not necessarily representative
of levels during the year. Year-end inventory levels are affected by order
demand for the upcoming year as merchandise is received by the Company to ship
to customers in the first quarter. Consequently, inventory levels can be
significantly influenced by the timing of deliveries and shipments in any
particular year.

Financing Arrangements

As of March 29, 1997, the Company had a $161.5 million secured credit
facility (the "Credit Facility") with BT Commercial Corporation ("BTCC"), as
agent, and certain other institutional lenders (collectively the "Banks"),
comprised of an A Facility for $135.0 million, subject to a borrowing base
formula, and a B Facility for $26.5 million of direct borrowings. The Credit
Facility is secured by substantially all of the Company's assets located in
the United States and Canada. As discussed below, the Company has received a
commitment letter from BTCC to replace the Credit Facility with a new $150
million secured credit facility.

Availability under the A Facility is determined on a formula basis by the
amount of eligible collateral, principally accounts receivable and inventory
from U.S. and Canadian operations (the "Borrowing Base"). The Borrowing Base
was supplemented by $25.0 million in November 1995 with an irrevocable standby
letter of credit issued for the account of Apollo, for the benefit of BTCC on
behalf of the Banks. The standby letter of credit has an expiration date of
June 30, 1997. In addition, in November 1996, the Banks agreed to provide a
seasonal accommodation increase to the Borrowing Base of $10.0 million
commencing November 15, 1996 and ending March 31, 1997. In March 1997, the
Banks agreed to extend the seasonal accommodation and increase it to $15.0
million through October 15, 1997. In addition, the commitment of the Banks
under the A Facility was increased from $135.0 million to $150.0 million. As
of March 29, 1997, the Borrowing Base was $135.0 million, inclusive of
availability as a result of the standby letter of credit and seasonal
accommodation. As of March 29, 1997 utilization under the A Facility inclusive
of the standby letter of credit and seasonal accommodation, consisted of
revolving loans of $93.7 million, banker acceptances of $34.5 million and
outstanding letters of credit of $3.6 million. As a result, $3.2 million of
the maximum available Borrowing Base remained unutilized as of March 29, 1997.
As of December 28, 1996, the Borrowing Base was $113.9 million, inclusive of
availability as a result of the standby letter of credit and seasonal
accommodation. As of December 28, 1996, utilization under the A Facility,
inclusive of the standby letter of credit and seasonal accommodation,
consisted of revolving loans of $78.5 million and banker acceptances of $11.0
million. In addition, outstanding letters of credit of $17.3 million as of
December 28, 1996 were reserved against the maximum available Borrowing Base.
As a result, $7.1 million of the maximum available Borrowing Base remained
unutilized as of December 28, 1996. Revolving loans accrue interest at the
Prime Lending Rate plus 1.25% or Adjusted LIBOR (as such terms are defined in
the Credit Facility) plus 2.5%. The average weighted interest rate on the A
Facility was 8.26% at March 29, 1997 and 8.20% at December 28, 1996.

27
<PAGE>

The B Facility was reduced from $40.0 million outstanding at December 30,
1995 to $28.3 million at December 28, 1996 and to $26.5 million at March 29,
1997. The proceeds applied, as required under the Credit Facility, were $5.0
million for the sale of the Chester, South Carolina facility and an aggregate
of $2.4 million pursuant to the exercise of various stock options. In February
1996, the Credit Facility was amended to require the prepayment of certain tax
refunds to the outstanding balance of the B Facility and, commencing on
September 30, 1996, to pay equal quarterly principal installments of one-
twentieth ( 1/20th) of the then outstanding principal amount of the B
Facility. Accordingly, tax refund proceeds of $2.7 million and the first
quarterly installment payment of $1.6 million were also applied to the
reduction of the B Facility during the year. During First Quarter 1997, the
quarterly installment of $1.6 million was made and $0.2 million was applied
from the exercise of stock options. Loans outstanding under the B Facility
accrue interest at the Prime Lending Rate plus 4.0% or Adjusted LIBOR plus
5.5% at March 29, 1997 (subject to an increase of 0.5% in May 1997). The
average weighted interest rate on the B Facility was 11.24% at March 29, 1997
and 10.95% at December 28, 1996. The Company is not permitted further
borrowings against the B Facility.

The Credit Facility is scheduled to expire during 1997. Accordingly, the
total indebtedness outstanding pertaining to these debt instruments of $154.8
million at March 29, 1997 has been classified as current. However, the Company
has the right to extend the Credit Facility for an additional two years if it
has paid off the B Facility and there is no event of default. On April 30,
1997, the Company accepted a commitment letter of BTCC to supply a new $150
million revolving credit facility (the "New Credit Facility"). The New Credit
Facility will have a term of five years, will provide for borrowings and other
credit accommodations in a manner similar to the A Facility and will be
secured by substantially the same assets. Borrowings will initially bear
interest at the rates currently provided under the A Facility, but such
interest rates will be reduced in the event that the Company achieves certain
financial ratios. On a pro forma basis after giving effect to the New Credit
Facility and application of the estimated net proceeds of the Offering, at
March 29, 1997 the Company's unutilized availability under the New Credit
Facility would have been approximately $32.0 million. The commitment letter is
conditional upon completion of the Offering and other customary matters. The
Company anticipates that the New Credit Facility will be completed at the same
time as or shortly after completion of the Offering. However, the Offering is
not conditioned on the New Credit Facility and no assurance can be given that
the New Credit Facility will be completed. In the event that the New Credit
Facility or a similar new facility is not completed for any reason, the
Company would extend the term of the existing Credit Facility for two years as
described above.

The Credit Facility, as amended, requires compliance with certain financial
covenants. As of December 28, 1996, the Company was in default of one
financial covenant that was waived by the Banks in March 1997. The Credit
Facility was amended in March 1997 to reset the financial covenants for the
term of the agreement and to extend and increase the seasonal accommodation
(discussed above).

The Company maintains asset based financing arrangements in certain European
countries with various lenders. Borrowings outstanding under these financing
arrangements totaled $16.4 million at March 29, 1997 and $13.4 million as of
December 28, 1996. Interest is payable at the respective lender's base rate
plus 1.5% (6.0% to 8.25% at March 29, 1997 and December 28, 1996). The
obligations are secured by a first priority lien on the respective European
assets being financed.

In conjunction with Converse's acquisition of 100% of the outstanding common
stock of Apex (see Note 3 of the Notes to the December 28, 1996 Consolidated
Financial Statements), Converse issued subordinated notes in the face amount
of $11.0 million discounted at a rate of 12% to $9.6 million. The subordinated
notes bear interest at a rate of 8% per annum for the first three years and
increase to 10% and 12% in 1998 and 1999, respectively. The subordinated notes
mature on May 18, 2003. As a result of the indemnification awards and claims
against certain former owners of Apex and the related exchange and settlement
agreements, no accretion of the subordinated note discount has been recorded
in the December 28, 1996 Consolidated Financial Statements. The long-term debt
of the Company as of December 28, 1996 includes $9.6 million of debt related
to the Company's acquisition of Apex. In the first quarter of 1997
substantially all of these subordinated notes were delivered to the Company in
full satisfaction of the Company's indemnification claims. See Note 16 to the
Company's December 28, 1996 Consolidated Financial Statements included herein.

28
<PAGE>

Capital Expenditures

Capital expenditures were $0.8 million, $5.3 million, $5.8 million and $8.5
million in First Quarter 1997, Fiscal 1996, Fiscal 1995 and Fiscal 1994,
respectively. During First Quarter 1997, the Company spent $0.5 million to
maintain and upgrade the Company's manufacturing facility in Lumberton, North
Carolina, $0.2 million to upgrade the Company's trade show booth and $0.1
million on various smaller projects and improvements. During Fiscal 1996, the
Company spent $1.4 million on leasehold improvements primarily to open or
remodel the Company's retail stores, $1.0 million to maintain and upgrade the
Company's manufacturing facility in Lumberton, North Carolina, $0.9 million in
information technology to support improvements in networking, retail store
operations and international operations, $0.9 million to upgrade the Company's
trade show booth and $1.1 million on various smaller projects and
improvements. Fiscal 1995 investments included $2.3 million in new equipment
and improvements to upgrade the Company's manufacturing facility in Lumberton,
North Carolina, $0.8 million in computer equipment, $0.7 million to move the
research and development offices to its present location, $0.7 million to
support international expansion and $0.4 million to open four new retail
stores. The remaining $0.9 million was invested in various smaller projects.
Fiscal 1994 investments included $2.7 million in new equipment and
improvements to upgrade the Company's manufacturing facility in Lumberton,
North Carolina, $1.6 million to complete a new factory in Mission, Texas, $1.7
million in computer equipment, $1.0 million to upgrade distribution facilities
and $0.4 million to open four new retail stores. The remaining $1.1 million
was invested in various smaller projects. The Company expects that capital
expenditures during Fiscal 1997 will be in the range of $6.0 million to $8.0
million.

Backlog

At March 29, 1997, the Company's global backlog was $220.1 million, as
compared to $149.3 million at March 30, 1996, an increase of 47.4%. The amount
of backlog 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. Accordingly, a
comparison of backlog as of two different dates is not necessarily meaningful.

29
<PAGE>

BUSINESS

Converse is a leading global designer, manufacturer and marketer of high
quality athletic footwear for men, women and children. The Company is also a
global licensor of sports apparel, accessories and selected footwear. The
Company, founded in 1908, began establishing its authentic footwear heritage
with the introduction of its original canvas Chuck Taylor(R) basketball shoe
in 1923. Throughout its nearly 90-year history, Converse has achieved a high
level of brand name recognition due to its reputation for high performance
products, quality, value and style. Through its well-known Converse(R) All
Star(R) brand, the Company has consistently maintained its position as the
American performance brand with authentic sports heritage.

The Company's footwear is focused on four core categories: basketball,
athleisure, children's and cross training, which represented approximately
34%, 31%, 22% and 8%, respectively, of the Company's 1996 net sales. The
basketball category is comprised of high performance footwear for athletes and
typically features Converse's proprietary REACT(R) shock absorption
technology. Converse's athleisure footwear offerings are centered on the
Converse Chuck Taylor All Star canvas athletic shoe, which management believes
is the world's all time best-selling athletic shoe with over 550 million pairs
sold since its introduction. Converse's rapidly growing children's category
consists of children's-sized versions of the Company's basketball, athleisure
and cross training shoes, as well as certain styles designed exclusively for
children. Cross training, which is the fastest growing category in the
athletic footwear industry, consists of high performance athletic shoes used
for sports training and fitness.

The Company's products are distributed in over 90 countries to approximately
9,000 customers, which include specialty athletic, sporting goods, department
and shoe stores, as well as to 37 Company-operated retail outlet stores. In
1996, the Company's reported net sales were $349.3 million. However, this
figure understates the total worldwide presence of Converse-branded products
since a large portion is sold through licensees, and the Company recognizes
only the percentage of these sales which it records as royalty income. Global
wholesale sales of Converse-branded products, which include direct sales by
the Company to retailers, sales by Converse distributors and sales of licensed
products by Converse licensees, were approximately $800 million in 1996, of
which over $560 million, or approximately 70%, were international sales.
Although the Company's reported net sales declined from 1995 to 1996, global
wholesale sales of Converse-branded products increased approximately 11%
during this period.

During 1996, Converse implemented a series of strategies designed to
position the Company for long-term growth and profitability (the "1996
Repositioning"). These strategies included: (i) establishing a new management
team, (ii) focusing on four core product categories, (iii) creating a single
brand identity, (iv) coordinating marketing and product development and (v)
streamlining operations. Primarily as a result of the 1996 Repositioning, net
earnings for First Quarter 1997, excluding the one-time gain related to the
Apex litigation settlements and bankruptcy plan confirmation described under
"--Legal Proceedings," were $4.7 million, or $0.26 per share, compared to a
net loss of $3.3 million, or a $0.20 loss per share in First Quarter 1996. The
Company's net sales for First Quarter 1997 were $136.0 million compared to
$86.6 million in First Quarter 1996, an increase of 57%. During First Quarter
1997, the Company recorded substantial sales increases in each of its four
product categories of basketball, athleisure, children's, and cross training
of approximately 105%, 26%, 66% and 61%, respectively, compared to First
Quarter 1996. The Company's gross profit margin also improved to 31.0% of net
sales for First Quarter 1997 from 25.0% for First Quarter 1996. In addition,
selling, general and administrative expenses, although increasing by $10.5
million in First Quarter 1997 compared to First Quarter 1996, decreased as a
percentage of net sales to 27.0% from 30.4%. The foregoing factors enabled the
Company to record earnings from operations of $12.3 million for First Quarter
1997 as compared to $0.2 million for First Quarter 1996. Converse's global
backlog increased approximately 47% to $220.1 million at March 29, 1997 from
$149.3 million at March 30, 1996. The backlog increases were approximately
32%, 83%, 40% and 14%, respectively, in the Company's categories of
basketball, athleisure, children's and cross training.

30
<PAGE>

THE 1996 REPOSITIONING

. Establishing a New Management Team. Since April 1996, the Company has
recruited a new management team with proven experience in the athletic
footwear and sporting goods industries. The Company appointed Glenn N.
Rupp as Chairman and Chief Executive Officer, James E. Solomon as Senior
Vice President, Marketing and Edward C. Frederick as Senior Vice
President, Research and Development. Previously, Mr. Rupp was at Wilson
Sporting Goods Co. for eight years and served as President from 1985 to
1991, and Chief Executive Officer from 1987 to 1991. From 1985 to 1991,
net sales at Wilson more than doubled and operating performance
significantly improved. Mr. Solomon had previously been President and
Chief Operating Officer of Dansk International and, prior to holding that
position, had significant experience in the athletic footwear industry
with companies such as Avia and New Balance. Dr. Frederick has previously
held senior product design and development positions at Nike and adidas.
The Company believes that the strategies executed by the new management
team have contributed significantly to the recent improvement in the
Company's performance.

. Coordinating Marketing and Product Development. During 1996, the new
management team greatly increased the Company's ability to develop
products consistent with consumer preferences. As a result of consumer
demand, the Company has increased the frequency of its product
introductions as well as the depth of its products in each of its four
core categories. Management anticipates introducing new products every
six to eight weeks, as compared to generally having introduced new
products semi-annually in the past. The Company's consumer research is
integral to the development of both the Company's new products and its
advertising campaigns and in-store point of purchase materials. Each of
the Company's products is now fully supported by a consistent, integrated
marketing program, responsive to the demands of the Company's target
customers. Management attributes the success of its Spring 1997
basketball line to its improved marketing and product development.
Management believes that the Company's top four selling Spring 1997
basketball shoes will generate net sales in excess of $40 million, a
level more than double the net sales of the Company's top four basketball
shoes in any prior spring basketball line.

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<PAGE>

during 1996. Selling, general and administrative expenses in 1996 were
$114.9 million, or 32.9% of net sales, as compared to $146.3 million, or
35.9% of net sales, in 1995.

GROWTH STRATEGIES

32
<PAGE>

PRODUCTS

As a result of the Company's 1996 Repositioning, Converse now focuses all of
its marketing, product development and sales efforts on its four core
categories: basketball, athleisure, children's and cross training.

Basketball

Converse's basketball footwear offerings are comprised of high performance
footwear for athletes and typically feature Converse's proprietary REACT shock
absorption technology. The Company's basketball footwear is worn by a number
of NBA players, including endorsers such as Dennis Rodman, Latrell Sprewell,
Kevin Johnson and Anthony Mason, and by many major NCAA basketball teams.

The Company continues to introduce new state-of-the-art designs under the
Converse All Star brand, such as the All Star Springfield and the All Star
Tourney. Recently, many of Converse's successful basketball shoes, including
the All Star 2000 canvas and the Dr. J. 2000, have featured design elements
that trace their heritage to authentic Converse footwear of the 1950s, 1960s
and 1970s. The Dr. J. 2000 and the All Star 2000 canvas shoes are designed for
the performance needs of today's basketball players, yet are familiar to
consumers who have known Converse products throughout the years. Both the Dr.
J. 2000 and the All Star 2000 canvas incorporate the Company's REACT
technology. Management believes that these top four Spring 1997 basketball
shoes will generate net sales in excess of $40 million, a level of net sales
that is more than double the net sales of the top four basketball shoes in any
prior Spring basketball line.

Management believes that the domestic branded retail market for basketball
footwear was approximately $2.4 billion in 1996. The Company's basketball
footwear sells in the U.S. at suggested retail prices ranging from $45.00 to
$85.00 through an extensive network of athletic specialty, sporting goods,
department and shoe stores. While the target consumers for Converse basketball
shoes are males and females ages 12 to 24, the Company's basketball shoes
appeal to a broad group of consumers.

In First Quarter 1997, sales of the Company's basketball footwear were $54.5
million, a 105% increase from the prior year period. In addition, the
Company's backlog for basketball footwear was $82.5 million as of March 29,
1997, a 32% increase from the Company's backlog of $62.5 million as of March
30, 1996.

Athleisure

Converse athleisure footwear offerings are centered on the Chuck Taylor All
Star canvas athletic shoe, which management believes is the world's all time
best-selling athletic shoe with over 550 million pairs sold

33
<PAGE>

since its introduction in 1923 as the world's first basketball shoe.
Converse's athleisure footwear encompasses both classic, time-tested athletic
shoes and styles targeted at alternative sports enthusiasts. The Company
believes that the main consumers for these products are male and female
athletes that seek a more simply styled athletic shoe when not playing sports.
Because these shoes have authentic sports heritage, many have remained
unchanged since their inception and have become true American sports icons.

The Company's athleisure products, which come in a wide variety of colors,
sell in the U.S. at suggested retail prices ranging from $20.00 to $65.00 in
athletic specialty, sporting goods, department and shoe stores, as well as
specialty apparel retailers. The Company's Spring 1997 athleisure footwear
offerings include the canvas Chuck Taylor All Star, the One Star, the Jack
Purcell and the Boarderline.

In First Quarter 1997, sales of the Company's athleisure footwear were $40.1
million, a 26% increase from the prior year period. In addition, the Company's
backlog for athleisure footwear was $70.8 million as of March 29, 1997, a 83%
increase from the Company's backlog of $38.7 million as of March 30, 1996.

Children's

Converse's rapidly growing children's category consists of children's-sized
versions of the Company's basketball, athleisure and cross training shoes, as
well as certain styles designed exclusively for children. The Company's
children's footwear is rooted in sports, offering all the features and
benefits of the adult models and the same unique styling that attracts adults
to the Company's basketball, athleisure and cross training products. With the
Company's current momentum in adult basketball shoes, there is a renewed
interest on the part of retailers and consumers for children's versions of
these popular offerings.

Management believes that the domestic branded retail market for children's
footwear was approximately $2.0 billion in 1996. The Company's children's
footwear is generally sold in the U.S. at suggested retail prices ranging from
$22 to $60 through athletic specialty, children's bootery, sporting goods and
department stores.

In First Quarter 1997, sales of the Company's children's footwear were $28.3
million, a 66% increase from the prior year period. In addition, the Company's
backlog for children's footwear was $42.7 million as of March 29, 1997, a 40%
increase from the Company's backlog of $30.6 million as of March 30, 1996.

Cross Training

Cross training, which is the fastest growing category in the athletic
footwear industry, consists of high performance athletic shoes used for
multiple sports activities. The Company believes this category represents a
major growth opportunity since Converse's cross training and basketball
products have similar target purchasers. With Converse's current positive
momentum in the basketball category, the Company believes that there are
significant opportunities to expand the sales of Converse's cross training
products.

Management believes that the domestic branded retail market for cross
training footwear was approximately $1.7 billion in 1996. In addition, cross
training is estimated by Converse to be a larger worldwide category than
basketball. The Company's cross training footwear sells in the U.S. at
suggested retail prices ranging from $50.00 to $75.00 through an extensive
network of athletic specialty, sporting goods, department and shoe stores. The
Company's Spring 1997 cross training footwear offerings include the One Star
2000 and the Fit Star.

In First Quarter 1997, sales of the Company's cross training footwear were
$8.6 million, a 61% increase from the prior year period. In addition, the
Company's backlog for cross training footwear was $12.9 million as of March
29, 1997, a 14% increase from the Company's backlog of $11.3 million as of
March 30, 1996.

MARKETING AND PRODUCT DEVELOPMENT

The Company's marketing strategy is centered on the Converse All Star brand,
which is positioned as the American performance brand with authentic sports
heritage. The Company believes that there are significant

34
<PAGE>

opportunities to continue to build the brand, which commands high consumer
awareness generated by its nearly 80-year history. As a result of its single
brand marketing strategy, management believes that it will be able to build
the Converse All Star brand in a more efficient and focused manner than in
previous years.

Management believes that the increased coordination between the Company's
marketing and product development teams has greatly improved the Company's
ability to develop products consistent with consumer preferences. As a result,
the Company has been able to increase the frequency of its product
introductions as well as the depth of its products in each of its four core
categories. The Company's consumer research has become an integral part of its
product development, advertising campaigns and in-store point of purchase
materials. Each of the Company's products is now fully supported by a
consistent, integrated marketing program, responsive to the demands of the
Company's target customers.

To complement its marketing strategies, Converse cultivates the endorsement
and promotion of Converse footwear among athletes. In 1996, management
rationalized its endorsement programs consistent with the Company's single
brand strategy and focus on the Company's four core product categories.

The Company's endorsers include both current NBA athletes, such as Dennis
Rodman, Latrell Sprewell, Anthony Mason and Kevin Johnson and NBA athletes
from an earlier era, including Julius "Dr. J" Erving and Larry Bird. The
Company is also a leading supplier of athletic shoes to premier NCAA
basketball teams, including the University of Arkansas, Clemson University,
the University of Georgia, Indiana University, the University of Louisville,
the University of New Mexico, Oklahoma University and the University of South
Carolina. Management believes that there are substantial opportunities to
utilize these endorsers to influence its target customers and further build
the Converse All Star brand through the Company's focused and integrated
marketing strategies.

SALES AND DISTRIBUTION

The Company's products are distributed in over 90 countries to approximately
9,000 customers, which include athletic specialty, sporting goods, department
and shoe stores, as well as to 37 Company-operated retail outlet stores.
Recently, the Company has significantly increased its distribution through
specialty athletic retailers that showcase the Company's and its licensees'
coordinated head-to-toe product offerings.

United States

The Company's 48 member U.S. sales force markets Converse footwear through
approximately 4,200 active retail accounts. In 1996, domestic sales
represented 55% of total Company net sales. The Company has recently refined
its distribution strategy to increase its focus on key growth accounts such as
specialty athletic retailers. National and large regional accounts are
serviced by 12 account executives who are paid on a salary and bonus basis,
and who focus on the product and merchandising needs of these retailers. A
majority of the Company's domestic sales are served by an electronic data
interface ("EDI") ordering system. In addition, a quick response system has
been implemented with a number of the Company's highest volume accounts. The
quick response system provides for the rapid replenishment of retailer stock
through an inventory management process which produces constant "on-hand"
inventory quantities.

All sales to U.S. retailers other than the national or large regional
accounts are serviced by the Company's 36 member direct sales force, which is
compensated on a commission basis. The commission schedule is structured to
reward future orders (orders placed four to five months before delivery),
product mix, and profitability. This compensation structure is integral to the
Company's inventory management program, which emphasizes future orders over
"at once" orders to reduce inventory investment and risk.

In 1996, two key accounts, Sears Roebuck and J.C. Penney, each contributed
over $10 million to the Company's net sales. Together they accounted for 10.5%
of the Company's total U.S. net sales in 1996 (as

35
<PAGE>

compared to 7.5% in 1995) and 5.8% of 1996 worldwide net sales (as compared to
3.8% in 1995). The Company strives to maintain the integrity of the Converse
image by controlling the distribution channels for its products based on
criteria which include the retailer's image and ability to effectively promote
the Company's products. The Company works with its retailers to display, stock
and sell a greater volume of the Company's products.

The Company operates 35 retail outlet stores in the United States which
serve as a vehicle to close out inventory in a controlled manner. In addition,
these stores showcase the Company's current product offerings. The retail
outlets average 4,400 square feet each and contributed a total of $26.6
million to 1996 net sales. The Company continually upgrades the design and
layout of its retail outlet stores to further promote the Converse brand
image.

International

Management believes that the Company is well-positioned to continue to take
advantage of additional international growth opportunities. Although the
tradition of the Converse All Star brand as a high performance athletic brand
is not as well known internationally as in the United States, the Company
believes that because of the global reach of music, fashion, media and
alternative sports, the styles and trends among the Company's target customer
group internationally are similar in many ways to those in the United States.
Management believes that the Company is well-positioned to continue to take
advantage of additional growth opportunities in Europe and the Pacific Rim as
well as opportunities in the developing markets of Latin America and Eastern
Europe.

In the key western European markets of France, Italy, Spain, Benelux, United
Kingdom, Germany, Portugal, Scandinavia, Austria and Switzerland, Converse has
converted its independent distributors to operating units of the Company to
better control the distribution of its products in these markets. These
Converse operating units are responsible for the marketing and distribution of
Converse-branded footwear, apparel and accessories to sporting goods,
department, and specialty stores within these territories. The Company
operates two retail outlet stores in England. Sales in Eastern Europe, the
Middle East and Africa are made through independent importer/distributors.

Sales of footwear in the Pacific region are made through independent
importer/distributors, the largest of which is Moon-Star Chemical Corporation,
which is the Company's exclusive distributor of footwear in Japan. Moon-Star
contributes approximately 12% to the Company's total net sales worldwide.
Sales of Converse-branded apparel and accessories in the Pacific region are
made by over 20 licensees who generated approximately $270 million in
wholesale sales in 1996. The Pacific region contributes the largest percentage
of international licensee income. See "Licensing Agreements."

The Latin America market which is supplied by nine footwear
importer/distributors and four apparel licensees, continues to show strong
growth potential.

LICENSING AGREEMENTS

Converse utilizes licensees who manufacture or purchase and distribute
sports apparel, accessories and selected footwear to provide consumers head-
to-toe Converse-branded products globally. Converse has entered into 65
separate licensing agreements permitting the licensees to design and market
specific products under the Converse brand name in specific markets. Under the
terms of Converse's licensee arrangements, all products designed by licensees,
as well as the related advertising, must be approved in advance by Converse.
In addition, Converse has the right to monitor the quality of the licensed
products on an ongoing basis.

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<PAGE>

The following table details sales by Converse's licensees that produced
royalties to Converse for the years indicated and Converse's resulting royalty
income:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------------------- -------------------
DECEMBER 31, DECEMBER 30, DECEMBER 28, MARCH 30, MARCH 29,
1994 1995 1996 1996 1997
------------ ------------ ------------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total sales by
licensees:
Footwear.............. $ 90,449 $ 84,231 $101,117 $23,012 $31,874
Apparel and accesso-
ries................. 106,490 178,185 307,011 53,566 60,343
-------- -------- -------- ------- -------
Total................. $196,939 $262,416 $408,128 $76,578 $92,217
======== ======== ======== ======= =======
Total royalty income:
Footwear.............. $ 7,653 $ 7,046 $ 7,944 $ 1,723 $ 2,508
Apparel and accesso-
ries................. 6,559 10,211 19,693 3,205 3,869
-------- -------- -------- ------- -------
Total................. $ 14,212 $ 17,257 $ 27,637 $ 4,928 $ 6,377
======== ======== ======== ======= =======
</TABLE>

In Japan, Converse has agreements with 10 licensees to produce Converse-
branded apparel, accessories and selected footwear for the Japanese market.
These Japanese licensees accounted for approximately 54.6% of total worldwide
royalty income in 1996. Licensees in Australia and Taiwan contributed 15.2% of
total worldwide royalty income in 1996. Licensee income generated in the U.S.
represented approximately 9.7% of total worldwide royalty income in 1996.

SOURCING AND MANUFACTURING

The majority of the Company's footwear is sourced from various Far East
factories. However, most of the Company's athleisure products are manufactured
domestically.

Sourcing

In 1996, approximately 70% of all Converse footwear was sourced from a
variety of Far East manufacturers on a per order basis. These manufacturers
produce the Company's footwear according to the Company's own design
specifications and quality standards. Sourcing is managed by the Company's
corporate headquarters in the United States. In selecting subcontractors,
Converse attempts to use manufacturers that specialize in the type of footwear
being produced and to avoid overdependence on any particular supplier by
having a sufficient diversity of sources. The Company utilizes one sourcing
agent in Taiwan who assists the Company in selecting and overseeing third
party contractors, ensuring quality, sourcing fabrics and monitoring quotas
and other trade regulations. The Company's production staff and independent
sourcing agent together oversee all aspects of manufacturing and production.
Many of the manufacturers utilized by Converse are also used by the Company's
competitors.

Starting in 1995, the Company shifted a portion of its footwear production
from Korea and Indonesia to China and other Pacific Rim countries to reduce
costs while maintaining the Company's high product quality standards. In 1996,
the Company purchased over 11.7 million pairs of shoes from 24 manufacturers
located in China, Taiwan, Macau, Vietnam, Indonesia and the Philippines. While
one manufacturer produces approximately 24% of the Company's products, the
Company believes such manufacturer can be replaced, if necessary, subject to
short-term supply disruptions.

Manufacturing

Converse is the largest manufacturer of athletic footwear in the United
States, producing over 5.2 million pairs in 1996. Converse owns and operates
manufacturing facilities in Lumberton, North Carolina and Reynosa, Mexico.
During 1995, due to decreasing order volume, the Company closed its leased
manufacturing facility in Mission, Texas and transferred all of its stitching
operations to Reynosa, Mexico. During First Quarter 1997,

37
<PAGE>

due to increased demand for athleisure products, the Company reopened the
Mission facility for cutting and limited production.

The Company manufactures most of its athleisure footwear at the Company's
approximately 350,000 square foot Lumberton facility. The Lumberton factory
produces components and is responsible for the final assembly of the Company's
athleisure footwear. All stitching is done at the Reynosa facility to
capitalize on lower labor costs. The Lumberton facility presently operates at
approximately 55% of capacity. The Company is evaluating alternative ways to
best utilize this excess capacity.

The domestic manufacturing of Converse's athleisure products has enabled the
Company to go on EDI/Quick response with some of its major customers.
Converse's ability to produce its best-selling athleisure models with
significantly shorter lead-times than foreign-sourced products is a
competitive advantage.

The principal materials used in Converse's athleisure footwear products are
canvas, linen and rubber. The Company purchases its raw materials from diverse
suppliers. While one supplier accounts for approximately 20% of raw materials
purchases, the Company believes such supplier can be replaced, if necessary,
subject to short term supply disruptions.

RESEARCH AND DEVELOPMENT

Converse is a leading innovator of new footwear technologies, an important
factor in increasing sales to the Company's target customers. The Company
spent $7.8 million, $8.6 million and $6.5 million on research and development
in 1994, 1995 and 1996, respectively. Converse's state of the art biomechanics
laboratory, located in a leased facility near the Company's headquarters,
continually conducts research on new performance-enhancing technologies. The
Company's biomechanical engineers are also involved in the design stages of
athletic footwear to help develop new technologies and attributes to improve
the function of shoes for specific sports. The Company maintains a full set of
production equipment at its North Reading headquarters to develop prototypes,
and to ensure that new products can be manufactured efficiently to Converse's
specifications. In addition, Converse maintains a chemistry laboratory that
develops and tests midsole and outsole compounds, adhesives and fabrics for
use in its products.

Many of Converse's basketball shoes use the patented REACT shock absorption
technology. REACT gel is a polymer encapsulated in the midsoles of Converse
basketball shoes in the heel and forefoot regions that attenuates shock as
athletes run and jump and force pressure on their feet. Management believes
that REACT technology attenuates shock better than the technologies of its
competitors. Competitive athletes have reacted favorably to the comfort and
performance of REACT technology.

BACKLOG

COMPETITION

The athletic footwear market is highly competitive. Industry participants
compete with respect to fashion, price, quality, performance and durability.
The athletic footwear industry in the United States can be broken down into
several groups. Nike, with 1996 estimated U.S. footwear revenues exceeding
$2.5 billion, controls over 30% of the U.S. athletic footwear market. Reebok,
with 1996 estimated U.S. footwear revenues exceeding $1.2 billion, controls
approximately 15% of the U.S. athletic footwear market. Each of these
companies has full lines of product offerings, competes with Converse in the
Far East for manufacturing sources, distributes to more than 10,000 outlets
worldwide and spends substantially more on advertising and promotion than
Converse. Fila

38
<PAGE>

USA, Inc. has estimated U.S. footwear sales exceeding $500 million, and
adidas, New Balance Athletic Shoe, Inc. and Stride Rite Corporation each have
1996 U.S. footwear revenues of between $200 million and $500 million. All of
these companies also compete with Converse for access to foreign manufacturing
facilities. In addition to these competitors, there are companies with U.S.
revenues of under $200 million, including Airwalk, ASICS Tiger Corporation,
British Knights, Inc., Etonic, Inc., Hyde Athletic Industries, Inc., K-Swiss,
Inc., L.A. Gear, Inc. and Vans, Inc., among others. Some of these companies
emphasize footwear in categories such as running, tennis or teamsports that
are not produced by the Company. Worldwide footwear industry data is
unavailable, but the largest companies worldwide are believed to be Nike,
Reebok and adidas.

TRADEMARKS AND PATENTS

Converse utilizes trademarks on virtually all of its footwear and licensed
apparel. Converse's main trademarks are "Converse(R) All Star(R)", "Chuck
Taylor(R)" and "REACT(R)" name and design and the "Converse All Star Chuck
Taylor Patch" and "All Star and Design" logos. In addition to those main
trademarks, from time to time Converse registers and/or uses other special
trademarks for special product lines or products or features. Converse
believes that these trademarks are important in identifying its products with
the Converse brand image, and the trademarks are often incorporated
prominently in product designs.

The Company believes the Converse brand to be among its most important and
valuable assets for its marketing, and generally seeks protection for its
trademarks in most countries where significant existing or potential markets
for its products exist. Converse takes vigorous action to defend its
trademarks in any jurisdiction where infringement is threatened or has
occurred or others have tried to register them. It is impossible to estimate
the amount of counterfeiting involving Converse products or the effect such
counterfeiting may have on Converse's revenue and brand image.

Accordingly, the Company maintains and preserves its trademarks and the
related registrations and aggressively protects such rights by taking
appropriate legal action against infringement, counterfeiting and misuse. The
Company is not aware of any material claim of infringement or other challenges
to the Company's right to use any of its trademarks, tradenames, or patents.

The Company has a variety of patents, including a number of U.S. and foreign
patents and patent applications on its REACT(R) technology.

ENVIRONMENTAL MATTERS

The Company's operations are subject to federal, state and local laws,
regulations and ordinances relating to the operation and removal of
underground storage tanks and the storage, handling, generation, treatment,
emission, release, discharge and disposal of certain materials, substances and
wastes. The nature of the Company's operations expose it to the risk of claims
with respect to environmental matters and there can be no assurance that
material costs or liabilities will not be incurred in connection with such
claims.

Based on the Company's experience to date, the Company believes that its
future cost of compliance with environmental laws, regulations and ordinances,
or exposure to liability for environmental claims, will not have a material
adverse effect on the Company's business, operations, financial position or
liquidity. However, future events, such as changes in existing laws and
regulations, or unknown contamination of sites owned or operated by the
Company (including contamination caused by prior owners and operators of such
sites) may give rise to additional compliance costs which could have a
material adverse effect on the Company's financial condition.

EMPLOYEES

As of December 28, 1996, Converse employed 2,249 individuals, of whom 1,220
were in manufacturing, and 1,029 were in sales, administration, development
and distribution. Management believes its relationship with its employees to
be good. Converse has not experienced any material work stoppages or strikes
in recent

39
<PAGE>

years. The Reynosa, Mexico manufacturing workforce, representing approximately
17% of Converse's work force, is represented by a union.

LEGAL PROCEEDINGS

In January 1997, a New York State Supreme Court jury ruled unanimously in
favor of Converse and awarded damages against certain former owners of Apex in
a lawsuit between Converse and such former owners. Following this jury award,
the Company was able to settle substantially all claims with the former owners
of Apex. As part of these settlements, the former owners delivered to Converse
$10.2 million of subordinated notes (discounted to approximately $8.9 million)
and warrants to purchase 1.75 million shares of Converse Common Stock at
$11.40 per share (valued at the time of acquisition at approximately $3.5
million) and cancelled $5.4 million of other contractual obligations, all of
which Converse issued in connection with its 1995 acquisition of Apex. In
addition, one former owner made a cash payment to Converse of $2.0 million. As
a result, the Company will save approximately $1.0 million in annual interest
expense relating to these subordinated notes and there will be no stockholder
dilution relating to the exercise of these warrants.

In February 1997, the United States Bankruptcy Court confirmed a plan of
liquidation in connection with the Apex bankruptcy. The plan confirmation
process included settlements pursuant to which Converse made payments of
approximately $4.5 million to the Apex estate and to certain creditors of
Apex. Converse also relinquished its claims against Apex. The confirmed plan
included an injunction which precludes Apex and its creditors from bringing or
continuing any Apex-related claims against Converse.

As a result of the litigation settlements and the bankruptcy plan
confirmation discussed above, Converse recorded a net pretax gain of $13.1
million in First Quarter 1997. See Note 16 to the Company's December 28, 1996
Consolidated Financial Statements and Note 8 to the Company's March 29, 1997
Consolidated Financial Statements included herein.

40
<PAGE>

MANAGEMENT

DIRECTORS

The directors of Converse are as follows:

<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
- ---- --- --------------------
<S> <C> <C>
Glenn N. Rupp......... 52 Chairman of the Board and Chief Executive Officer of
Converse
Donald J. Barr........ 62 Retired; formerly Executive Vice President of Time
Inc.
Leon D. Black......... 45 Officer and Director of Apollo Capital Management,
Inc. and Lion Capital Management, Inc.
Julius W. Erving...... 47 President, The Erving Group and Dr. J. Enterprises
Robert H. Falk........ 58 Officer of Apollo Capital Management, Inc. and Lion
Capital Management, Inc.
Gilbert Ford.......... 65 Consultant; formerly Chairman of the Board and Chief
Executive Officer of Converse
Michael S. Gross...... 35 Officer of Apollo Capital Management, Inc. and Lion
Capital Management, Inc.
John J. Hannan........ 44 Officer and Director of Apollo Capital Management,
Inc. and Lion Capital Management, Inc.
Joshua J. Harris...... 32 Officer of Apollo Capital Management, Inc. and Lion
Capital Management, Inc.
John H. Kissick....... 55 Officer of Lion Capital Management, Inc. and advisor
to Apollo Capital Management, Inc.
Richard B. Loynd...... 69 Chairman of the Board of Furniture Brands
International, Inc. and formerly its Chief Executive
Officer
Michael D. Weiner..... 44 Officer of Apollo Capital Management, Inc. and Lion
Capital Management, Inc.
</TABLE>

MR. RUPP was elected Chairman of the Board and Chief Executive Officer by
Converse's Board of Directors on April 11, 1996. From August 1994 to April
1996, Mr. Rupp was the Acting Chairman of McKenzie Sports Products, Inc. and a
Strategic Planning Advisor for CRC Industries, Inc. Mr. Rupp was President and
Chief Executive Officer of Simmons Upholstered Furniture Inc. ("Simmons") from
August 1991 until May 1994. Prior to 1991, Mr. Rupp held various positions
with Wilson Sporting Goods Co., including President and Chief Executive
Officer from 1987 to 1991. Mr. Rupp is also a director of Consolidated Papers,
Inc. In July 1994, a voluntary petition for reorganization under Chapter 11 of
the U.S. Bankruptcy Code was filed on behalf of Simmons.

MR. BARR was elected a director of Converse on December 15, 1994. From
October 1990 until his retirement in October 1996, Mr. Barr served as an
Executive Vice President of Time Inc. Prior to 1990 Mr. Barr was the publisher
of Sports Illustrated from 1985 to 1990 and Vice President of Time Inc. from
1987 to 1990. Mr. Barr was an employee of Time Inc. for 39 years.

MR. BLACK has been a director of Converse since August 1994. Mr. Black is
one of the founding principals of Apollo Advisors, L.P. ("Apollo Advisors"),
which acts as general partner of Apollo and other private securities
investment funds, of Lion, which acts as financial advisor to and
representative for certain institutional investors with respect to securities
investments, and of Apollo Real Estate Advisors, L.P. ("Apollo Real Estate
Advisors"), which acts as general partner of Apollo Real Estate Investment
Fund, L.P., a private real estate

41
<PAGE>

oriented investment fund. Mr. Black has been director and officer of Apollo
Capital Management, Inc. ("Apollo Capital") and Lion Capital Management, Inc.
("Lion Capital") since 1990 and of Apollo Real Estate Management, Inc.
("Apollo Real Estate") since 1993. Apollo Capital is the general partner of
Apollo Advisors; Lion Capital is the general partner of Lion Advisors; and
Apollo Real Estate is the managing general partner of Apollo Real Estate
Advisors. Mr. Black also serves as a director of Big Flower Press, Inc.,
Culligan Water Technologies, Inc., Furniture Brands International, Inc.,
Samsonite Corporation, Telemundo Group, Inc. and Vail Resorts, Inc.

MR. ERVING was elected a director of Converse in November 1994. Since 1979
Mr. Erving has been the President of The Erving Group and Dr. J. Enterprises.
Mr. Erving is also a part owner of Philadelphia Coca-Cola Bottling Company and
Television Station WKBW, Buffalo, New York. Mr. Erving also serves as an
analyst for professional basketball for NBC Sports. He was a member of the
Philadelphia 76'ers basketball team until April 1987 and has been an endorser
of Converse's products since 1975. Mr. Erving is also a director of CoreStates
Bank, N.A. and Philadelphia Coca-Cola Bottling Company.

MR. FALK has been a director of Converse since August 1994. Mr. Falk has
been an officer of Apollo Capital and Lion Capital since 1992. Prior thereto,
Mr. Falk was a partner in the law firm of Skadden, Arps, Slate, Meagher &
Flom. Mr. Falk is also a director of Culligan Water Technologies, Inc.,
Florsheim Group Inc. and Samsonite Corporation.

MR. FORD has been a director of Converse since 1987. Mr. Ford served as
Chief Executive Officer of Converse from October 1986 to April 1996 and as
Chairman of the Board from September 1994 to April 1996. Mr. Ford served as
Converse's Vice Chairman from April 1996 until his retirement in December
1996. Previously, Mr. Ford held various positions within Converse, including
President from 1986 to 1994, Executive Vice President from 1981 to 1986, Vice
President of Sales and Marketing from 1976 to 1981, Vice President of Sales
from 1972 to 1976 and National Sales Manager from 1969 to 1972. Mr. Ford was
an employee of Converse for over 34 years.

MR. GROSS has been a director of Converse since 1992. Mr. Gross is one of
the founding principals of Apollo Advisors and Lion Advisors and has served as
an officer of Apollo Capital and Lion Capital since 1990. Mr. Gross is a
director of Florsheim Group Inc., Furniture Brands International, Inc.,
Proffitt's Inc. and Urohealth, Inc.

MR. HANNAN has been a director of Converse since August 1994. Mr. Hannan is
one of the founding principals of Apollo Advisors, Lion Advisors and Apollo
Real Estate Advisors and has served as an officer and director of Apollo
Capital and Lion Capital since 1990 and of Apollo Real Estate since 1993. Mr.
Hannan is a director of Aris Industries, Inc., Florsheim Group Inc., Furniture
Brands International, Inc. and United Auto Group, Inc.

MR. HARRIS has been a director of Converse since 1992. Mr. Harris is an
officer of Apollo Capital and Lion Capital, having been associated with them
since 1990. Mr. Harris is a director of Florsheim Group Inc. and Furniture
Brands International, Inc.

MR. KISSICK has been a director of Converse since August 1994. Mr. Kissick
is one of the founding principals of Apollo Advisors and Lion Advisors and has
served as an officer of Lion Capital and a consultant to Apollo Capital since
1991. Mr. Kissick is also a director of Continental Graphics Holdings, Inc.,
Florsheim Group Inc., Food 4 Less Holdings, Inc. and Furniture Brands
International, Inc.

MR. LOYND has been a director of Converse since 1982. Mr. Loynd was Chief
Executive Officer of Furniture Brands International, Inc. from 1989 to October
1, 1996 and continues as Chairman of the Board. Mr. Loynd was also Chairman of
the Board of Converse from 1982 to August 1994. Mr. Loynd is also a director
of Emerson Electric Co. and Florsheim Group Inc.

42
<PAGE>

MR. WEINER has been a director of Converse since 1996. Mr. Weiner has been
an officer of Apollo Capital and Lion Capital since 1992 and of Apollo Real
Estate since 1993. Prior to 1992, Mr. Weiner was a partner in the law firm of
Morgan, Lewis & Bockius LLP. Mr. Weiner is also a director of Applause, Inc.,
Capital Apartment Properties, Inc., Continental Graphics Holdings, Inc.,
Florsheim Group Inc. and Furniture Brands International, Inc.

EXECUTIVE OFFICERS

The executive officers of Converse are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Glenn N. Rupp......... 52 Chairman of the Board and Chief Executive Officer
Donald J. Camacho..... 46 Senior Vice President and Chief Financial Officer
Edward C. Frederick... 50 Senior Vice President, Research and Development
Jack A. Green......... 51 Senior Vice President, General Counsel and Secretary
Thomas L. Nelson...... 42 Senior Vice President, Sales/North America
Herbert R. Rothstein.. 55 Senior Vice President, Production
Ronald J. Ryan........ 55 Senior Vice President, Operations
James E. Solomon...... 41 Senior Vice President, Marketing
Alistair M. Thorburn.. 39 Senior Vice President, International
James E. Lawlor....... 43 Vice President, Finance and Treasurer
</TABLE>

MR. RUPP'S biography appears under "Directors."

MR. CAMACHO has served as Senior Vice President and Chief Financial Officer
since September 1994. Previously, Mr. Camacho held the positions of Vice
President and Controller from 1992 to 1994, Controller from 1984 to 1992,
Assistant Controller from 1980 to 1984, and several other positions of
increasing responsibility since 1974.

DR. FREDERICK has served as Senior Vice President, Research and Development
since April 1997. From February 1996 to April 1997, Dr. Frederick was a
consultant to Converse through his wholly-owned consulting company, Exeter
Research, Inc. ("Exeter") and held the title of Chief Product Executive of
Converse. Dr. Frederick has been the President of Exeter since 1987. Since
1995, Dr. Frederick has also served as an Adjunct Professor in the Department
of Exercise Sciences, School of Public Health and Health Sciences, University
of Massachusetts. Dr. Frederick worked as a consultant for adidas, AG in the
fields of development, design and technology from 1991 to 1996. Previously,
Dr. Frederick worked as the Director of Research for Nike from 1980 to 1986
and as a design consultant for Nike from 1978 to 1980 and from 1986 to 1990.

MR. GREEN has served as Senior Vice President and General Counsel and
Secretary since August 1985, having joined the Company as Vice President Legal
in 1983.

MR. NELSON joined Converse as Senior Vice President, Sales/North America on
March 13, 1995. Before joining Converse, Mr. Nelson worked for The Rockport
Company, a subsidiary of Reebok International Ltd., where he served as Senior
Vice President of Sales/Operations from 1992 to 1995. Prior to that, Mr.
Nelson worked for G.H. Bass & Company from 1983 to 1992 where he held several
sales-related positions before being promoted to Senior Vice President of
Sales in 1990.

MR. ROTHSTEIN has served as Senior Vice President, Production since January
1996. Previously, Mr. Rothstein was Senior Vice President Sourcing from 1992
to 1996, Senior Vice President of Materials

43
<PAGE>

Management and Manufacturing from 1991 to 1992 and Vice President of Materials
Management from 1988 to 1991. Before joining Converse, Mr. Rothstein held
several senior management positions with Reebok International Ltd. from 1985
to 1988, Morse Shoe Inc. from 1973 to 1985, BGS Shoe Corporation from 1969 to
1972 and Signet from 1964 to 1969.

MR. RYAN has served as Senior Vice President, Operations since September
1994. Previously, Mr. Ryan held the position of Senior Vice President of
Finance and Operations since May 1994, having joined the Company as Senior
Vice President of Finance and Administration from 1990 to 1994. Prior thereto,
Mr. Ryan served as Vice President of Finance and Business Planning for the
Europe, Middle East and Africa divisions of the Bristol-Myers Squibb Company
from 1984 to 1990.

MR. SOLOMON has served as Senior Vice President, Marketing since October
1996. Previously, Mr. Solomon worked for Lenox Inc. from August 1990 to
September 1996 in a number of senior positions, including president and chief
operating officer of the Dansk International Design division from May 1994 to
September 1996 and Gorham, Kirk-Stieff, Dansk division from July 1991 to May
1994. He also has experience in the athletic footwear industry, having served
as Executive Vice President of Kangaroos USA from 1989 to 1990, Vice
President, Marketing of Avia Athletic Footwear from 1985 to 1988, and Group
Product Manager, New Balance Athletic Shoes from 1981 to 1983.

MR. THORBURN has served as Senior Vice President, International since
December 1993. Prior to joining the Company, Mr. Thorburn was Vice President
Europe/Asia Pacific for the Wilson Sporting Goods Co., Ltd. from 1987 to 1993.

MR. LAWLOR has served as Vice President, Finance of Converse since June
1995. Previously, Mr. Lawlor held the positions of Vice President and
Treasurer from September 1994 to June 1995, Treasurer from 1984 to 1994 and
other positions of increasing responsibility since 1975.

CERTAIN TRANSACTIONS

CONSULTING AGREEMENT

The Company is a party to a consulting agreement (the "Consulting
Agreement") with Apollo Advisors pursuant to which Apollo Advisors provides
corporate advisory, financial and other consulting services to the Company.
Fees under the Consulting Agreement are payable at an annual rate of $500,000,
plus out-of-pocket expenses. The Consulting Agreement is for a term currently
expiring on December 31, 1997 and is automatically renewable for successive
one-year terms unless terminated by independent members of the Board of
Directors.

REGISTRATION RIGHTS AGREEMENT

Converse has granted registration rights to the Apollo Stockholders with
respect to their shares of Common Stock. The Apollo Stockholders can require
Converse to file registration statements and to include the Apollo
Stockholders' shares in registration statements otherwise filed by Converse.
Costs and expenses of preparing such registration statements are required to
be paid by Converse.

CREDIT SUPPORT

In November 1995, Apollo caused a standby letter of credit for the account
of Apollo in the amount of $25 million to be provided to the Banks under
Converse's Credit Facility, which had the effect of allowing Converse to
borrow an additional $25 million above its borrowing base. This letter of
credit was subsequently extended through June 30, 1997, and Apollo has agreed
to cause it to be further extended to November 17, 1997, if required. In
consideration of the foregoing, Apollo received a fee from the Company equal
to 3% of the face amount of the letter of credit and a subsequent fee of
$100,000 upon extension of the letter of credit.

44
<PAGE>

ENDORSEMENT CONTRACT

Mr. Erving has a contract with Converse whereby he has agreed to perform
certain services. The agreement provides for Mr. Erving's endorsement of the
Company's footwear and activewear, the right to use his name and likeness to
advertise the Company's products, promotional appearances, advertising
production and product development consulting. The agreement provides for an
annual fee of $162,500 from October 1, 1995 through September 30, 1996 and
$200,000 from October 1, 1996 through September 30, 1997 and beyond and
expires on September 30, 2000. Mr. Erving is also entitled to receive a
royalty of (i) 1% of the net sales for the first 500,000 pairs of the Dr. J
2000 shoe and 1.5% of net sales for all pairs of the Dr. J 2000 shoe sold in
excess of 500,000, (ii) 1.5% of the net sales of apparel items which bear Mr.
Erving's name or are designed to coordinate with shoes bearing Mr. Erving's
name and (iii) 1% of the net sales of any shoes other than the Dr. J. 2000
which bear Mr. Erving's name or for which Mr. Erving is the Company's primary
designated endorser. The agreement provides for a minimum royalty of $145,000
to be paid to Mr. Erving for all shoe and apparel net sales in 1997. Mr.
Erving earned a total of $215,336 under this agreement in 1996.

CONSULTING AGREEMENT

Converse entered into a consulting agreement in February 1996 with Exeter
whereby Exeter provides certain services to Converse in the fields of research
and development and product design. Converse entered into an additional
consulting agreement with Exeter in May 1996 to provide additional product
development services. Exeter is owned by Edward C. Frederick, who was hired as
the Company's Senior Vice President, Research and Development in April 1997.
The consulting agreements with Exeter provide for an aggregate fee of $290,000
per year plus expenses. One of the consulting agreements, the fee for which
was $200,000 per year, was terminated in April 1997 when Dr. Frederick was
hired as an officer of the Company. The remaining consulting agreement relates
to consulting services provided by employees of Exeter other than Dr.
Frederick. Exeter was paid a total of $238,679 under these two agreements
during 1996.

TAX REFUND TRANSACTION

In connection with the Distribution, Converse and Furniture Brands entered
into a Tax Sharing Agreement (the "Tax Sharing Agreement") providing, among
other things, for an equal allocation between Furniture Brands and Converse of
benefits derived from a carryback of federal and state tax liabilities to
periods prior to completion of the Distribution. On February 21, 1996,
Converse and Furniture Brands executed an amendment to the Tax Sharing
Agreement under which Converse agreed to carry back federal income tax
operating losses for the years ended December 30, 1995 and December 28, 1996
to one or more Pre-Distribution tax periods. The amendment applies to the
first $41 million of tax operating losses generated, which approximates the
taxable income available in the carryback period. For the year ended December
30, 1995, tax operating losses of approximately $31 million were carried back
generating a tax refund of approximately $10.8 million. In accordance with the
Tax Sharing Agreement, as amended, Furniture Brands paid Converse $8 million
on February 29, 1996 and in return Furniture Brands became entitled to the
full amount of the tax refund. Furniture Brands is also entitled to any tax
refunds resulting from the first $10 million of tax operating losses for the
year ended December 28, 1996. Furniture Brands is not entitled to any refund
of the $8 million payment in the event the ultimate tax refund it receives
from the Internal Revenue Service is less than anticipated.

45
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information as of April 25, 1997
regarding the beneficial ownership of shares of Converse Common Stock by (i)
each person known by Converse to beneficially own more than 5% of the
outstanding shares of Converse Common Stock, (ii) each of the executive
officers and directors of Converse and (iii) the directors and executive
officers of Converse as a group.

<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
SHARES COMMON STOCK
BENEFICIALLY BENEFICIALLY
OWNED OWNED
------------ ------------
<S> <C> <C>
Apollo Investment Fund, L.P.
and
Lion Advisors, L.P
Two Manhattanville Road
Purchase, New York 10577 (1)....................... 11,230,365 65.1%
Glenn N. Rupp (2)................................... 105,000 *
Donald J. Camacho (2)............................... 34,500 *
Edward C. Frederick (2)............................. 20,000 *
Jack A. Green (2)................................... 17,000 *
James E. Lawlor (2)................................. 20,250 *
Thomas L. Nelson (2)................................ 14,000 *
Herbert R. Rothstein (2)............................ 4,000 *
Ronald J. Ryan (2).................................. 28,250 *
James E. Solomon (2)................................ 0 *
Alistair M. Thorburn (2)............................ 32,250 *
Donald J. Barr (2).................................. 7,500 *
Leon D. Black (1)(3)................................ 11,230,365 65.1
Julius W. Erving (2)................................ 5,000 *
Robert H. Falk (1)(3)............................... 11,230,365 65.1
Gilbert Ford........................................ 10,000 *
Michael S. Gross (1)(3)............................. 11,230,365 65.1
John J. Hannan (1)(3)............................... 11,230,365 65.1
Joshua J. Harris (1)(3)............................. 11,230,365 65.1
John H. Kissick (1)(3).............................. 11,230,365 65.1
Richard B. Loynd (2)................................ 42,166 *
Michael D. Weiner (1)(3)............................ 11,230,365 65.1
Directors and executive officers of the Company as a
group (21 persons) (1)(3).......................... 11,570,281 72.6
</TABLE>
- --------
* Indicates less than 1%.
(1) Includes 5,616,306 shares beneficially owned by Apollo and 5,614,059
shares beneficially owned by Lion. Apollo Capital and Lion Capital, as the
general partners of Apollo Advisors and Lion, respectively, are the
entities having dispositive power and voting control over shares
beneficially owned by Apollo and Lion. Messrs. Black and Hannan are
directors, officers and the principal stockholders of Apollo Capital and
Lion Capital.
(2) Shares beneficially owned represent options to purchase Converse Common
Stock that are exercisable within 60 days, except for shares held of
record by the following: Mr. Rupp 5,000 shares, Mr. Camacho 2,500 shares,
Mr. Lawlor 5,000 shares, Mr. Ryan 2,000 shares, Mr. Barr 2,500 shares and
Mr. Loynd 37,166 shares.
(3) Messrs. Black and Hannan are directors, officers and the principal
stockholders of Apollo Capital and Lion Capital. Messrs. Falk, Gross,
Harris and Weiner are officers of Apollo Capital and Lion Capital. Mr.
Kissick is an officer of Lion Capital and a consultant to Apollo Capital.
Each such director disclaims beneficial ownership of, and a personal
pecuniary interest in, the shares beneficially owned by Apollo and Lion.

46
<PAGE>

DESCRIPTION OF NOTES

The Notes will be issued under an indenture dated as of May 21, 1997 (the
"Indenture") between the Company and First Union National Bank, as trustee
(the "Trustee"). The following summaries of certain provisions of the
Indenture and the Notes do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
Indenture, including the definition therein of certain terms. Whenever defined
terms of the Indenture are referred to, such defined terms are incorporated
herein by reference. A copy of the proposed form of Indenture is filed as an
exhibit to the Registration Statement of which this Prospectus is a part.

GENERAL

The Notes will be unsecured, subordinated obligations of the Company, will
be limited to $80,000,000 in aggregate principal amount (including the Notes
issuable under the Underwriters' over-allotment option) and will mature on
June 1, 2004. The Notes will bear interest at the rate per annum shown on the
front cover of this Prospectus from the date of original issuance of Notes
pursuant to the Indenture, or from the most recent Interest Payment Date to
which interest has been paid or provided for, payable semi-annually on June 1
and December 1 of each year, commencing December 1, 1997, to the person in
whose name the Note (or any predecessor Note) is registered at the close of
business on the preceding May 15 or November 15, as the case may be (whether
or not a Business Day). Interest on the Notes will be paid on the basis of a
360-day year of twelve 30-day months.

Principal of and premium, if any, and interest on the Notes will be payable
and the conversion and transfer of Notes may be registered at the office of
the Trustee in New York, New York. In addition, payment of interest may be
made at the option of the Company by check mailed to the address of the
persons entitled thereto as it appears in the Register for the Notes on the
Regular Record Date for such interest.

The Notes will be issued only in registered form, without coupons and in
denominations of $1,000 or any integral multiple thereof. No service charge
will be made for any transfer or exchange of the Notes, but the Company may
require payment of a sum sufficient to cover any tax or other governmental
charge and any other expenses (including the fees and expenses of the Trustee)
payable in connection therewith. The Company is not required (i) to issue or
register the transfer or exchange of any Notes during a period beginning at
the opening of business 15 days before the day of the mailing of a notice of
redemption and ending at the close of business on the day of such mailing,
(ii) to register the transfer of or exchange of any Note selected for
redemption in whole or in part, except the unredeemed portion of Notes being
redeemed in part or (iii) to register the transfer or exchange of any Notes
surrendered for conversion or repurchase upon the occurrence of a Change of
Control.

All monies paid by the Company to the Trustee or any Paying Agent for the
payment of principal of and premium and interest on any Note which remain
unclaimed for two years after such principal, premium or interest become due
and payable may be repaid to the Company. Thereafter, the holder of such Note
may, as an unsecured general creditor, look only to the Company for payment
thereof.

CONVERSION RIGHTS

The Notes will be convertible, in whole or from time to time in part (in
denominations of $1,000 or integral multiples thereof), into shares of Common
Stock of the Company at any time prior to redemption or final maturity on June
1, 2004 at the conversion price set forth on the cover page of this
Prospectus, adjusted as described in the following paragraphs, except that if
a Note or portion thereof is earlier called for redemption,

47
<PAGE>

the conversion right with respect thereto will terminate at the close of
business on the business day prior to the date fixed for redemption and will
be lost if not exercised prior to that time, unless the Company shall default
in payment of the redemption price.

Fractional shares of Common Stock will not be delivered upon conversion, but
a cash adjustment will be paid in respect of such fractional interests based
on the current market price of the Company's Common Stock.

The initial conversion price is subject to adjustment upon certain events,
including (i) the issuance of Common Stock as a dividend or distribution on
capital stock, including the Common Stock; (ii) a combination, subdivision or
reclassification of Common Stock; (iii) the issuance to all holders of Common
Stock of rights, warrants or options entitling them to subscribe for or
purchase Common Stock (or securities convertible into Common Stock) at less
than the Current Market Price; provided, however, that in the case of certain
rights, warrants or options that are not exercisable until the occurrence of a
specified event or events, the conversion price will not be adjusted until the
occurrence of the earliest such specified event; (iv) the distribution to all
holders of Common Stock of capital stock (other than Common Stock), evidences
of indebtedness of the Company, assets (excluding regular periodic cash
dividends paid from surplus), or rights, warrants or options to subscribe for
or purchase securities of the Company (excluding the dividends, distributions,
rights and warrants mentioned above); (v) a distribution consisting
exclusively of cash (excluding any cash distributions referred to in (iv)
above or made in connection with a merger or similar transaction) to all
holders of Common Stock in an aggregate amount that, together with (A) all
other cash distributions (excluding any cash distributions referred to in (iv)
above) made within the 12 months preceding such distribution and (B) any cash
and the fair market value of other consideration payable in respect of any
previous tender offer by the Company or a Subsidiary (as defined in the
Indenture) for the Company's Common Stock consummated within the 12 months
preceding such distribution, exceeds 10% of the Company's market
capitalization (being the Current Market Price times the number of shares of
Common Stock then outstanding) on the date fixed for determining the
stockholders entitled to such distribution; (vi) the completion of a tender
offer made by the Company or any Subsidiary for the Company's Common Stock
involving an aggregate consideration that, together with (X) any cash and the
fair market value of any other consideration paid or payable in respect of any
previous tender offer by the Company or a Subsidiary for the Company's Common
Stock consummated within the 12 months preceding the consummation of such
tender offer and (Y) the aggregate amount of all cash distributions (excluding
any cash distributions referred to in (iv) above) to all holders of Common
Stock within the 12 months preceding the consummation of such tender offer
exceeds 10% of the Company's market capitalization on the date of consummation
of such tender offer; and (vii) issuances of Common Stock to an Affiliate (as
defined in the Indenture) for a net consideration per share less than the
Current Market Price (other than issuances of Common Stock under certain
benefit plans of the Company).

The Company will be permitted to make such reductions in the conversion
price as it determines to be advisable in order that any stock dividend,
subdivision of shares, distribution of rights to purchase stock or securities
or distribution of securities convertible into or exchangeable for stock made
by the Company to its stockholders will not be taxable to the recipients.

Except as stated above, the conversion price will not be adjusted for the
issuance of Common Stock, or any securities convertible into or exchangeable
for Common Stock or carrying the right to purchase any of the foregoing, in
exchange for cash, property or services.

If at any time (a) the Company makes a distribution of property to its
stockholders or purchases Common Stock in a tender offer and such distribution
or purchase would be taxable to such stockholders as a dividend for federal
income tax purposes (e.g., distributions of evidences of indebtedness or
assets of the Company but generally not stock dividends or rights to subscribe
for capital stock) and, pursuant to the antidilution provisions of the
Indenture, the conversion price of the Notes is reduced or (b) the conversion
price is reduced at the discretion of the Company, such reduction may be
deemed to be the receipt of taxable income by holders of the Notes. Holders of
Notes therefore could have taxable income as a result of an event in which
they receive no cash or property. See "Certain United States Federal Tax
Consequences--Adjustment of Conversion Price."

48
<PAGE>

Subject to any applicable right of the holders to cause the Company to
repurchase their Notes upon a Change of Control (as defined below), in the
case of certain consolidations, mergers or statutory exchanges of securities
with another corporation to which the Company is a party, or the sale or
conveyance of the Company's assets substantially as an entirety, there will be
no adjustment to the conversion price, but each holder will have the right, at
the holder's option, to convert all or any portion of such holder's Notes into
the kind and amount of securities, cash or other property receivable upon the
consolidation, merger, statutory exchange or transfer by a holder of the
number of shares of Common Stock into which such Note might have been
converted immediately prior to such consolidation, merger, statutory exchange
or transfer (assuming such holder failed to exercise any rights of election
and received per share the kind and amount of consideration received per share
by a plurality of non-electing shares). In the case of a cash merger of the
Company into another corporation or any other cash transaction of the type
mentioned above, the effect of these provisions would be that thereafter the
Notes would be convertible at the conversion price in effect at such time into
the same amount of cash per share into which the Notes would have been
convertible had the Notes been converted into Common Stock immediately prior
to the effective date of such cash merger or transaction. Depending upon the
terms of such cash merger or transaction, the aggregate amount of cash into
which the Notes would be converted could be more or less than the principal
amount of the Notes.

Notes surrendered for conversion after the close of business on a record
date for payment of interest and before the close of business on the next
succeeding interest payment date (unless there exists a default in the payment
of interest on such Notes or such Notes have been called for redemption) must
be accompanied by payment of an amount equal to the interest thereon that is
to be paid on such interest payment date. Subject to the foregoing, no
payments or adjustments will be made upon conversion on account of accrued
interest on the Notes or for any dividends or distributions on any shares of
Common Stock delivered upon such conversion. No adjustment of the conversion
price will be required to be made in any case until cumulative adjustments
amount to at least 1% of the conversion price, as last adjusted. Any
adjustment that would otherwise be required to be made shall be carried
forward and taken into account in any subsequent adjustment.

SUBORDINATION

The payment of the principal of and premium, if any, and interest on the
Notes, including purchase at the option of a holder upon the occurrence of a
Change of Control, is subordinated in right of payment, as set forth in the
Indenture, to the prior payment in full of all Senior Indebtedness of the
Company. Senior Indebtedness is defined as (a) the principal of, premium, if
any, and accrued and unpaid interest on (i) indebtedness of the Company for
money borrowed, whether outstanding on the date of execution of the Indenture
or thereafter created, incurred or assumed, (ii) guarantees by the Company of
indebtedness for money borrowed by any other person, or reimbursement
obligations under letters of credit, in either case, whether outstanding on
the date of execution of the Indenture or thereafter created, incurred or
assumed, (iii) indebtedness evidenced by notes (other than the Notes),
debentures, bonds or other instruments of indebtedness for the payment of
which the Company is responsible or liable, by guarantees or otherwise,
whether outstanding on the date of execution of the Indenture or thereafter
created, incurred or assumed, (iv) obligations of the Company under interest
rate and currency swaps, caps, floors, collars or similar agreements or
arrangements intended to protect the Company against fluctuations in interest
or currency rates, whether outstanding on the date of execution of the
Indenture or thereafter created, incurred or assumed, and (v) obligations of
the Company under any agreement to lease, or any lease of, any real or
personal property, which obligations, whether outstanding on the date of
execution of the Indenture or thereafter created, incurred or assumed, are
required to be capitalized on the books of the Company in accordance with
generally accepted accounting principles, or guarantees by the Company of
similar obligations of others, and (b) modifications, renewals, extensions and
refundings of any such indebtedness, obligations or guarantees; unless, in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that such indebtedness, obligations or guarantees,
or such modification,
renewal, extension or refunding thereof, is not superior in right of payment
to the Notes; provided, however, that Senior Indebtedness will not be deemed
to include, and the Notes will rank pari passu in right of payment with, any
obligation of the Company to any of its Subsidiaries.

49
<PAGE>

In the event of (a) any insolvency or bankruptcy case or proceeding, or any
receivership, liquidation, reorganization or other similar case or proceeding
in connection therewith, relative to the Company or to its creditors, as such,
or to its assets or (b) any liquidation, dissolution or other winding-up of
the Company, whether total or partial, whether voluntary or involuntary and
whether involving insolvency or bankruptcy, or (c) any assignment for the
benefit of creditors or any other marshaling of assets and liabilities of the
Company, the holders of all Senior Indebtedness will first be entitled to
receive payment in full of all amounts due or to become due thereon or in
respect thereof before the holders of the Notes are entitled to receive any
payment on account of the principal of, or premium, if any, or interest on the
Notes (other than payment (a "Permitted Payment") consisting solely of shares
of stock, securities or indebtedness subordinated at least to the extent of
the Notes provided by a plan of reorganization or adjustment that does not
adversely alter the rights of holders of Senior Indebtedness). Following the
occurrence of any of the events described above, if the Trustee or any holder
of the Notes receives any payment or distribution of assets of the Company of
any kind or character before all Senior Indebtedness is paid in full, then
such payment or distribution (other than a Permitted Payment) will be required
to be paid over or delivered to the trustee in bankruptcy, receiver,
liquidating trustee, custodian, assignee, agent or other person making payment
or distribution of the assets of the Company for application to the payment of
all amounts payable on or in respect of Senior Indebtedness remaining unpaid,
to the extent necessary to pay such amounts in full after giving effect to any
concurrent payment or distribution to or for the holders of Senior
Indebtedness.

The Indenture also provides that in the event there shall have occurred and
be continuing (i) any default in the payment when due of principal of,
premium, if any, or interest on any Senior Indebtedness or (ii) any other
event of default with respect to any Senior Indebtedness, then no payment
shall be made by the Company on account of the principal of, premium, if any,
or interest on the Notes or on account of the purchase or redemption or other
acquisition of the Notes (x) in the case of any event of default described in
clause (i) above, unless and until the Senior Indebtedness to which such
default relates is discharged or such event of default shall have been cured
or waived or shall have ceased to exist or the holders of such Senior
Indebtedness or their agents shall have waived the benefits of this provision,
and (y) in the case of any event of default specified in clause (ii) above,
from the date the Company or the Trustee receives written notice of such
default (a "Senior Default Notice") from the agent for the lenders under the
Credit Facility or the New Credit Facility or any replacement thereof or from
the holders of at least 25% in principal amount of any other kind or category
of Senior Indebtedness to which such default relates or any representative of
such holders until the earlier of (A) 180 days after such date or (B) the
date, if any, on which the Senior Indebtedness to which such default relates
is discharged or such default shall have been cured or waived or shall have
ceased to exist or the holders of such Senior Indebtedness or their agents
shall have waived the benefits of this provision; provided, however, that not
more than one Senior Default Notice is permitted to be given during any period
of 360 consecutive days, regardless of the number of defaults with respect to
Senior Indebtedness during such 360-day period. Subject to the payment in full
of all Senior Indebtedness, the holders of the Notes will be subrogated to the
rights of the holders of Senior Indebtedness to receive payments or
distributions of assets of the Company applicable to Senior Indebtedness until
the Notes are paid in full.

Notwithstanding anything in the Indenture to the contrary, neither the
Trustee nor any holder of Notes may exercise any right either may have to
accelerate the maturity of the Notes at any time when payment of any amount
owing on the Notes is prohibited, in whole or in part, as described in the
preceding paragraphs; provided, however, that such right may nevertheless be
so exercised upon the earliest of the acceleration of the maturity of any
Senior Indebtedness, the exercise by any holder of Senior Indebtedness of any
remedies available to such holder upon a default or event of default with
respect to such Senior Indebtedness or the occurrence of an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization.

By reason of the subordination of the Notes, in the event of insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the holders of the Notes. In addition, the right of the
Company, and, therefore, the right of creditors of the Company (including
Noteholders), to participate in any distribution of assets of any subsidiary
of the Company upon its liquidation or reorganization or otherwise is
necessarily subject to the prior claims of creditors of the subsidiary, except
to the extent that claims of the Company itself as a creditor of the
subsidiary may be recognized.

50
<PAGE>

The Indenture will not limit the amount of other indebtedness or securities
that may be issued by the Company or any of its subsidiaries.

OPTIONAL REDEMPTION

The Notes may not be redeemed by the Company prior to June 5, 2000.
Thereafter, the Notes may be redeemed at the option of the Company, in whole
or in part, at any time and from time to time, upon not less than 15 nor more
than 60 days notice by mail at the applicable redemption prices (expressed in
percentages of principal amount) set forth below.

If redeemed during the twelve-month period beginning June 1 in the year
indicated (June 5 in the case of the year 2000), the redemption price shall
be:

<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2000.................... 104%
2001.................... 103
2002.................... 102
2003.................... 101
</TABLE>

together with interest accrued and unpaid thereon to the date fixed for
redemption. If all accrued and payable interest on the Notes has not been
paid, the Notes may not be redeemed in part and the Company may not purchase
or acquire any Notes otherwise than pursuant to a purchase or exchange offer
made on the same terms to all holders of the Notes.

If less than all the Notes are to be redeemed, the Trustee will select those
to be redeemed by lot or such other method as the Trustee in its discretion
shall deem appropriate and fair. Notice of redemption will be given to holders
of the Notes to be redeemed by first class mail at their last address
appearing on the Register for the Notes.

CONSOLIDATION, MERGER AND SALE OF ASSETS

The Company will not consolidate with or merge into any other person or
convey, transfer or lease its properties and assets substantially as an
entirety to any person, and the Company will not permit any person to
consolidate with or merge into the Company unless (a) if applicable, the
person formed by such consolidation or into which the Company is merged or the
person or corporation which acquires the properties and assets of the Company
substantially as an entirety is a corporation, partnership or trust organized
and validly existing under the laws of the United States or any state thereof
or the District of Columbia and expressly assumes payment of the principal of
and premium, if any, and interest on the Notes and performance and observance
of each obligation of the Company under the Indenture, (b) after consummating
such consolidation, merger, transfer or lease, no Event of Default or event
which, after notice or lapse of time or both, would become an Event of Default
will occur and be continuing, (c) such consolidation, merger, conveyance,
transfer or lease does not adversely affect the validity or enforceability of
the Notes and (d) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger, conveyance, transfer or lease complies with the provisions of the
Indenture.

PURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL

In the event of a Change of Control, each holder of Notes will have the
right, at the holder's option, subject to the terms and conditions of the
Indenture, to require the Company to repurchase all or any part (provided that
the principal amount must be $1,000 or an integral multiple thereof) of the
holder's Notes on the date that is 40 business days after the occurrence of
such Change of Control (the "Repurchase Date") for a repurchase price equal to
100% of the principal amount thereof, plus interest accrued and unpaid thereon
to the Repurchase Date.

51
<PAGE>

Within 20 business days after the occurrence of the Change of Control, the
Company shall mail to the Trustee and to each holder (and to beneficial owners
as required by law) a notice of the occurrence of the Change of Control,
setting forth, among other things, the terms and conditions of, and the
procedures required for exercise of, the holder's right to require the
repurchase of such holder's Notes.

To exercise the repurchase right, a holder must deliver written notice of
such exercise to the Trustee prior to the close of business on the Repurchase
Date, specifying the Notes with respect to which the right of repurchase is
being exercised. Such notice of exercise may be withdrawn by the holder by a
written notice of withdrawal delivered to the Trustee at any time prior to the
close of business on the Repurchase Date.

Under the Indenture, a "Change of Control" is deemed to have occurred at
such time as (i) there shall be consummated a sale of all or substantially all
of the Company's assets as an entirety, (ii) any Acquiring Person has become
such Person or (iii) there shall be consummated any consolidation or merger of
the Company in which the Company is not the continuing or surviving
corporation (other than a consolidation or merger with a wholly owned
subsidiary of the Company in which all shares of Common Stock outstanding
immediately prior to the effectiveness thereof are changed into or exchanged
for the same consideration) or pursuant to which the Common Stock would be
converted into cash, securities or other property, in each case, other than a
consolidation or merger in which the holders of Common Stock immediately prior
to the consolidation or merger have, directly or indirectly, at least a
majority of common stock of the continuing or surviving corporation
immediately after the consolidation or merger; provided, however, that a
Change of Control shall not be deemed to have occurred if the last sale price
of the Common Stock for any five trading days during the ten trading days
immediately preceding the Change of Control is at least equal to 105% of the
conversion price in effect immediately preceding the time of such Change of
Control.

"Acquiring Person" means any person or group (as defined in Section 13(d)(3)
of the Exchange Act) who or which, together with all affiliates and associates
(as defined in Rule 12b-2 under the Exchange Act), becomes the beneficial
owner of shares of Common Stock or other voting securities of the Company
having more than 50% of the total number of votes that may be cast for the
election of directors of the Company; provided, however, that an Acquiring
Person shall not include (w) the Apollo Stockholders and their affiliates, (x)
the Company, (y) any Subsidiary of the Company or (z) any current or future
employee benefit plan of the Company or any Subsidiary of the Company or any
entity holding Common Stock of the Company for or pursuant to the terms of any
such plan. Notwithstanding the foregoing, no person shall become an Acquiring
Person as the result of an acquisition of Common Stock by the Company which,
by reducing the number of shares outstanding, increases the proportionate
number of shares beneficially owned by such Person to more than 50% of the
Common Stock of the Company then outstanding; provided, however, that if a
Person shall become the beneficial owner of 50% or more of the Common Stock of
the Company then outstanding by reason of share purchases by the Company and
shall, after such share purchases by the Company, become the beneficial owner
of any additional shares of Common Stock of the Company, then such Person
shall be deemed to be an Acquiring Person.

The Company will comply with the provisions of Rule 13e-4, Rule 14e-1 and
any other tender offer rules under the Exchange Act which may then be
applicable, and will file Schedule 13E-4 or any other schedule required
thereunder in connection with any offer by the Company to repurchase Notes at
the option of the holders upon a Change of Control.

The Change of Control repurchase feature of the Notes may in certain
circumstances make more difficult or discourage a takeover of the Company and,
thus, the removal of incumbent management. The Change of Control repurchase
feature is a standard term contained in other similar debt offerings, and the
terms of such feature result from negotiations between the Company and the
Underwriters.

The right to require the Company to repurchase Notes as a result of a Change
of Control could create an event of default under Senior Indebtedness of the
Company as a result of which any repurchase could, absent a waiver, be blocked
by the subordination provisions of the Notes. The Company's Board of Directors
may not waive a Change of Control. Failure by the Company to repurchase the
Notes when required will result in an

52
<PAGE>

Event of Default with respect to the Notes whether or not such a repurchase is
permitted by the subordination provisions.

If a Change of Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the Change of Control repurchase
price for all Notes tendered by the holders thereof. The Company's ability to
make such payments may be limited by the terms of its then-existing borrowing
and other agreements.

EVENTS OF DEFAULT

An Event of Default with respect to the Notes is defined in the Indenture as
being default for 30 days in payment of any interest installment of the Notes
(even if such payment is prohibited by the subordination provisions of the
Indenture); default in payment of principal of or premium, if any, on the
Notes either in connection with any redemption or otherwise (even if such
payment is prohibited by the subordination provisions of the Indenture);
default in the payment of the repurchase price in respect of any Note on the
Repurchase Date therefor (even if such payment is prohibited by the
subordination provisions of the Indenture); failure to provide timely notice
of a Change of Control as required by the Indenture; failure to observe or
perform for 45 days after notice thereof any other covenant in the Indenture;
default in respect of any instrument or instruments evidencing or securing
other indebtedness for borrowed money of the Company or any Significant
Subsidiary having an aggregate principal amount of $10,000,000 or more, which
default (i) is caused by a failure to pay principal of or premium, if any, or
interest on such indebtedness after the expiration of any applicable grace or
forbearance period relating to such indebtedness or (ii) results in the
acceleration of such indebtedness prior to its stated maturity, which
acceleration shall not have been rescinded or annulled within 30 days after
notice is given to the Company by the Trustee or to the Company and the
Trustee by the holders of 25% or more in aggregate principal amount of the
Notes; entry of a final judgment or judgments against the Company or any
Significant Subsidiary in the amount of at least $10,000,000 that remain
undischarged and unstayed for a period of 30 days; or certain events of
bankruptcy, insolvency, reorganization, receivership or liquidation involving
the Company or any Significant Subsidiaries.

The Company is required to file with the Trustee annually a written
statement as to the fulfillment of its obligations under the Indenture. The
Indenture provides that the Trustee may withhold notice to the holders of the
Notes of any default (except in payment of principal of, premium, if any, or
interest on the Notes) if the Trustee considers it in the interest of the
holders of the Notes to do so. The Indenture provides that, if an Event of
Default (other than an Event of Default resulting from bankruptcy, insolvency
or reorganization) shall have occurred and be continuing, either the Trustee
or the holders of 25% or more in aggregate principal amount of the Notes may
declare the principal of all the Notes and the interest accrued thereon to be
due and payable immediately, but if the Company shall cure all defaults
(except the nonpayment of principal of and premium, if any, and accrued
interest on Notes that shall have become due by acceleration) and certain
other conditions are met, such declaration may be annulled and past defaults
may be waived by the holders of a majority in aggregate principal amount of
the Notes. Prior to a declaration of acceleration, certain Events of Default
and past defaults may be waived by the holders of a majority in aggregate
principal amount of the Notes. In the case of an Event of Default resulting
from certain events of bankruptcy, insolvency or reorganization, all unpaid
principal of and accrued interest on the Notes then outstanding shall be due
and payable immediately without any declaration or other act on the part of
the Trustee or the holders of Notes.

Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default should occur and be continuing, the
Trustee shall be under no obligation to exercise any of the rights or powers
under the Indenture at the request or direction of any of the Noteholders,
unless such Noteholders have offered to the Trustee reasonable security or
indemnity. Subject to such provision for security or indemnification, the
holders of a majority in aggregate principal amount of the Notes will have the
right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power
conferred on the Trustee, provided that the Trustee shall have the right to
decline to follow any such direction if the Trustee shall be advised by
counsel that the action or proceeding so directed may not lawfully be taken or
the Trustee shall determine that the action or proceeding so directed could
involve the Trustee in personal liability or would be unduly prejudicial to
the rights of the holders not joining in such directions or would conflict
with the Indenture.

53
<PAGE>

MODIFICATION OF THE INDENTURE

The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the holders of not less than a majority of the aggregate
principal amount of the Notes then outstanding, to execute a supplemental
indenture to add provisions to, or change in any manner or eliminate any
provisions of, the Indenture or modify in any manner the rights of the holders
of the Notes, provided that no such supplemental indenture may, among other
things, (1) extend the time for payment of principal of or any premium or
interest on any Note or reduce the principal amount thereof or the interest
thereon or any premium payable upon the redemption thereof or impair the right
of any holder to institute suit for payment of the Notes, or make the
principal thereof or any premium or interest thereon payable in any coin or
currency other than that provided in the Indenture, or modify the
subordination provisions of the Indenture in a manner adverse to the holders
or impair the right to convert the Notes into Common Stock or to require the
Company to repurchase the Notes upon the occurrence of a Change of Control
without the consent of the holder of each outstanding Note so affected, or (2)
reduce the aforesaid percentage of the aggregate principal amount of Notes,
the holders of which must consent to authorize any such supplemental
indenture, without the consent of the holders of all outstanding Notes.

GOVERNING LAW

The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to such state's
conflicts of laws principles.

BOOK-ENTRY

The Notes will be issued in the form of a global note or notes (together,
the "Global Note") deposited with, or on behalf of, The Depository Trust
Company ("DTC") and registered in the name of Cede & Co. as DTC's nominee.
Owners of beneficial interests in the Notes represented by the Global Note
will hold such interests pursuant to the procedures and practices of DTC and
must exercise any rights in respect of their interests (including any right to
convert or require repurchase of their interests) in accordance with those
procedures and practices. Such beneficial owners will not be deemed holders of
Notes, and will not be entitled to any rights under the Global Note or the
Indenture, with respect to the Global Note and the Company and the Trustee,
and any of their respective agents, may treat DTC as the sole holder and owner
of the Global Note.

DTC has advised the Company as follows: DTC is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code, and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC holds securities that its
participants deposit with DTC. DTC also facilitates the settlement among
participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct participants include securities brokers and
dealers (including the Underwriters), banks, trust companies, clearing
corporations, and certain other organizations. DTC is owned by a number of its
direct participants and by the New York Stock Exchange, Inc., the American
Stock Exchange, Inc., and the National Association of Securities Dealers, Inc.
Access to the DTC system is also available to others such as securities
brokers and dealers, banks, and trust companies that clear through or maintain
a custodial relationship with a direct participant, either directly or
indirectly. The rules applicable to DTC and its participants are on file with
the Securities and Exchange Commission.

Unless and until they are exchanged in whole or in part for certificated
Notes in definitive form as set forth below, the Global Note may not be
transferred except as a whole by DTC to a nominee of DTC, or by a nominee of
DTC to DTC or another nominee of DTC.

The Notes represented by the Global Note will not be exchangeable for
certificated Notes, provided that if DTC is at any time unwilling, unable or
ineligible to continue as depositary, the Company will issue individual Notes
in definitive form in exchange for the Global Note. In addition, the Company
may at any time and in its

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<PAGE>

sole discretion determine not to have a Global Note, and, in such event, will
issue individual Notes in definitive form in exchange for the Global Note
previously representing all such Notes. In such instances, an owner of a
beneficial interest in a Global Note will be entitled to physical delivery of
Notes in definitive form equal in principal amount to such beneficial interest
and to have such Notes registered in its name. Individual Notes so issued in
definitive form will be issued in denominations of $1,000 and any larger
amount that is an integral multiple of $1,000 and will be issued in registered
form only, without coupons.

Payments of principal of and interest on the Notes will be made by the
Company through the Trustee to DTC or its nominee, as the case may be, as the
registered owner of the Global Note. Neither the Company nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests of the Global
Note or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests. The Company expects that DTC, upon receipt of
any payment of principal or interest in respect of the Global Note, will
credit the accounts of the related participants with payment in amounts
proportionate to their respective holdings in principal amount of beneficial
interest in the Global Note as shown on the records of DTC. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Note will be governed by standing customer instructions and customary
practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such participants.

So long as the Notes are represented by a Global Note, DTC or its nominee
will be the only entity that can exercise a right to repayment pursuant to the
holder's option to elect repayment of its Notes or the right of conversion of
the Notes. Notice by participants or by owners of beneficial interests in a
Global Note held through such participants of the exercise of the option to
elect repayment, or the right of conversion, of beneficial interests in Notes
represented by the Global Note must be transmitted to DTC in accordance with
its procedures on a form required by DTC and provided to participants. In
order to ensure that DTC's nominee will timely exercise a right to repayment,
or the right of conversion, with respect to a particular Note, the beneficial
owner of such Notes must instruct the broker or other participant through
which it holds an interest in such Notes to notify DTC of its desire to
exercise a right to repayment, or the right of conversion. Different firms
have different cut-off times for accepting instructions from their customers
and, accordingly, each beneficial owner should consult the broker or other
participant through which it holds an interest in a Note in order to ascertain
the cut-off time by which such an instruction must be given in order for
timely notice to be delivered to DTC. The Company will not be liable for any
delay in delivery of such notice to DTC.

LISTING

The Notes have been authorized for listing on the New York Stock Exchange.

DESCRIPTION OF CAPITAL STOCK

GENERAL

Pursuant to the Company's Restated Certificate of Incorporation (the
"Converse Certificate"), the authorized capital stock of the Company consists
of 50 million shares of Common Stock, without par value, and 10 million shares
of Preferred Stock, without par value. The Common Stock has a stated value of
$1.00 per share.

As of March 29, 1997, there were 17,250,056 shares of Common Stock
outstanding held of record by approximately 2,300 persons, and 1,666,300
shares of Common Stock reserved for issuance upon exercise of stock options
granted to employees, consultants and non-employee directors. All of the
outstanding shares of Common Stock are fully paid and non-assessable. No
shares of Preferred Stock have been issued by Converse, and the Company has no
present intention to issue shares of Preferred Stock.

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<PAGE>

COMMON STOCK

Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders and are not entitled to cumulate
votes for the election of directors. Subject to preferences that may be
applicable to any outstanding Preferred Stock, holders of shares of Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. In the event of liquidation, dissolution or winding up of
Converse, the holders of shares of Common Stock are entitled to share ratably
in all assets remaining after payment of liabilities, subject to prior
distribution rights of Preferred Stock, if any, then outstanding. Shares of
Common Stock have no preemptive, conversion or other subscription rights and
there are no redemption or sinking fund provisions applicable to the Common
Stock.

Converse is not subject to the provisions of Section 203 of the Delaware
General Corporation Law ("DGCL"). Subject to certain exceptions, Section 203
of the DGCL prohibits a publicly-held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the interested stockholder attained such status
with the approval of the board of directors of Converse or unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
interested stockholder is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.

PREFERRED STOCK

The Converse board of directors is authorized to provide for the issuance of
such Preferred Stock in one or more series and to fix the dividend rate,
conversion rights, voting rights, rights and terms of redemption, redemption
price or prices, liquidation preferences and qualifications, limitations and
restrictions thereof with respect to each series, without any further vote or
action by the stockholders of Converse. Any Preferred Stock that is issued
could have terms that adversely affect the holders of the Common Stock.
Furthermore, because the terms of the Preferred Stock may be fixed by the
Converse board of directors without stockholder action, the Preferred Stock
could be issued quickly with terms calculated to defeat a proposed takeover of
Converse, or to make the removal of management of Converse more difficult. See
"Risk Factors--Anti-Takeover Provisions."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Boston EquiServe
Limited Partnership, Canton, Massachusetts.

LIMITATION OF LIABILITY

As permitted by the DGCL, the Converse Certificate provides that directors
of the Company shall not be personally liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Section 174 of the DGCL, relating to prohibited dividends or
distributions or the repurchase or redemption of stock, or (iv) for any
transaction from which the director derives an improper personal benefit.

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<PAGE>

CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES

The following is a summary of certain United States federal income and
estate tax considerations relating to the purchase, ownership and disposition
of the Notes and the Common Stock into which Notes may be converted, but does
not purport to be a complete analysis of all the potential tax considerations
relating thereto. This summary is based on laws, regulations, rulings and
decisions now in effect, all of which are subject to change. This summary
deals only with holders that will hold Notes and Common Stock as capital
assets and does not address tax considerations applicable to investors that
may be subject to special tax rules, such as banks, tax-exempt organizations,
insurance companies, dealers in securities or currencies, persons that will
hold the Notes or Common Stock as part of an integrated investment (including
a "straddle") comprised of Notes or shares of Common Stock and one or more
other positions, persons that have a "functional currency" other than the U.S.
dollar or holders of Notes that did not acquire the Notes in the initial
distribution thereof at their original issue price. In addition, the following
discussion does not address foreign, state or local tax consequences.
Prospective investors are urged to consult their tax advisors regarding the
U.S. federal tax consequences of acquiring, holding and disposition of Notes
and Common Stock, as well as any tax consequences that may arise under the
laws of any foreign, state, local or other taxing jurisdiction.

UNITED STATES HOLDERS

As used herein, the term "United States Holder" means the beneficial owner
of a Note or Common Stock that is a United States person. A "United States
person" is (1) a citizen or resident of the United States, (2) an entity
created or organized in or under the laws of the United States or any
political subdivision thereof that is classified as a corporation or as a
partnership, (3) an estate the income of which is subject to United States
federal income taxation regardless of its source, or (4) a trust if (i) a U.S.
court is able to exercise primary supervision over the trust's administration
and (ii) one or more U.S. fiduciaries have the authority to control all the
trust's substantial decisions. The term "United States" means the United
States of America (including the States and the District of Columbia).

PAYMENT OF INTEREST

Interest on a Note generally will be includible in the income of a United
States Holder as ordinary income at the time such interest is received or
accrued, in accordance with such holder's method of accounting for United
States federal income tax purposes.

SALE, EXCHANGE OR REDEMPTION OF THE NOTES

Upon the sale, exchange or redemption of a Note, a United States Holder
generally will recognize capital gain or loss equal to the difference between
(i) the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (except to the extent such amount
is attributable to accrued interest income, which is taxable as ordinary
income) and (ii) such holder's adjusted tax basis in the Note. A United States
Holder's adjusted tax basis in a Note generally will equal the cost of the
Note to such holder. Such capital gain or loss will be long-term capital gain
or loss if the holder's holding period in the Note was more than one year at
the time of sale, exchange or redemption.

CONVERSION OF THE NOTES

A United States Holder generally will not recognize any income, gain, or
loss upon conversion of a Note into Common Stock except with respect to cash
received in lieu of a fractional Share of Common Stock. Such holder's basis in
the Common Stock received on conversion of a Note will be the same as such
holder's adjusted tax basis in the Note at the time of conversion (reduced by
any basis allocable to a fractional share interest), and the holding period
for the Common Stock received on conversion will generally include the holding
period of the Note converted.

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<PAGE>

Cash received in lieu of a fractional share of Common Stock upon conversion
will be treated as a payment in exchange for the fractional share of Common
Stock. Accordingly, the receipt of cash in lieu of a fractional
share of Common Stock generally should result in capital gain or loss
(measured by the difference between the cash received for the fractional share
and the United States Holder's adjusted basis in the fractional share).

ADJUSTMENT OF CONVERSION PRICE

If at any time (a) the Company makes a distribution of property to its
stockholders or purchases Common Stock in a tender offer and such distribution
or purchase would be taxable to such stockholders as a dividend for federal
income tax purposes (e.g., distributions of evidences of indebtedness or
assets of the Company but generally not stock dividends or rights to subscribe
for capital stock) and, pursuant to the antidilution provisions of the
Indenture, the conversion price of the Notes is reduced or (b) the conversion
price is reduced at the discretion of the Company, such reduction may be
deemed to be the receipt of taxable income by holders of the Notes. Holders of
Notes therefore could have taxable income as a result of an event in which
they receive no cash or property. Similarly, a failure to adjust the
conversion price of the Notes to reflect a stock dividend or other event
increasing the proportionate interest of the holders of outstanding Company
Common Stock could in some circumstances give rise to deemed dividend income
to United States Holders of such Common Stock.

DIVIDENDS ON THE COMMON STOCK

Dividends paid on the Common Stock generally will be includible in the
income of a United States Holder as ordinary income to the extent of the
Company's current or accumulated earnings and profits. Subject to certain
limitations, a corporate taxpayer holding Common Stock that receives dividends
thereon generally will be eligible for a dividends received deduction equal to
70 percent of the dividends received. Under legislation proposed as part of
the Clinton administration's fiscal year 1998 budget proposal, the 70 percent
dividends received deduction would be reduced to 50 percent for dividends paid
or accrued more than 30 days after the date of enactment of the legislation.
It is not clear whether such legislation would be enacted in the current form.

SALE, EXCHANGE OR REDEMPTION OF COMMON STOCK

Upon the sale, exchange or redemption of shares of Common Stock, a United
States Holder generally should recognize capital gain or loss equal to the
difference between (i) the amount of cash proceeds and the fair market value
of any property received on the sale, exchange or redemption and (ii) such
holder's adjusted tax basis in the Common Stock. Such capital gain or loss
will be long-term capital gain or loss if the holder's holding period in the
Common Stock was more than one year at the time of sale, exchange or
redemption.

INFORMATION REPORTING AND BACKUP WITHHOLDING TAX

In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on a Note, payments of dividends on
Common Stock, and payments of the proceeds of the sale of a Note or Common
Stock to certain non-corporate United States holders, and a 31% backup
withholding tax may apply to such payments if the United States Holder (i)
fails to furnish or certify its correct taxpayer identification number to the
payer in the manner required, (ii) is notified by the Internal Revenue Service
(the "IRS") that it has failed to report payments of interest and dividends
properly, or (iii) under certain circumstances, fails to certify that it has
not been notified by the IRS that it is subject to backup withholding for
failure to report interest and dividend payments. Any amounts withheld under
the backup withholding rules from a payment to a United States Holder will be
allowed as a credit against such holder's United States federal income tax
liability and may entitle the holder to a refund.

NON-UNITED STATES HOLDERS

Subject to the discussion of backup withholding below, payments of interest
on the Notes to, or on behalf of, any beneficial owner of a Note that is not a
United States Holder (a "Non-U.S. Holder") will not be subject to U.S. federal
income or withholding taxes, provided that such interest income is not
effectively connected with

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<PAGE>

a United States trade or business of the Non-U.S. Holder and provided that (i)
such Non-U.S. Holder does not
actually or constructively own 10 percent or more of the total combined voting
power of all classes of stock of the Company, (ii) such Non-U.S. Holder is not
a controlled foreign corporation for U.S. tax purposes that is related to the
Company actually or constructively through stock ownership and (iii) the Non-
U.S. Holder certifies, under penalties of perjury, that it is not a United
States person and provides its name and address in compliance with applicable
requirements.

Except to the extent that an applicable treaty otherwise provides, a Non-
U.S. Holder generally will be taxed in the same manner as a United States
Holder with respect to interest paid on the Notes if the interest income is
effectively connected with a United States trade or business of the Non-U.S.
Holder. Effectively connected interest received by a corporate Non-U.S. Holder
may also, under certain circumstances, be subject to an additional "branch
profits tax" at a 30% rate (or, if applicable, a lower treaty rate). Even
though such effectively connected interest is subject to income tax, and may
be subject to the branch profits tax, it is not subject to withholding tax if
the holder delivers IRS Form 4224 to the payor.

Any capital gain realized on the sale, exchange, redemption or other
disposition of a Note or of shares of Common Stock (including the receipt of
cash in lieu of fractional shares upon conversion of a Note into shares of
Common Stock) by a Non-U.S. Holder will not be subject to United States
federal income or withholding taxes unless (1) in the case of an individual,
such holder is present in the United States for 183 days or more in the
taxable year of the sale, exchange, redemption, or other disposition or
receipt and certain other conditions are met, (2) the gain is effectively
connected with a United States trade or business of the Non-U.S. Holder, (3)
the holder is subject to tax pursuant to the provisions of the Code applicable
to certain United States expatriates, or (4) the Company is a United States
real property holding corporation. The Company does not believe that it is or
is likely to become a United States real property holding corporation.

Except as described above with respect to the receipt of cash in lieu of
fractional shares by certain Non-U.S. Holders upon conversion of a Note, no
United States federal income or withholding taxes will be imposed upon the
conversion of a Note into shares of Common Stock.

Dividends paid (or deemed paid, as described under "United States Holders--
Adjustment of Conversion Price") on shares of Common Stock held by a Non-U.S.
Holder (excluding dividends that are effectively connected with the conduct of
a trade or business in the United States by such holder) will be subject to
withholding of United States federal income tax at a 30 percent rate (or lower
rate provided under any applicable tax treaty, assuming the holder of the
Common Stock satisfies any certification or documentation requirements
necessary to claim the benefits of such treaty). Except to the extent that an
applicable tax treaty otherwise provides, a Non-U.S. Holder will be taxed in
the same manner as a United States Holder on dividends paid (or deemed paid)
that are effectively connected with the conduct of a trade or business in the
United States by the Non-U.S. Holder. If such Non-U.S. Holder is a foreign
corporation, it may also be subject to a United States branch profits tax at a
30% rate or such lower rate as may be specified by an applicable income tax
treaty. Even though such effectively connected dividends are subject to income
tax, and may be subject to the branch profits tax, they will not be subject to
U.S. withholding tax if the holder delivers IRS Form 4224 to the payor.

Payments made on a Note or shares of Common Stock and proceeds from the sale
of a Note or shares of Common Stock received by a Non-U.S. Holder will
generally not be subject to a backup withholding tax of 31% or to information
reporting requirements unless, in general, the holder fails to comply with
certain reporting procedures, the payment is received by a U.S. office of a
U.S. or foreign broker or the holder otherwise fails to establish an exemption
from such tax or reporting requirements under applicable provisions of the
Code.

On April 15, 1996, the Internal Revenue Service released proposed revisions
(the "Proposed Regulations") to the regulations interpreting the withholding
tax, information reporting and backup withholding tax rules described above.
In general, the Proposed Regulations would require certain Non-U.S. Holders to
provide additional information in order to establish an exemption from or
reduce the rate of withholding tax or backup withholding tax, and in
particular would require that foreign partnerships and partners of a foreign
partnership

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<PAGE>

provide certain information and comply with certain certification requirements
not required under existing law.
The Proposed Regulations are proposed generally to be effective for payments
made after December 31, 1997. It is not possible to predict whether, or in
what form, the Proposed Regulations ultimately will be adopted.

A Note will not be subject to United States federal estate tax as a result
of the death of a holder who is not a citizen or resident of the United States
at the time of death, provided that such holder did not at the time of death
actually or constructively own 10 percent or more of the combined voting power
of all classes of stock of the Company and, at the time of such holder's
death, payments of interest on such Note would not have been effectively
connected with the conduct by such holder of a trade or business in the United
States. Shares of Common Stock held by an individual at the time of the
individual's death (or previously transferred subject to certain retained
rights or powers) will be subject to United States federal estate tax unless
otherwise provided by an applicable estate tax treaty.

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UNDERWRITING

Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), each of the
underwriters named below (the "Underwriters"), has severally agreed to
purchase from the Company the principal amount of Notes set forth opposite the
name of such Underwriter below:

<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF NOTES
- ------------ ----------------
<S> <C>
Smith Barney Inc............................................... $17,500,000
Dillon, Read & Co. Inc......................................... 17,500,000
Donaldson, Lufkin & Jenrette Securities Corporation............ 17,500,000
Goldman, Sachs & Co............................................ 17,500,000
-----------
Total........................................................ $70,000,000
===========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by counsel and to certain
other conditions. The Underwriters are obligated to take and pay for all of
the Notes offered hereby (other than those covered by the over-allotment
option described below) if any such Notes are purchased.

The Underwriters initially propose to offer part of the Notes offered hereby
directly to the public at the public offering price set forth on the cover
page of this Prospectus and part of the Notes offered hereby to certain
dealers at a price which represents a concession not in excess of 1.95% of the
principal amount per Note under the price to public. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of 0.25% of
the principal amount per Note to certain other dealers. After the Offering,
the public offering price and such concessions may be changed by the
Underwriters.

The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to $10,000,000 principal
amount of additional Notes at the public offering price set forth on the cover
page hereof less underwriting discounts and commissions. The Underwriters may
exercise such option to purchase additional Notes solely for the purpose of
covering over-allotments, if any, incurred in connection with the sales of the
Notes offered hereby. To the extent such option is exercised, each Underwriter
will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional Notes as the principal
amount of Notes set forth opposite such Underwriter's name in the preceding
Underwriters table bears to the total principal amount of Notes in such table.

The Company, certain of its directors and officers and the Apollo
Stockholders have agreed that, for a period of 90 days from the date of this
Prospectus, they will not, without the prior written consent of Smith Barney
Inc., offer, sell, contract to sell, or otherwise dispose of, any shares of
Common Stock (or any securities convertible into or exercisable or
exchangeable for, Common Stock), or grant any options or warrants to purchase
Common Stock, except in certain circumstances.

In connection with the Offering and in compliance with applicable law, the
Underwriters may effect transactions which stabilize or maintain the market
price of the Notes, the Common Stock, or both at levels above those which
might otherwise prevail in the open market. Specifically, the Underwriters may
overallot in connection with the Offering creating a short position in the
Notes for their own account. For the purposes of covering a syndicate short
position or stabilizing the price of the Notes, the Underwriters may place
bids for the Notes, the Common Stock, or both or effect purchases of the
Notes, the Common Stock, or both in the open market. A syndicate short
position may also be covered by exercise of the over-allotment option
described above. Finally, the Underwriters may impose a penalty bid on certain
Underwriters and dealers. This means that the underwriting syndicate may
reclaim selling concessions allowed to an Underwriter or a dealer for
distributing the Notes in the Offering if the syndicate repurchases previously
distributed Notes in transactions to cover

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<PAGE>

syndicate short positions, in stabilization transactions or otherwise. The
Underwriters are not required to engage in any of these activities and any
such activities, if commenced, may be discontinued at any time.

Smith Barney Inc. has from time to time performed various investment banking
services for the Company. In 1996, Smith Barney Inc. provided financial
advisory services to the Company and received customary fees in respect of
such services.

The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended.

LEGAL MATTERS

The validity of the Notes offered hereby and certain legal matters with
respect to the Company will be passed upon by Morgan, Lewis & Bockius LLP,
Philadelphia, Pennsylvania. Certain legal matters will be passed upon for the
Underwriters by Latham & Watkins, New York, New York.

EXPERTS

The consolidated financial statements of Converse Inc. and subsidiaries as
of December 28, 1996 and December 30, 1995 and for the years then ended have
been included herein and in the Registration Statement (as defined below) in
reliance upon the report of Price Waterhouse LLP, independent accountants as
set forth in their report also included herein upon the authority of said firm
as experts in accounting and auditing. The consolidated financial statements
of Converse Inc. and subsidiaries for the year ended December 31, 1994 have
been included herein and in the Registration Statement in reliance upon the
report of KPMG Peat Marwick LLP, independent accountants, as set forth in
their report also included herein and upon the authority of said firm as
experts in accounting and auditing.

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ADDITIONAL INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities of the Commission, Judiciary Plaza,
450 Fifth Street, N.W., Washington, DC 20549, as well as at the following
Commission Regional Offices: Seven World Trade Center, 13th Floor, New York,
NY 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511. Copies can be obtained from the Commission by mail at
prescribed rates. Requests should be directed to the Commission's Public
Reference Branch, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549. Such material can be inspected and copied at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York, 10005, on which the
Company's Common Stock is listed. Such material may also be accessed
electronically by means of the Commission's home page on the Internet
(http://www.sec.gov).

This Prospectus constitutes a part of a registration statement on Form S-3
(herein, together with all exhibits thereto, referred to as the "Registration
Statement") filed by the Company with the Commission under the Securities Act
of 1933, as amended (the "Securities Act"), with respect to the securities
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. Reference is
hereby made to the Registration Statement and to the exhibits thereto for
further information with respect to the Company and the securities offered
hereby. Copies of the Registration Statement and the exhibits thereto are on
file at the offices of the Commission and may be obtained upon payment of the
prescribed fee or may be examined without charge at the public reference
facilities of the Commission described above. Statements contained herein
concerning the provisions of documents are necessarily summaries of such
documents, and each statement is qualified in its entirety by reference to the
copy of the applicable document filed with the Commission.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission (File No.
I-13430) are incorporated by reference in this Prospectus:

(1) Annual Report on Form 10-K for the year ended December 28, 1996, as
amended by Form 10-K/A-1 filed with the Commission on May 15, 1997;

(2) Quarterly Report on Form 10-Q for the quarter ended March 29, 1997;

(3) Current Report on Form 8-K filed April 17, 1997; and

(4) the description of the Company's Common Stock contained in its Form
10/A, Amendment No. 2, filed with the Commission on November 23, 1994.

All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the Offerings shall be deemed to be incorporated by
reference into this Prospectus.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.

This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents (not including exhibits to the
documents incorporated by reference unless such exhibits are specifically
incorporated by reference into the information that the Prospectus
incorporates) are available without charge to each person to whom a Prospectus
is delivered upon written or oral request. Requests should be directed to
Converse Inc., One Fordham Road, North Reading, Massachusetts 01864,
Attention: Secretary (telephone number (508) 664-1100).

63
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants 1995 and 1996......................... F-2
Independent Auditors' Report 1994....................................... F-3
Consolidated Balance Sheet.............................................. F-4
Consolidated Statement of Operations.................................... F-5
Consolidated Statement of Cash Flows.................................... F-6
Consolidated Statement of Stockholders' Equity (Deficiency)............. F-7
Notes to Consolidated Financial Statements.............................. F-8
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheet as of March 29, 1997 .............. F-30
Condensed Consolidated Statement of Operations for the Three Months
Ended March 30, 1996 and March 29, 1997 ............................... F-31
Condensed Consolidated Statement of Cash Flows for the Three Months
Ended March 30, 1996 and March 29, 1997 ............................... F-32
Notes to Consolidated Financial Statements ............................. F-33
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Stockholders of Converse Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, cash flows and stockholders' equity
(deficiency) present fairly, in all material respects, the financial position
of Converse Inc. and its subsidiaries at December 30, 1995 and December 28,
1996, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.

Price Waterhouse LLP

Boston, Massachusetts
February 19, 1997, except as to Note 16, which is as of March 14, 1997

F-2
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Converse Inc.:

We have audited the consolidated statements of operations, cash flows and
stockholders' equity (deficiency) of Converse Inc. and subsidiaries
("Converse") for the year ended December 31, 1994. These consolidated
financial statements are the responsibility of Converse's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and the
cash flows of Converse for the year ended December 31, 1994 in conformity with
generally accepted accounting principles.

KPMG Peat Marwick LLP

Boston, Massachusetts
February 15, 1995

F-3
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................ $ 2,738 $ 5,908
Restricted cash.......................... 443 1,354
Receivables, less allowances of $2,237
and $1,994, respectively................ 61,688 61,546
Inventories (Note 5)..................... 81,903 86,799
Refundable income taxes (Note 10)........ 11,377 582
Prepaid expenses and other current assets
(Note 10)............................... 21,059 20,383
-------- --------
Total current assets................... 179,208 176,572
Asset held for sale (Note 4)............... 3,066 --
Net property, plant and equipment (Note
6)........................................ 15,521 17,849
Other assets (Note 10)..................... 26,712 28,182
-------- --------
$224,507 $222,603
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
------------------------------------
Current liabilities:
Short-term debt (Note 7)................. $ 13,906 $ 13,421
Current maturities of long-term debt
(Note 9)................................ 6,324 117,765
Accounts payable......................... 34,208 49,503
Accrued expenses (Note 8)................ 33,295 25,124
Income taxes payable (Note 10)........... 1,795 3,407
-------- --------
Total current liabilities.............. 89,528 209,220
Long-term debt (Note 9).................... 112,824 9,644
Current assets in excess of reorganization
value (Note 2)............................ 34,454 32,376
Deferred postretirement benefits other than
pensions (Note 11)........................ 10,386 10,231
Commitments and contingencies (Note 14)
Stockholders' equity (deficiency):
Common stock, $1.00 stated value,
50,000,000 shares authorized, 16,692,156
and 17,213,157 shares issued and
outstanding at December 30, 1995 and
December 28, 1996, respectively......... 16,692 17,213
Preferred stock, no par value, 10,000,000
shares authorized, none issued and
outstanding............................. -- --
Additional paid-in capital............... 3,528 5,392
Retained earnings (deficit).............. (41,830) (60,265)
Foreign currency translation adjustment.. (1,075) (1,208)
-------- --------
Total stockholders' equity
(deficiency).......................... (22,685) (38,868)
-------- --------
$224,507 $222,603
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales............... $437,307 $407,483 $349,335
Cost of sales........... 286,555 293,948 263,098
-------- -------- --------
Gross profit............ 150,752 113,535 86,237
Selling, general and
administrative
expenses............... 128,876 146,332 114,888
Royalty income.......... 14,212 17,257 27,638
Restructuring expense
(credit) (Note 4)...... -- 14,182 (1,177)
-------- -------- --------
Earnings (loss) from
operations............. 36,088 (29,722) 164
Loss (credit) on
investment in
unconsolidated
subsidiary (Note 3).... -- 52,160 (1,362)
Interest expense........ 7,423 14,043 17,776
Other expense, net (Note
15).................... 504 3,966 6,319
-------- -------- --------
Earnings (loss) before
income taxes........... 28,161 (99,891) (22,569)
Income tax expense
(benefit) (Note 10).... 10,565 (28,144) (4,134)
-------- -------- --------
Net earnings (loss)..... $ 17,596 $(71,747) $(18,435)
Net (loss) per share
(Note 2)............... $ (4.30) $ (1.10)
======== ========
Pro forma net earnings
per share (Note 2)..... $ 0.96
========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from
operating activities:
Net earnings (loss)... $ 17,596 $(71,747) $(18,435)
Adjustments to
reconcile net
earnings (loss) to
net cash provided by
(required for)
operating activities:
Loss on investment in
unconsolidated
subsidiary, less cash
payments of $28,763
in Fiscal 1995 and
$3,439 in Fiscal
1996................. -- 23,397 (4,801)
Provision for
restructuring
actions, less cash
payments of $1,230 in
Fiscal 1995 and
$5,316 in Fiscal
1996................. -- 12,952 (6,493)
Depreciation of
property, plant and
equipment............ 1,493 2,744 3,100
Amortization of
intangible assets.... 148 471 539
Amortization of
current assets in
excess of
reorganization
value................ (2,077) (2,078) (2,078)
Deferred income
taxes................ 326 (18,551) (5,614)
Changes in assets and
liabilities:
Receivables........... (6,438) 7,940 (759)
Inventories........... (15,644) 18,546 (5,844)
Refundable income
taxes................ -- (11,377) 10,795
Prepaid expenses and
other current
assets............... (5,453) 1,627 64
Accounts payable and
accrued expenses..... (718) 912 16,889
Income taxes payable.. (747) 223 1,612
Other long-term assets
and liabilities...... 10 (966) 3,009
-------- -------- --------
Net cash required
for operating
activities......... (11,504) (35,907) (8,016)
-------- -------- --------
Cash flows from
investing activities:
Proceeds from disposal
of assets............ 6 -- 5,101
Additions to property,
plant and equipment.. (8,520) (5,760) (5,305)
-------- -------- --------
Net cash used by
investing
activities......... (8,514) (5,760) (204)
-------- -------- --------
Cash flows from
financing activities:
Net proceeds from
short-term debt...... 5,813 7,861 231
Net proceeds from the
A Facility........... 37,087 32,417 19,963
Proceeds from
(payments on) the B
Facility............. 40,000 -- (11,702)
Payments made in
conjunction with the
Distribution......... (70,313) -- --
Net proceeds from
exercise of stock
options.............. -- -- 2,385
Net capital
contribution from
Furniture Brands..... 9,072 -- --
-------- -------- --------
Net cash provided by
financing
activities......... 21,659 40,278 10,877
-------- -------- --------
Effect of foreign
currency rate
fluctuations on cash
and cash equivalents... -- (865) 513
-------- -------- --------
Net increase (decrease)
in cash and cash
equivalents............ 1,641 (2,254) 3,170
Cash and cash
equivalents at
beginning of period.... 3,351 4,992 2,738
-------- -------- --------
Cash and cash
equivalents at end of
period................. $ 4,992 $ 2,738 $ 5,908
======== ======== ========
Supplemental
disclosures:
Cash payments for
(refunds of) income
taxes, net........... $ 10,469 $ 5,081 $(10,150)
======== ======== ========
Cash payments for
interest............. $ 7,282 $ 12,276 $ 13,283
======== ======== ========
Non cash activities:
Contributions from
Furniture Brands in the
form of property, plant
and equipment.......... $ 6,425 $ -- $ --
======== ======== ========
Issuance of notes for
Apex acquisition....... $ -- $ 9,644 $ --
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL RETAINED CURRENCY TOTAL
COMMON PAID-IN EARNINGS INTER-COMPANY TRANSLATION STOCKHOLDERS'
STOCK CAPITAL (DEFICIT) CAPITAL ACCOUNT ADJUSTMENT (DEFICIENCY)
------- ---------- --------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1994................... $ 1,000 $ 3,926 $ 13,841 $(5,251) $(3,246) $ 10,270
Net earnings............ 17,596 17,596
Foreign currency
translation............ 1,624 1,624
Adjustment to reflect
common stock at stated
value.................. 15,692 (14,172) (1,520)
Other capital activity
(Note 15).............. 10,246 5,251 15,497
------- ------- -------- ------- ------- --------
Balance, December 31,
1994................... 16,692 -- 29,917 -- (1,622) 44,987
======= ======= ======== ======= ======= ========
Net loss................ (71,747) (71,747)
Foreign currency
translation............ 547 547
Issuance of common stock
warrants (Note 3)...... 3,528 3,528
------- ------- -------- ------- ------- --------
Balance, December 30,
1995................... 16,692 3,528 (41,830) -- (1,075) (22,685)
======= ======= ======== ======= ======= ========
Net loss................ (18,435) (18,435)
Foreign currency
translation............ (133) (133)
Exercise of common
stock options.......... 521 1,864 2,385
------- ------- -------- ------- ------- --------
Balance, December 28,
1996................... $17,213 $ 5,392 $(60,265) -- $(1,208) $(38,868)
======= ======= ======== ======= ======= ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. SUMMARY OF BUSINESS OPERATIONS

Converse Inc. ("Converse" or the "Company") is a leading global designer,
manufacturer and marketer of high quality athletic footwear for men, women,
and children. The Company is also a global licensor of sports apparel,
accessories and selected footwear. Prior to November 17, 1994, Converse was a
wholly-owned subsidiary of Furniture Brands International, Inc. ("Furniture
Brands"), which until March 1, 1996 was named INTERCO INCORPORATED. Converse's
principal markets are the United States, Europe and the Pacific Rim.

Distribution

On November 17, 1994, Furniture Brands distributed to the holders of
Furniture Brands common stock all outstanding shares of common stock of
Converse (the "Distribution"). The Distribution was part of a series of
transactions that also included Converse entering into a $200,000 secured
credit facility (the "Credit Facility") with BT Commercial Corporation
("BTCC"), as agent, and certain other institutional lenders (collectively, the
"Banks") and (A) using $75,000 to repay an allocated portion of the
outstanding joint and several indebtedness of Furniture Brands and its
domestic subsidiaries issued in connection with their 1992 plan of
reorganization and to repay an $8,000 industrial revenue bond and (B) using
$5,000 of seasonal working capital borrowings under the Credit Facility, which
was repaid in full prior to December 31, 1994, to repay other existing
seasonal indebtedness. Subsequently, the total amount of the Credit Facility
has been adjusted in connection with certain amendments to the facility. See
Note 9.

1996 Operating Results and 1997 Outlook

During 1996, Converse was adversely affected by weak U.S. and international
market conditions and a decline in gross profit attributable to weak sell-
through of certain products, sales of discontinued products and reduced
manufacturing utilization and efficiencies. The 1996 operating results were
favorably impacted by a reduction of selling, general and administrative
expenses of approximately $31,400 as a result of the Company's previously
announced restructuring plan and strong global royalty income growth. The
Company's earnings from operations in Fiscal 1996 were approximately $200
compared to an operating loss of approximately $29,700 in the previous fiscal
year.

Strategies implemented by the new management team during late 1995 and 1996
are beginning to yield positive results. The Company anticipates growth in
future sales and profitability resulting from: (i) increasing penetration of
the core categories; (ii) enhancing retail distribution; (iii) improving
margins; (iv) continuing focus on licensing opportunities; and (v) increasing
international sales.

As discussed in Note 9, the Company's Credit Facility expires on November
17, 1997 and the Collateral Letter of Credit expires on June 30, 1997. As a
result, total indebtedness outstanding at December 28, 1996 has been
classified as current within the December 28, 1996 consolidated balance sheet.

Converse expects that demands on its liquidity and credit resources will
continue to be significant throughout 1997. The Company is currently pursuing
various financing alternatives to address these liquidity constraints.

F-8
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

2. SIGNIFICANT ACCOUNTING POLICIES

The major accounting policies of Converse are set forth below.

Fiscal Year

Converse's fiscal year end is the Saturday closest to December 31 in each
year.

Principles of Consolidation

The consolidated financial statements include the accounts of Converse and
its subsidiaries. All material intercompany transactions are eliminated in
consolidation.

As more fully described in Note 3, effective May 18, 1995, Converse acquired
100% of the outstanding common stock of Apex One, Inc. ("Apex"). On August 11,
1995, Converse stopped funding the operations of Apex. As a result of this
decision, Apex was unable to meet its obligations, ceased operations and on
September 14, 1995 filed for Chapter 11 bankruptcy protection. Because
Converse's control of Apex was temporary in nature, its investment in Apex has
been recorded as an unconsolidated equity investment. Accordingly, the
consolidated financial statements do not include the accounts of Apex.

Accounting Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Converse considers all short-term investments with an original maturity of
three months or less to be cash equivalents.

Restricted Cash

Restricted cash represents interest payments into escrow on outstanding
subordinated notes issued in conjunction with the acquisition of Apex. See
Note 16.

Fair Value of Financial Instruments

The carrying amount of cash, cash equivalents, trade receivables and trade
payables approximates fair value because of the short maturity of these
financial instruments. The fair value of Converse's long-term instruments is
estimated based on market values for similar instruments and approximates
their carrying value at December 30, 1995 and December 28, 1996. As described
in Note 3, the Apex subordinated notes and common stock warrants are carried
within the accompanying consolidated balance sheet at their originally
recorded amounts of $9,644 and $3,528, respectively. In the first quarter of
1997, the Company prevailed in a breach of warranty lawsuit brought against
several former owners of Apex. Subsequently, the Company entered into
settlement agreements with substantially all of the former owners of Apex
whereby these former owners delivered to Converse in full satisfaction of
Converse's indemnification claims, their subordinated notes, common stock
warrants, and other contractual obligations issued by Converse in connection
with the Apex acquisition. Any remaining claims are not significant. See Note
16.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market.

F-9
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Property, Plant and Equipment

Property, plant and equipment are recorded at cost when acquired.
Expenditures for improvements are capitalized while normal repairs and
maintenance are expensed as incurred. When properties are disposed of, the
related cost and accumulated depreciation or amortization are removed from the
accounts, and gains or losses on the dispositions are reflected in results of
operations. For financial reporting purposes, Converse utilizes the straight-
line method of computing depreciation and amortization while accelerated
methods are used for tax purposes. Such expense is computed based on the
estimated useful lives of the respective assets.

Current Assets in Excess of Reorganization Value

In 1992, in connection with a reorganization under the bankruptcy code,
Furniture Brands and its domestic subsidiaries, including Converse, were
required to adopt "fresh-start" reporting. As a result of adopting "fresh-
start" reporting, Converse recorded current assets in excess of reorganization
value of approximately $41,553. This deferred credit is being amortized on a
straight-line basis over a 20 year period.

Capital Stock

In December 1994, Converse's Board of Directors fixed the stated value of
common stock at $1.00 per share. This resulted in an adjustment to the
additional paid-in capital and retained earnings.

Foreign Currency Transactions

Assets and liabilities of international operations are translated into U.S.
dollars at current exchange rates. Income and expense accounts are translated
into U.S. dollars at average rates of exchange prevailing during the period.
Adjustments resulting from translating foreign functional currency financial
statements into U.S. dollars are recorded in a separate component of
stockholders' equity. Other foreign currency transaction gains and losses are
included in the determination of net income.

Converse entered into foreign currency contracts in 1995 in order to reduce
the impact of foreign currency fluctuations. There were no open foreign
currency contracts as of December 30, 1995 or December 28, 1996. For financial
reporting purposes, any gains or losses are recognized as other income or
expense. Aggregate foreign currency exchange gains (losses) were $(14), $403
and $(789) in Fiscal 1994, Fiscal 1995 and Fiscal 1996, respectively.

Revenue Recognition

Revenue from the sale of product is recognized at the time of shipment.
Royalty income represents revenue from licensed products arising from domestic
and foreign licensees who manufacture or source sports apparel, accessories
and selected Converse-approved footwear using Converse trademarks and trade
names. Royalty income is recognized by Converse upon the shipment of product
by the licensees to the ultimate customer.

Advertising

Advertising production costs are expensed the first time an advertisement is
run. Media placement costs, which include television, radio and print
advertising, as well as co-operative advertising costs, are expensed as
incurred. Total advertising costs included within prepaid expenses and other
current assets were $914 and $934 as of December 30, 1995 and December 28,
1996, respectively.

Endorsement Contracts

Accounting for endorsement contracts is based upon specific contract
provisions. Generally, endorsement payments are expensed uniformly over the
term of the contract after giving recognition to periodic performance
compliance provisions of the contracts.

F-10
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Income Taxes

Through November 17, 1994, the date of the Distribution, Converse's results
of operations were included in Furniture Brands' consolidated income tax
returns. In connection with the Distribution, Converse and Furniture Brands
entered into a Tax Sharing Agreement providing, among other things, for an
equal allocation between Furniture Brands and Converse of federal and state
tax liabilities for all periods prior to completion of the Distribution. As
described in Note 15, this agreement was amended to provide for the allocation
of tax benefits relating to the carryback of certain net operating losses to
periods prior to the Distribution.

Earnings Per Share

Net loss per share for Fiscal 1995 and Fiscal 1996 has been calculated based
on 16,692,156 and 16,760,620 weighted average shares of common stock
outstanding, respectively.

Pro forma earnings per share for Fiscal 1994 are presented to give effect to
the fees paid to Furniture Brands and Apollo Advisors, L.P., which together
with its affiliates, is the majority owner of Converse's outstanding common
stock (see Note 15), for consulting services, the increase in interest
expense, and the decrease in income taxes resulting from the Distribution. Pro
forma net earnings per share are calculated based on 16,692,156 weighted
average shares of common stock outstanding, as outstanding stock options were
not dilutive.

Concentration of Risk

Converse purchases dyed canvas raw material mainly from one dye house with
the remaining balance supplied by two other dye houses. A change in dye houses
could cause a delay in manufacturing; however, management does not expect such
a change to impact long term supply due to alternative suppliers.

Financial instruments which potentially expose the Company to concentrations
of credit risk include trade accounts receivable. However, such risk is
limited due to the large number of customers and their international
dispersion. In addition, the Company maintains reserves for potential credit
losses and such losses, in the aggregate, have not exceeded management
expectations.

Reclassifications

Certain amounts in the prior year financial statements and related notes
have been reclassified to conform with the Fiscal 1996 presentation.

3. LOSS ON INVESTMENT IN UNCONSOLIDATED SUBSIDIARY

On May 18, 1995, Converse consummated the acquisition of Apex. Under the
terms of the Securities Purchase Agreement, the total consideration paid by
Converse to the sellers in exchange for 100% of the outstanding common stock
consisted of: (i) promissory notes in the aggregate principal amount of
$11,000 discounted to $9,644 at a rate of 12%; and (ii) warrants to purchase
1,750,000 shares of Converse common stock at an exercise price of $11.40. The
warrants expire on May 18, 2000 and were valued at the time of acquisition at
$3,528.

Subsequent to the acquisition of Apex, Converse, through its integration of
Apex's information systems and in-depth review of Apex operating procedures
and financial condition, determined that the operating losses of Apex and its
weak financial position could not be corrected without additional significant
investment or financing. On August 11, 1995, Converse's Board of Directors
voted to cease funding Apex's operations as of that date.

F-11
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

As a result of this decision, Apex ceased operations and was unable to meet
its obligations and on September 14, 1995 filed for Chapter 11 bankruptcy
protection. Because Converse's control of Apex was temporary in nature, its
investment in Apex was recorded as an unconsolidated equity investment. During
1995, Converse recorded a loss on this unconsolidated subsidiary, comprised
primarily of: (i) the Company's initial investment in Apex; (ii) additional
funding advances; (iii) contractual obligations, bank guarantees, professional
fees and other closing costs; and (iv) loss on the sale of Apex inventory
purchased by Converse for sale to independent third parties. The following
table summarizes the Fiscal 1995 and 1996 activity relating to each applicable
component:

<TABLE>
<CAPTION>
CONTRACTUAL
OBLIGATIONS,
FUNDING BANK GUARANTEES, LOSS ON
INITIAL PROVIDED PROFESSIONAL SALE OF
INVESTMENT MAY 18- FEES AND OTHER APEX
IN APEX AUGUST 11, 1995 CLOSING COSTS INVENTORY TOTAL
---------- --------------- ---------------- --------- --------
<S> <C> <C> <C> <C> <C>
Loss as of July 1,
1995................... $ 13,172 $ 10,422 $ 18,005 -- $ 41,599
Changes in estimates.... -- -- 2,680 7,881 10,561
Charges/write-offs...... (13,172) (10,422) (10,460) (7,881) (41,935)
-------- -------- -------- ------ --------
December 30, 1995
Balance................ -- -- 10,225 -- 10,225
Changes in estimates.... -- -- (1,877) 515 (1,362)
Charges/write-offs...... -- -- (2,924) (515) (3,439)
-------- -------- -------- ------ --------
December 28, 1996
Balance................ -- -- $ 5,424 -- $ 5,424
======== ======== ======== ====== ========
</TABLE>

As of July 1, 1995, Converse recorded a $41,599 loss on its unconsolidated
equity investment in Apex, as described above. During the fourth quarter of
1995, Converse recorded an additional $10,561 loss on its unconsolidated
equity investment in Apex, resulting in a total loss of $52,160. This
additional loss was comprised of unanticipated losses of $7,881 on the fourth
quarter sale of Apex inventory purchased by Converse for sale to independent
third parties and additional contractual obligations, professional fees and
other closing costs of $2,680. This additional amount was a result of changes
in estimates made during the fourth quarter of 1995 due to previously
unanticipated events and circumstances.

During the second quarter of 1996, the Company recorded an additional loss
of $515 relating to unanticipated credits issued to customers to settle claims
of discrepancies on shipments of the Apex inventory. During the fourth quarter
of 1996, the Company entered into agreements with two of the former owners of
Apex to settle certain obligations for $1,877 less than originally
anticipated, thereby resulting in a reduction in the accrual for the loss on
investment in unconsolidated subsidiary.

In the first quarter of 1997, the Company prevailed in a breach of warranty
lawsuit brought against several former owners of Apex. Subsequently, the
Company entered into settlement agreements with substantially all of the
former owners of Apex whereby these former owners delivered to Converse in
full satisfaction of Converse's indemnification claims, their subordinated
notes, common stock warrants, and other contractual obligations issued by
Converse in connection with the Apex acquisition. Any remaining claims are not
significant. See Note 16.

F-12
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

4. RESTRUCTURING CHARGES

During 1995 Converse recorded restructuring charges relating primarily to
initiatives aimed at reducing future operating costs, including domestic
manufacturing, global distribution, marketing, and general and administrative
costs. The following table summarizes the Fiscal 1995 and 1996 activity
relating to these initiatives:

<TABLE>
<CAPTION>
LOSS REDUCTION IN
CONTRACT (CREDIT) EMPLOYEE LEASE LIABILITY FOR
TERMINATION ON ASSET SEVERANCE AND TERMINATION POSTRETIREMENT
COSTS DISPOSALS RELATED COSTS COSTS BENEFITS TOTAL
----------- --------- ------------- ----------- -------------- -------
<S> <C> <C> <C> <C> <C> <C>
1995 accrual............ $ 6,150 $ 4,807 $2,502 $1,453 $(730) $14,182
Charges/write-offs...... (415) (4,807) (815) -- 730 (5,307)
------- ------- ------ ------ ----- -------
December 30, 1995
Balance................ 5,735 -- 1,687 1,453 -- 8,875
Changes in estimates.... (1,000) (1,533) 1,356 -- -- (1,177)
Charges/write-offs...... (3,233) 1,533 (587) (889) -- (3,176)
------- ------- ------ ------ ----- -------
December 28, 1996
Balance................ $ 1,502 -- $2,456 $ 564 -- $ 4,522
======= ======= ====== ====== ===== =======
</TABLE>

During the second quarter of 1995, Converse decided to close its Mission,
Texas manufacturing facility and recorded a charge of $1,000. Converse
completed the shutdown of the Mission facility during the third quarter of
1995. In the fourth quarter of 1995, Converse recorded a restructuring charge
totaling $13,182. Principal costs included in the charge were: (i) contract
termination costs relating to licensed apparel and certain marketing
activities; (ii) estimated losses on the sale or disposal of assets, including
a writedown for the proposed sale of a warehouse facility in Chester, South
Carolina; (iii) costs for employee severance and related benefits for the
termination of 140 employees; and (iv) lease termination costs relating to the
shutdown of the manufacturing facility in Mission, Texas and a distribution
facility in the United Kingdom.

During the second quarter of 1996, the Company sold the warehouse facility
in Chester, South Carolina. Proceeds from this sale exceeded the Company's
estimates, resulting in a reversal of $2,209 of restructuring reserves. During
the third quarter of 1996, certain contracts were terminated on terms more
advantageous than originally anticipated resulting in a reversal of $1,000 of
restructuring accruals. In addition, while implementing its fourth quarter
1995 restructuring plans, the company incurred additional severance charges of
$1,000 and $356 in the third and fourth quarters of 1996, respectively, and
additional asset write-offs of $676 during the fourth quarter of 1996. Such
additional charges were in excess of previously estimated amounts. The
remaining liabilities represent fixed amounts to be paid out over the next two
years.

5. INVENTORIES

Inventories are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Retail merchandise....................... $ 5,766 $ 6,298
Finished products........................ 67,835 73,887
Work-in-process.......................... 4,226 3,320
Raw materials............................ 4,076 3,294
------- -------
$81,903 $86,799
======= =======
</TABLE>

F-13
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

6. PROPERTY, PLANT AND EQUIPMENT

Property, Plant and Equipment consisted of the following:

<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIFE (YEARS) DECEMBER 30, 1995 DECEMBER 28, 1996
---------------- ----------------- -----------------
<S> <C> <C> <C>
Building and leasehold
improvements........... 5-10 $ 4,288 $ 5,734
Machinery and
equipment.............. 3-11 8,382 9,890
Furniture and fixtures.. 5-8 1,553 2,448
Office and computer
equipment.............. 7 6,098 7,272
------- -------
20,321 25,344
Less accumulated
depreciation........... 4,800 7,495
------- -------
$15,521 $17,849
======= =======
</TABLE>

7. SHORT-TERM DEBT

Converse maintains asset based financing arrangements in certain European
countries with various lenders. In general, these financing arrangements allow
the Company to borrow against varying percentages of eligible customer
receivable balances based on pre-established credit lines, along with varying
percentages of inventory, as defined. Borrowings outstanding under these
financing arrangements totaled $13,906 and $13,421 as of December 30, 1995 and
December 28, 1996, respectively. Interest is payable at the respective
lender's base rate plus 1.5% (6.0% to 8.25% at December 28, 1996). The
obligations are secured by a first priority lien on the respective European
assets being financed. In addition, Converse has provided guarantees of these
borrowings in certain of the European countries.

8. ACCRUED EXPENSES

Accrued expenses consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Employee compensation.................. $ 6,223 $ 3,543
Advertising and promotion.............. 3,930 3,432
Customer deposits...................... 61 2,943
Accrued interest....................... 661 2,160
Restructuring charges.................. 8,875 4,522
Loss on investment in unconsolidated
subsidiary............................ 10,225 5,424
Other.................................. 3,320 3,100
------- -------
$33,295 $25,124
======= =======
</TABLE>

F-14
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

9. LONG-TERM DEBT

Long-term debt consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Secured credit facility:
A Facility............................. $ 69,504 $ 89,467
B Facility............................. 40,000 28,298
Subordinated notes..................... 9,644 9,644
-------- ---------
119,148 127,409
-------- ---------
Less current maturities................ (6,324) (117,765)
-------- ---------
$112,824 $ 9,644
======== =========
</TABLE>

Credit Facility

As of December 28, 1996, Converse maintained the Credit Facility in the
amount of $163,298 (an "A Facility" for $135,000 and a "B Facility" for
$28,298).

The A Facility expires on November 17, 1997 with Converse's option to extend
for an additional two-year period provided certain conditions are met,
including payment in full of the B Facility on or prior to November 17, 1997.
The amount of credit available to Converse at any time under the A Facility is
determined by reference to Converse's borrowing base as set forth in the
Credit Facility, consisting primarily of domestic accounts receivable and
inventory. During November 1995, the Credit Facility was amended, thereby
reducing the commitment of the Banks under the A Facility from $160,000 to
$135,000. In addition, the amendment provided for borrowings by Converse under
the A Facility above those supported by its defined borrowing base in an
amount up to $25,000 provided a standby letter of credit was issued for the
benefit of the Banks. Apollo Investment Fund, L.P. ("Apollo"), which together
with its affiliates, is the beneficial owner of approximately 65.2% of
Converse's outstanding common stock as of December 28, 1996, caused a standby
letter of credit for the account of Apollo (the "Collateral Letter of Credit")
to be provided to the Banks in the amount of $25,000 (See Note 15). The
Collateral Letter of Credit expires on June 30, 1997.

During November 1996, the Credit Facility was amended in order to provide
seasonal borrowing ("Seasonal Accommodation") by Converse under the A Facility
above those supported by its defined borrowing base and Collateral Letter of
Credit in an amount up to $10,000. Subsequent to December 28, 1996, the Credit
Facility was amended whereby the Seasonal Accommodation was increased to
$15,000, expiring October 15, 1997. In addition, the commitment of the Banks
under the A Facility was increased from $135,000 to $150,000.

As further described herein, the Credit Facility, Collateral Letter of
Credit and Seasonal Accommodation expire during 1997. Accordingly, the total
indebtedness outstanding pertaining to these debt instruments of $117,765 as
of December 28, 1996 has been classified as current within the accompanying
consolidated balance sheet.

As of December 28, 1996, approximately $113,898 was available under the A
Facility borrowing base, inclusive of availability as a result of the
Collateral Letter of Credit and Seasonal Accommodation, for borrowing which
may be used for revolving loans, letters of credit, foreign exchange contracts
and acceptances. The aggregate of letters of credit, foreign exchange
contracts and acceptances may not exceed $100,000 at any time; revolving loans
are limited only by the facility's maximum availability less any amount
outstanding for letters of credit, foreign exchange contracts or acceptances.
As of December 28, 1996, utilization under the A Facility, inclusive of the
Collateral Letter of Credit and Seasonal Accommodation, consisted of revolving
loans of $78,467 and bankers acceptances of $11,000. In addition, outstanding
letters of credit of $17,299 as of December 28,

F-15
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1996 were reserved against the maximum available borrowing base. As a result,
$7,132 of the maximum available borrowing base remained unutilized as of
December 28, 1996. As of December 28, 1996, the B Facility, which also expires
on November 17, 1997, had loans outstanding of $28,298. The Company is not
permitted further borrowings against the B Facility.

Loans under the A Facility bear interest either at the Prime Lending Rate
(as defined therein) plus a margin of 1.25%, or at Adjusted LIBOR (as defined
therein) plus a margin of 2.5% per annum. The foregoing LIBOR margin may be
reduced following Converse's achievement of improved ratios under certain
financial tests specified in the Credit Facility. At December 28, 1996,
revolving loans outstanding under the A Facility bore interest at 8.20%, based
upon the weighted average of the Prime and Adjusted LIBOR rates, as defined.
Loans under the B Facility bear interest at the Prime Lending Rate plus a
margin of 4%, or at Adjusted LIBOR plus a margin of 5.5% per annum. At
successive six-month terms of the loan, the rate of interest on loans
outstanding under the B Facility automatically increases 0.5%. At December 28,
1996, loans outstanding under the B Facility were Adjusted LIBOR rate loans
bearing interest at 10.95%.

On November 17, 1994, Converse paid to the Banks a closing and commitment
fee and an agent fee of 2.5% of the total amount of the A Facility. Converse
also paid a 3% commitment fee to the Banks for the B Facility. Additional fees
of 1% and 2% of the B Facility were paid in September and November 1995,
respectively, as defined, since loans against the entire availability of the B
Facility remained outstanding as of those dates. As consideration for causing
the Collateral Letter of Credit to be provided, Apollo received a fee from
Converse equal to 3% of the amount of such letter of credit, and Converse
agreed to reimburse Apollo for all of its expenses, including but not limited
to expenses incurred in connection with obtaining the Collateral Letter of
Credit.

The Credit Facility also provides for certain other ongoing fees, including
an unused line fee on the portion of the A Facility that is not utilized
(equal to 0.5% per annum), fees with respect to letters of credit, foreign
exchange contracts and acceptances issued under the Credit Facility (generally
varying from 1.25% to 2.25% per annum) and an annual collateral management fee
of $100.

Obligations outstanding under the Credit Facility are secured by a first
priority lien on substantially all of Converse's assets located in the United
States and Canada.

At December 28, 1996, Converse was in default of one financial covenant
contained in the Credit Facility, as amended November 1996. Subsequent to
December 28, 1996, the Banks waived Converse's default of this financial
covenant as of December 28, 1996 and reset the financial covenants for the
term of the A Facility. As such, Converse is currently in compliance with the
amended covenants and believes that it will be in compliance with these
amended financial covenants through the term of the A Facility.

The Credit Facility requires Converse to pay the unpaid aggregate principal
amount of the B Facility, in equal quarterly principal installments of one-
twentieth of the then outstanding principal balance commencing September 30,
1996 and on each successive quarter end thereafter, with a final installment
of any remaining unpaid principal then outstanding being due on November 17,
1997. Accordingly, on September 30, 1996, the Company paid the first principal
installment totaling $1,598. The Credit Facility also required Converse to
apply proceeds received during 1996 relating to the occurrence of specified
events against the aggregate unpaid B Facility principal. During 1996, the
Company remitted an additional $10,104 against the aggregate unpaid B Facility
principal.

In conjunction with Converse's acquisition of 100% of the outstanding common
stock of Apex (see Note 3), Converse issued subordinated notes in the face
amount of $11,000, discounted at a rate of 12%, to $9,644.

F-16
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

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. The notes mature
on May 18, 2003. As a result of the indemnification awards and claims against
certain former owners of Apex and the related exchange and settlement
agreements, no accretion of the subordinated note discount has been recorded
in the accompanying consolidated balance sheet.

Converse has capitalized certain fees incurred in conjunction with the
acquisition of these various financing arrangements. These costs are amortized
over the term of the related agreements. Unamortized financing fees included
within the other asset component of the consolidated balance sheet were $5,028
and $2,104 at December 30, 1995 and December 28, 1996, respectively. Total
interest expense was comprised of the following:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Interest on borrowings.. $1,107 $ 9,220 $11,368
Interest on Furniture
Brands borrowings...... 6,002 -- --
Credit line fees........ 146 2,504 2,398
Amortization of original
Credit Facility
financing fees......... 141 1,767 1,767
Credit Facility
amendment and other
fees................... 27 552 2,243
------ ------- -------
$7,423 $14,043 $17,776
====== ======= =======
</TABLE>

10. INCOME TAXES

The domestic and foreign components of income (loss) before income taxes
were as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Domestic.............. $14,926 $(84,482) $(17,967)
Foreign............... 13,235 (15,409) (4,602)
------- -------- --------
$28,161 $(99,891) $(22,569)
======= ======== ========
</TABLE>

F-17
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Income tax expense (benefit) was comprised of the following:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Current:
Federal............. $ 7,926 $(12,666) $(3,617)
State............... 1,151 417 299
Foreign............. 1,162 2,656 3,571
------- -------- -------
10,239 (9,593) 253
------- -------- -------
Deferred:
Federal............. 261 (16,557) (3,906)
State............... 65 (1,994) (481)
------- -------- -------
326 (18,551) (4,387)
------- -------- -------
$10,565 $(28,144) $(4,134)
======= ======== =======
</TABLE>

The following table reconciles the differences between the Federal corporate
statutory rate and Converse's effective income tax rate:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Federal corporate
statutory tax rate
(benefit).............. 35.0% (35.0)% (35.0)%
State taxes (benefit),
net of Federal
tax effect............. 3.1 (1.5) (2.9)
Foreign income taxes.... 2.5 1.7 10.1
Valuation allowance..... -- 6.7 12.7
Other................... (3.1) (0.1) (3.2)
---- ----- -----
Effective income tax
(benefit) rate......... 37.5% (28.2)% (18.3)%
==== ===== =====
</TABLE>

F-18
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Deferred income taxes reflect the effect of temporary differences between
the tax basis of assets and liabilities and the reported amounts of assets and
liabilities for financial reporting purposes. Deferred income taxes also
reflect the value of net operating losses, net of any valuation allowance.
Converse's deferred tax assets and liabilities at December 30, 1995 and
December 28, 1996, consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Tax benefit of loss carryforward..... $ 7,272 $ 22,263
Loss on investment in unconsolidated
subsidiary.......................... 13,015 11,739
Restructuring accruals............... 2,900 1,524
Fair value adjustments............... 4,266 3,718
Employee postretirement benefits
other than pensions................. 4,317 4,061
Expense accruals..................... 2,725 3,182
Receivable, inventory and other
reserves............................ 3,628 3,399
Other................................ 689 341
------- --------
Gross deferred tax assets.......... 38,812 50,227
Deferred tax liabilities:
Depreciation......................... (702) --
Employee pension plans............... -- (762)
Other................................ (2,033) (2,840)
------- --------
Net deferred tax assets before
valuation allowance............... 36,077 46,625
Valuation allowance.................. (6,650) (11,584)
------- --------
Net deferred tax assets............ $29,427 $ 35,041
======= ========
</TABLE>

The net deferred tax assets are included in the consolidated balance sheet
as follows:

<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Prepaid expenses and other current
assets............................... $14,183 $14,491
Other assets.......................... 15,244 20,550
------- -------
$29,427 $35,041
======= =======
</TABLE>

Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," requires that a valuation allowance be recorded against deferred tax
assets for which there is a greater than fifty percent chance that the tax
assets will not be realized. In assessing the realizability of the deferred
tax assets, Converse has based its judgment primarily on estimated future
earnings. Converse believes these deferred tax assets will be realized.
However, based on the weight of objective evidence including historical
operating results, operating forecasts and significant net operating loss
carryforwards, Converse has concluded that a valuation allowance of $11,584 is
required as of December 28, 1996.

At December 28, 1996, Converse had operating loss carryforwards of $52,864.
The loss carryforwards expire between the years 2009 and 2011.

11. EMPLOYEE BENEFITS

Converse sponsors or contributes to retirement plans covering substantially
all domestic employees. Converse has defined benefit pension and
postretirement plans in addition to other retirement plans and benefits. The
annual cost for defined benefit plans is determined using the projected unit
credit actuarial cost method

F-19
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

which includes significant actuarial assumptions and estimates which are
subject to change in the near term. Prior service cost is amortized on a
straight-line basis over the average remaining service period of employees
expected to receive benefits. In certain foreign countries, contributions are
made to defined contribution plans as well as to government sponsored plans,
as required in the respective jurisdictions. Liabilities and expenses related
to these foreign employees are not material.

Defined Benefit Pension Plan

Converse has a non-contributory defined benefit pension plan covering
substantially all salaried employees at its domestic operations. Retirement
benefits generally are based on years of service and final average
compensation with employees generally becoming vested upon completion of five
years of service. The plan is funded by company contributions to trust funds
which are held for the sole benefit of the employees. It is Converse's
practice to fund pension costs to the extent that such costs are tax
deductible and in accordance with ERISA. The assets of the plan are primarily
comprised of equity securities and fixed income investments.

The table below summarizes the plan's funded status and amounts recognized
in the balance sheet:

<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefit obligation............ $38,467 $39,048
======= =======
Accumulated benefit obligation....... 39,104 39,641
======= =======
Projected benefit obligation......... 44,738 46,781
Fair value of plan assets............ 44,852 51,122
------- -------
Plan assets in excess of projected
benefit obligation.................. 114 4,341
Unrecognized net loss (gain)......... 323 (2,166)
Unrecognized prior service cost...... (89) (82)
------- -------
Prepaid pension cost included in
other assets........................ $ 348 $ 2,093
======= =======
</TABLE>

Net periodic pension cost for Fiscal 1994, 1995 and 1996 includes the
following components:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Service cost-benefits
earned during
the period............. $ 1,204 $ 1,300 $ 1,410
Interest cost on the
projected
benefit obligation..... 2,830 3,309 3,375
Actual return on plan
assets................. 664 (9,775) (6,365)
Net amortization and
deferral............... (3,986) 6,364 2,110
------- ------- -------
Net periodic pension
cost................... $ 712 $ 1,198 $ 530
======= ======= =======
</TABLE>

Measurement of the projected benefit obligation was based on a weighted
average discount rate of 8.0%, 7.25%, and 7.50% in Fiscal 1994, 1995 and 1996,
respectively, and a rate of increase in future compensation levels of 4.5% in
each year. The expected long-term rate of return on plan assets used in
determining net pension cost was 8.5%, 9.5% and 9.5% in Fiscal 1994, 1995 and
1996, respectively.

F-20
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Defined Benefit Postretirement Plan

In addition to pension benefits, certain retired employees are currently
provided with specified health care and life insurance benefits. Eligibility
requirements generally state that benefits are available to employees who
retire after a certain age with specified years of service if they agree to
contribute a portion of the cost. Converse has reserved the right to modify or
terminate these benefits. Health care and life insurance benefits are provided
to both retired and active employees through medical benefit trusts, third-
party administrators and insurance companies.

The following table sets forth the combined financial status of deferred
postretirement benefits other than pensions:

<TABLE>
<CAPTION>
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Accumulated postretirement benefit
obligation:
Retirees............................ $ 4,501 $ 4,311
Fully eligible active plan
participants....................... 91 128
Other active plan participants...... 1,441 1,564
------- -------
Total............................... 6,033 6,003
Unrecognized net gain............... 1,635 1,735
Unrecognized prior service gain..... 2,718 2,493
------- -------
Accrued postretirement benefit
obligation......................... $10,386 $10,231
======= =======
</TABLE>

Net periodic postretirement benefit costs for Fiscal 1994, 1995 and 1996
include the following components:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Service cost-benefits
earned during
the period............. $ 96 $ 90 $ 105
Interest cost on the
postretirement
benefit obligation..... 359 362 421
Net amortization and
deferral............... (387) (373) (305)
----- ----- -----
Net periodic
postretirement benefit
cost................... 68 79 221
Curtailment gains....... -- (730) --
----- ----- -----
Total periodic
postretirement benefit
cost (income).......... $ 68 $(651) $ 221
===== ===== =====
</TABLE>

For measurement purposes, a 16.0%, 15.0% and 15.0% annual rate of increase
in the cost of health care benefits for pre-age 65 retirees and 12.0%, 11.0%
and 11.0% for post-age 65 retirees was assumed for Fiscal 1994, 1995 and 1996,
respectively. For Fiscal 1994, 1995 and 1996, the rates are assumed to
decrease gradually to 8.0% in the year 2002 for pre-age 65 retirees and to
7.0% in 1999 for post-age 65 retirees and remain at those levels thereafter.
The health care cost trend rate assumption has an effect on amounts reported.
Increasing the health care cost trend rate by one percentage point in each
year would increase the accumulated postretirement benefit obligation as of
December 28, 1996 by approximately $331 and the net periodic cost by $27 for
the year.

The unrecognized prior service gain resulted from a change in Converse's
postretirement medical plan. Effective July 1, 1993, Converse required age and
service related employee contributions and capped Converse's retiree medical
costs at 1998 average claim levels. These changes apply to employees retiring
after December 31, 1994.

F-21
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Measurement of the accumulated postretirement benefit obligation was based
upon a weighted average discount rate of 8.0%, 7.25% and 7.50% for Fiscal
1994, 1995 and 1996, respectively, and a long-term rate of compensation
increase of 4.5% in each year.

During 1995, Converse recognized curtailment gains resulting from workforce
reductions. These gains are primarily due to the reduction of the accumulated
postretirement benefit obligation associated with those employees'
postretirement benefits and recognition of the prior service costs related to
those employees.

Other Retirement Plans and Benefits

Converse has a non-contributory defined contribution plan covering all
hourly employees with at least one year of service at their domestic
manufacturing and warehouse facilities. Contributions under this plan are
fixed at $0.37 per hour of service with a maximum contribution based on 2,000
hours per employee. The defined contribution expense was $662, $992 and $318
for Fiscal 1994, 1995 and 1996, respectively.

Converse also sponsors a savings plan. The total cost of this plan for
Fiscal 1994, 1995, and 1996 was $555, $609 and $329, respectively.

12. STOCK OPTION PLANS; WARRANTS

Converse 1994 Stock Option Plan

The Board of Directors of Converse adopted the Converse Inc. 1994 Stock
Option Plan (the "1994 Plan") as a means to encourage ownership of Converse
common stock by key employees and enable Converse to attract and retain the
services of outstanding employees in competition with other employers.

The 1994 Plan authorizes grants to key employees, including executive
officers of Converse and its subsidiaries, and to its consultants, of
incentive and non-qualified options to purchase shares of common stock. The
plan administrator has discretion to grant non-qualified options at less than
100% of the fair market value per share of the common stock of Converse on the
date of grant. The plan administrator has granted such below market exercise
price options to certain Converse employees who held options to acquire
Furniture Brands common stock in connection with the Distribution in exchange
for such Furniture Brands options. Converse incentive stock options must be
granted with an exercise price of not less than 100% of the fair market value
per share of common stock of Converse on the date of grant. Option prices are
payable, in full and in cash, upon the exercise of a stock option and the
proceeds are added to the general funds of Converse. As of December 28, 1996,
the number of shares of common stock which may be issued under the 1994 Plan
is 2,300,000 subject to adjustment upon the occurrence of certain
contingencies. The maximum number of shares with respect to which options may
be granted to any individual during any calendar year and during the term of
the 1994 Plan is 500,000 and 750,000, respectively. Options under the 1994
Plan expire nine years from the grant date.

The 1994 Plan will terminate in October 2004, subject to the right of the
Board of Directors to suspend or discontinue the 1994 Plan at any prior date
and the rights of holders of options to exercise options after such date in
accordance with the terms of such options.

F-22
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following table summarizes option activity under the 1994 Plan:

<TABLE>
<CAPTION>
WEIGHTED
EXERCISE AVERAGE
NUMBER PRICE EXERCISE PRICE
OF OPTIONS PER SHARE PER SHARE
---------- ------------ --------------
<S> <C> <C> <C>
Outstanding at January 1, 1994...... -- -- --
Granted............................. 920,000 $5.27-$11.46 $ 8.66
---------
Outstanding at December 31, 1994.... 920,000 $5.27-$11.46 $ 8.66
Granted............................. 633,000 $5.00-$23.00 $ 9.64
Canceled............................ (429,000) $ 7.00 $ 7.00
---------
Outstanding at December 30, 1995.... 1,124,000 $5.00-$23.00 $ 7.71
Granted............................. 1,221,000 $4.00-$23.00 $ 7.17
Canceled............................ (520,200) $5.00-$23.00 $11.71
Exercised........................... (246,000) $5.00-$ 7.00 $ 5.57
---------
Outstanding at December 28, 1996.... 1,578,800 $4.00-$23.00 $ 6.31
=========
Exercisable at December 28, 1996.... 214,050 $ 7.15
=========
Available for future grants......... 475,200
=========
</TABLE>

The following table summarizes information about the 1994 Plan stock options
outstanding at December 28, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------- --------------------------
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/28/96 LIFE (YEARS) EXERCISE PRICE AT 12/28/96 EXERCISE PRICE
--------------- ----------- ------------ -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$4.00-$5.00............. 511,000 8 $ 4.99 1,000 $ 5.00
$5.27................... 150,000 7 5.27 107,500 5.27
$5.63-$6.50............. 514,000 9 6.23 -- --
$7.00................... 275,800 8 7.00 57,800 7.00
$7.75-$8.65............. 26,000 9 7.96 -- --
$9.00-$23.00............ 102,000 8 12.69 47,750 11.64
--------- -------
1,578,800 214,050
========= =======
</TABLE>

On June 2, 1995, Converse repriced certain stock options granted under the
1994 Plan. Options to purchase 854,000 shares of common stock were repriced at
an exercise price of $7.00 per share, which represented the closing price of
Converse's common stock on June 2, 1995. The original vesting schedules and
expiration dates associated with these stock options were also amended to
coincide with the stock option repricing date. None of the foregoing stock
option grants had vested prior to the repricing date and they did not begin to
vest until June 2, 1996. On September 5, 1996, Converse repriced certain
additional stock options granted under the 1994 Plan. Options to purchase
105,000 shares of common stock at prices ranging from $5.00 to $23.00 per
share were repriced to an exercise price of $6.375 per share, which
represented the closing price of Converse's common stock on September 5, 1996.
In connection with this repricing, options to purchase 45,000 shares of common
stock were canceled. None of the repriced options had vested prior to the
repricing date and they do not begin to vest until September 5, 1997. The
above option activity table reflects all options at their amended price and
vesting terms.

F-23
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Converse 1995 Non-Employee Director Plan

On March 22, 1995, the Board of Directors of Converse adopted the 1995 Non-
Employee Directors Plan ("the 1995 Plan") as a means of fostering and
promoting the long term financial success of Converse by attracting and
retaining Non-Employee Directors of outstanding ability.

Converse has reserved an aggregate of 45,000 shares for issuance under the
1995 Plan. Options to purchase 22,500 of these shares were granted during 1995
at the fair market value on the date of grant of $9.88. These stock options
become exercisable in equal one-third increments beginning on March 22, 1996
and expire ten years from the date of grant. No such options were exercised
during 1996.

Other Stock Option Activity

On October 13, 1995, in addition to the aforementioned option grants,
Converse granted options to purchase an aggregate of 275,000 shares of common
stock not pursuant to any formal plan. These options were granted in
conjunction with a consulting agreement at the fair market value on the date
of grant of $4.88 and were exercised during Fiscal 1996.

Warrants

Warrants to purchase 1,750,000 shares of Converse stock at an exercise price
of $11.40 per share were issued in conjunction with the acquisition of Apex,
as discussed in Note 3. These warrants expire on May 18, 2000 and were valued
at the time of acquisition at $3,528. In the first quarter of 1997, the
Company prevailed in a breach of warranty lawsuit brought against several
former owners of Apex. Subsequently, the Company entered into settlement
agreements with substantially all of the former owners of Apex whereby these
former owners delivered to Converse in full satisfaction of Converse's
indemnification claims, their subordinated notes, common stock warrants, and
other contractual obligations issued by Converse in connection with the Apex
acquisition. See Note 16.

New Accounting Pronouncement

The Company accounts for stock-based compensation using the method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees". Accordingly, no compensation cost has been
recognized for the Company's stock option plans. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123"). Had compensation
cost been determined based on the fair value at the grant dates for awards in
1995 and 1996 consistent with the provisions of SFAS 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Net income--as reported.................. $(71,747) $(18,435)
Net income--pro forma.................... (73,031) (19,559)
Earnings per share--as reported.......... (4.30) (1.10)
Earnings per share--pro forma............ (4.38) (1.17)
</TABLE>

F-24
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The fair value of options granted at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- -----------------
<S> <C> <C>
Expected life (years)................... 5.3 6.0
Interest rate........................... 6.45% 6.27%
Volatility.............................. 75.00% 65.00%
Dividend yield.......................... 0 0
</TABLE>

The weighted average grant date fair value of options granted during Fiscal
1995 and Fiscal 1996 was $3.87 and $3.37, respectively.

The pro forma net income and earnings per share amounts reflected above do
not include a tax benefit for 1995 or 1996, as a full valuation allowance
would have been provided against any such benefit. The pro forma effect on net
income for Fiscal 1995 and Fiscal 1996 is not indicative of future amounts as
it does not take into consideration pro forma compensation expense related to
grants made prior to 1995. SFAS 123 does not apply to awards prior to 1995,
and additional awards in future years are anticipated.

13. LEASE COMMITMENTS

Substantially all of Converse's retail outlets and certain other real
properties and equipment are operated under lease agreements expiring at
various dates through the year 2012. Leases covering retail outlets and
equipment generally require, in addition to stated minimums, contingent
rentals based on retail sales and equipment usage. Generally, the leases
provide for renewal for various periods at stipulated rates.

Rental expense under operating leases was as follows:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Minimum rentals......... $3,681 $3,901 $4,244
Contingent rentals...... 962 1,088 825
------ ------ ------
4,643 4,989 5,069
Less: sublease rentals.. 135 -- --
------ ------ ------
$4,508 $4,989 $5,069
====== ====== ======
</TABLE>

Future minimum lease payments under operating leases are $3,720, $3,208,
$2,450, $1,933 and $1,244 for 1997 through 2001, respectively.

14. COMMITMENTS AND CONTINGENCIES

In December 1995, Converse issued a consumer alert relating to the RAW
Energy and RAW Power product lines. This alert informed the public about the
potential for the products' technology to fail under continuous, competitive
strain. All retailers and consumers were given the option to return these
products to Converse for a full credit. As a result of this action, as of
December 30, 1995 Converse reversed sales with a gross margin impact of
$2,400, provided $413 to repair the defective units and recorded a writedown
of $4,354 relating to the inventory carrying value of the defective units.
During 1996, the returns and repair processes were completed, resulting in
$400 of previously provided reserves being reversed to income.

F-25
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

For discussion of Apex related litigation see Note 16.

Converse is or may become a defendant in a number of pending or threatened
legal proceedings in the ordinary course of its business. Converse believes
the ultimate outcome of any such proceedings will not have a material adverse
effect on its financial position or results of operations.

15. RELATED PARTY TRANSACTIONS

In connection with the Distribution, Converse and Furniture Brands entered
into a Tax Sharing Agreement (the "Agreement") providing, among other things,
for an equal allocation between Furniture Brands and Converse of benefits
derived from a carryback of federal and state tax liabilities to periods prior
to completion of the Distribution. On February 21, 1996, Converse amended this
Agreement with Furniture Brands, under which Converse agreed to carryback
certain federal income tax operating losses for the years ended December 30,
1995 and December 28, 1996 to one or more Pre-Distribution tax periods. For
the year ended December 30, 1995, the amendment applies to the first $41,000
of tax operating losses generated, which approximates the taxable income
available in the carryback period. For the year ended December 30, 1995, tax
operating losses of approximately $31,000 were carried back generating a tax
refund of $10,832. In accordance with the Agreement, as amended, Furniture
Brands paid Converse $8,000 on February 29, 1996 and in return Furniture
Brands is entitled to the full amount of the tax refund. Furniture Brands is
not entitled to any refund of the $8,000 payment in the event the ultimate tax
refund it receives from the Internal Revenue Service is less than anticipated.
In accordance with the Agreement, Furniture Brands is also entitled to tax
refunds resulting from the carryback of approximately $10,000 of the Company's
Fiscal 1996 tax operating losses.

The $2,832 excess of the 1995 tax refund over Furniture Brands' payment to
Converse and the $3,616 tax refund associated with the aforementioned $10,000
of 1996 tax operating losses of Converse being carried back to Furniture
Brands have been recorded by Converse as other expense in Fiscal 1995 and
1996, respectively. In addition, Furniture Brands and Converse shared, on an
equal basis, 1994 tax carryback benefits totaling $1,380. Furniture Brands'
share of this amount, $690, was recorded by Converse as other expense for
Fiscal 1995.

Prior to the Distribution, Furniture Brands provided services to Converse,
including legal, administration of benefit and insurance programs, income tax
management and cash management and treasury services. The accompanying
consolidated financial statements include a charge for Furniture Brands'
administrative expenses totaling $500 for Fiscal 1994. Management believes the
basis used to charge corporate administrative expenses to Converse was
reasonable and representative of the amount of expenses that would have been
incurred on a stand-alone basis.

In connection with the Distribution, Converse and Furniture Brands entered
into a Distribution and Services Agreement for Fiscal 1995 relating to the
continued provision of certain of the services described above by Furniture
Brands to Converse as well as additional advisory services, support and
consulting as a result of Converse being a public company. In November 1995,
this Agreement was amended to decrease the amount of fees payable from
Converse to Furniture Brands. For the year ended December 30, 1995, Converse
paid $210 to Furniture Brands for these services.

As more fully described in Note 9, in November 1995, Apollo caused a standby
letter of credit to be provided to the Banks to enable Converse to borrow an
additional $25,000 under the A Facility above its defined borrowing base.

On November 17, 1994, Converse entered into a consulting agreement with
Apollo Advisors, L.P., an affiliate of Apollo, pursuant to which Apollo
Advisors, L.P. will provide corporate advisory, financial and other consulting
services to Converse. Fees under the agreement are payable at an annual rate
of $500 plus out-of-pocket expenses for an unlimited period unless terminated
by the Converse Board of Directors.

F-26
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

16. APEX LITIGATION AND SUBSEQUENT EVENTS

As a result of significant operational and financial difficulties discovered
subsequent to the acquisition of Apex, Converse performed an investigation of
potential breaches of representations and warranties by Apex and its former
owners in connection with Converse's purchase of Apex. In November 1995,
Converse paid into escrow, as opposed to paying the former owners directly,
the first interest payment of $443 pertaining to the subordinated notes issued
as part of the Apex purchase price. Converse also paid the May 1996 and
November 1996 interest payments into escrow, bringing the total in escrow,
including accumulated interest, at December 28, 1996 to $1,354. In January,
1996, certain former owners of Apex filed suit against Converse seeking a
declaratory judgment that they were entitled to payment of this interest. In
March 1996, Converse filed counter claims against these former Apex owners for
breach of warranty and other claims relating to the Apex purchase (together,
the "State Court Action"). In May 1996, the Company filed suit in U.S.
District Court, Southern District of New York against certain former owners of
Apex for violation of the federal securities laws. In a separate suit filed
the same day, several former owners of Apex asserted certain securities law
and other claims against Converse (together the "Federal Court Action").

In January 1997, a jury ruled unanimously in favor of Converse and against
each of the four former owners of Apex who were parties to the State Court
Action. In connection with the favorable jury verdict, the Company was awarded
damages against these four former Apex owners. Subsequently, the Company
entered into settlement agreements with three of these parties, whereby
subordinated notes, common stock warrants and other contractual obligations
issued to such parties by Converse in connection with the acquisition of Apex
were delivered to the Company, together with a cash payment of $2,000 by one
of the former owners to Converse in satisfaction of Converse's indemnification
claims. Separately, the Company entered into settlement agreements with all of
the remaining former owners of Apex who were not parties to the State Court
Action, whereby these former owners acknowledged their obligations to Converse
for indemnification claims under the Securities Purchase Agreement. As part of
these settlements, the former owners delivered to Converse in full
satisfaction of Converse's indemnification claims their subordinated notes,
common stock warrants, and other contractual obligations issued by Converse to
these parties in connection with the acquisition of Apex. In addition, the
settling former owners of Apex referred to above have agreed to forego all
claims against Converse related to the Federal Court Action. As a result of
the above, during the first quarter of 1997, Converse will realize a pretax
gain of approximately $17,800. The settlements with the former owners referred
to above will result in the reduction during the first quarter of 1997 of
subordinated notes, common stock warrants, and accrued liabilities for other
contractual obligations of $8,870, $3,528 and $5,424 respectively, from those
amounts recorded at December 28, 1996.

As of March 14, 1997, only one former owner of Apex has not settled with
Converse. The jury award in the State Court Action included an indemnification
award against this party in the amount of $750, which was the maximum
indemnification obligation of this party to Converse under the Securities
Purchase Agreement. This former owner holds subordinated notes in the amount
of $774. Converse continues to pursue its claims against this remaining party
in the Federal Court Action and believes it will prevail based upon, among
other things, the jury award in the State Court Action.

As described in Note 3, on September 14, 1995, Apex filed for Chapter 11
bankruptcy protection. As a result of the Chapter 11 bankruptcy filing,
various lawsuits were filed against Converse alleging that the Company was
liable for the debts of Apex. Claims in connection with these lawsuits totaled
approximately $6,500. Despite Converse's belief that it had valid defenses to
the claims made, the Company entered into settlement discussions with the Apex
estate in order to avoid defending these lawsuits and incurring the associated
legal fees. In February 1997, the United States Bankruptcy Court confirmed the
Apex plan of liquidation pursuant to which Converse made a $4,000 payment to
the Apex estate and a $500 payment to certain

F-27
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

creditors of Apex during the first quarter of 1997, resulting in a pretax loss
of approximately $4,500. In addition, Converse relinquished its claims against
Apex. The confirmed plan also included injunction and release provisions which
preclude Apex or its creditors from bringing or continuing any Apex related
claims against Converse.

As a result of the State Court Action, the settlement agreements with
certain former owners of Apex and the Apex bankruptcy payments, Converse will
record a net pretax gain of approximately $13,300 during the first quarter of
1997.

17. OTHER FINANCIAL DATA

Items charged to earnings during Fiscal 1994, 1995 and 1996 include the
following:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Advertising and
promotion.............. $51,339 $49,884 $28,544
Research and
development............ 7,847 8,617 6,503
</TABLE>

18. BUSINESS SEGMENT INFORMATION

Converse operates in one industry segment; designing, manufacturing and
marketing of athletic and leisure footwear. Converse has a diversified
customer base with one customer accounting for 12% of the Company's net sales
in both Fiscal 1995 and Fiscal 1996. Converse's products are distributed in
the United States and internationally.

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Total Revenues:
United States......... $328,334 $277,241 $254,255
Europe, Middle East,
Africa............... 70,575 115,788 96,613
Pacific............... 32,607 49,979 43,695
Americas (excluding
United States)....... 40,010 36,577 19,374
Less: Inter-Geographic
Revenues............. (34,219) (72,102) (64,602)
-------- -------- --------
$437,307 $407,483 $349,335
======== ======== ========
Operating Income (Loss):
United States......... $ 20,404 $(38,922) $(12,367)
Europe, Middle East,
Africa............... (3,694) (12,131) (11,253)
Pacific............... 14,356 18,276 23,576
Americas (excluding
United States)....... 5,022 3,055 208
-------- -------- --------
$ 36,088 $(29,722) $ 164
======== ======== ========
Identifiable Assets:
United States......... $127,394 $ 85,147 $ 99,724
Europe, Middle East,
Africa............... 49,558 83,358 72,293
Pacific............... 24,155 33,780 35,611
Americas (excluding
United States)....... 22,619 22,222 14,975
-------- -------- --------
$223,726 $224,507 $222,603
======== ======== ========
</TABLE>

F-28
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 DECEMBER 28, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
United States Export
Sales:
(included in geographic
revenues above)
Europe, Middle East,
Africa............... $ 35,354 $15,984 $12,203
Pacific............... 32,607 31,171 23,570
Americas (excluding
United States)....... 40,011 20,758 11,415
-------- ------- -------
$107,972 $67,913 $47,188
======== ======= =======
</TABLE>

Beginning in Fiscal 1995, the Company began converting certain international
independent distributors to operating units of Converse. Accordingly, United
States export sales began to decline in Fiscal 1995.

Inter-Geographic sales are accounted for based on established sales prices
between the related companies and pertain primarily to sales from the United
States to various foreign operations.

19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

Following is a summary of unaudited quarterly information:

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Year ended December 30, 1995:
Net sales......................... $131,196 $ 89,324 $110,121 $ 76,842
Gross profit...................... 45,669 29,815 29,338 8,713
Net earnings (loss)............... $ 8,509 $(32,353) $ (6,583) $(41,320)
======== ======== ======== ========
Net earnings (loss) per share..... $ 0.51 $ (1.94) $ (0.39) $ (2.48)
======== ======== ======== ========
Year ended December 28, 1996:
Net sales......................... $ 86,551 $ 79,907 $113,318 $ 69,559
Gross profit...................... 21,617 22,887 29,930 11,803
Net earnings (loss)............... $ (3,260) $ (3,743) $ (3,011) $ (8,421)
======== ======== ======== ========
Net earnings (loss) per share..... $ (0.20) $ (0.22) $ (0.18) $ (0.50)
======== ======== ======== ========
</TABLE>

F-29
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

<TABLE>
<CAPTION>
MARCH 29, 1997
--------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 3,913
Receivables, less allowance of $2,357 ........................ 114,419
Inventories (Note 3).......................................... 78,290
Refundable income taxes....................................... 582
Prepaid expense and other current assets...................... 13,529
--------
Total current assets........................................ 210,733
Net property, plant and equipment............................... 17,746
Other assets.................................................... 27,355
--------
$255,834
========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Short-term debt............................................... $16,366
Current maturities of long-term debt (Note 4)................. 154,777
Accounts payable.............................................. 52,758
Accrued expenses.............................................. 15,319
Income taxes payable.......................................... 3,836
--------
Total current liabilities................................... 243,056
Long-term debt, less current maturities (Note 4)................ --
Current assets in excess of reorganization value................ 31,857
Deferred postretirement benefits other than pensions............ 10,207
Stockholders' equity (deficiency):
Common stock, $1.00 stated value, 50,000,000 shares
authorized, 17,250,056 shares issued and outstanding at March
29, 1997..................................................... 17,250
Preferred stock, no par value, 10,000,000 shares authorized,
none issued and outstanding.................................. --
Additional paid-in capital.................................... 2,049
Retained earnings (deficit)................................... (47,585)
Foreign currency translation adjustment....................... (1,000)
--------
Total stockholders' equity (deficiency)..................... (29,286)
--------
$255,834
========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-30
<PAGE>

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

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 30, 1996 MARCH 29, 1997
-------------- --------------
<S> <C> <C>
Net sales....................................... $86,551 $135,969
Cost of sales................................... 64,934 93,809
------- --------
Gross profit.................................... 21,617 42,160
Selling, general and administrative expenses.... 26,306 36,765
Royalty income.................................. 4,928 6,377
Restructuring expense (credit)(Note 6).......... -- (564)
------- --------
Earnings from operations........................ 239 12,336
Loss (credit) on investment in unconsolidated
subsidiary..................................... -- (13,051)
Interest expense, net........................... 3,837 2,679
Other (income) expense, net..................... 877 2,090
------- --------
Earnings (loss) before income tax............... (4,475) 20,618
Income tax expense (benefit).................... (1,215) 7,938
------- --------
Net earnings (loss)............................. $(3,260) $ 12,680
======= ========
Net earnings (loss) per share................... $ (0.20) $ 0.71
======= ========
Weighted average number of common shares (Note
2)............................................. 16,692 17,862
======= ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-31
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------
MARCH 30, 1996 MARCH 29, 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................. $ (3,260) $ 12,680
Adjustments to reconcile net earnings (loss) to
net cash required for operating activities:
(Credit) on investment in unconsolidated sub-
sidiary ($13,051) less cash payments of
$7,207........................................ -- (20,258)
Provision for restructuring actions............ -- (564)
Depreciation of property, plant and equipment.. 818 860
Amortization of intangible assets.............. 108 118
Amortization of current assets in excess of re-
organization value............................ (519) (519)
Deferred tax benefit........................... (3,086) 6,948
Changes in assets and liabilities:
Receivables.................................... (15,714) (52,873)
Inventories.................................... 221 8,509
Refundable income taxes........................ 11,377 --
Prepaid expenses and other current assets...... 1,254 1,397
Accounts payable and accrued expenses.......... 3,337 1,100
Income taxes payable........................... 910 429
Other long-term assets and liabilities......... 191 756
-------- --------
Net cash required for operating activities... (4,363) (41,417)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment..... (1,422) (757)
-------- --------
Net cash used by investing activities........ (1,422) (757)
-------- --------
Cash flows from financing activities:
Net proceeds from exercise of stock options.... -- 222
Net proceeds from short-term debt.............. 1,051 2,945
Net proceeds from the A Facility............... 6,958 38,819
Payments on the B Facility..................... (2,686) (1,807)
-------- --------
Net cash provided by financing activities.... 5,323 40,179
Net decrease in cash and cash equivalents........ (462) (1,995)
Cash and cash equivalents at beginning of peri-
od.............................................. 2,738 5,908
-------- --------
Cash and cash equivalents at end of period....... $ 2,276 $ 3,913
======== ========
</TABLE>

See accompanying notes to condensed consolidated financial statements.

F-32
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

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 thereto should be read in conjunction
with the Company's annual report on Form 10-K for the year ended December 28,
1996. The Company's consolidated results of operations for the three months
ended March 29, 1997 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 weighted
average number of common shares and common equivalent shares, if dilutive,
assumed outstanding for the applicable period.

Net earnings for the first quarter of 1997 included a gain of approximately
$8,000, net of income taxes, pertaining to the settlement of outstanding
litigation relating to Apex One, Inc. (see Note 8). Earnings per share for the
first quarter of 1997 of $0.71 includes $0.45 pertaining to these litigation
settlements.

3. INVENTORIES

Inventories are summarized as follows:

<TABLE>
<CAPTION>
MARCH 29, 1997
--------------
<S> <C>
Retail merchandise............................................ $ 6,610
Finished products............................................. 64,336
Work in process............................................... 4,070
Raw materials................................................. 3,274
-------
$78,290
=======
</TABLE>

4. DEBT

As more fully described in Note 9 to the Consolidated Financial Statements
for the year ended December 28, 1996 the Company maintains a $161,490 secured
credit facility (comprising an "A Facility" for $135,000 and a "B Facility"
for $26,490) (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
borrowing base was increased by an additional $25,000 under the A Facility,
provided a standby letter of credit is issued for the benefit of the Banks.
Apollo Investment Fund, LP ("Apollo"), which together with its affiliates, is
the beneficial owner of approximately 65.1% of the Company's outstanding
common stock as of March 29, 1997, 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 June 30, 1997.

During November 1996, the Credit Facility was amended in order to provide
seasonal borrowing ("Seasonal Accommodation") by Converse under the A Facility
above those supported by its defined borrowing base and Collateral Letter of
Credit in an amount up to $10,000. Effective March 31, 1997, the Credit
Facility was amended whereby the Seasonal Accommodation was increased to
$15,000, expiring October 15, 1997. In addition, the commitment of the Banks
under the A Facility was increased from $135,000 to $150,000.

F-33
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

As further described herein, the Credit Facility, Collateral Letter of
Credit and Seasonal Accommodation expire during 1997. Accordingly, the total
indebtedness outstanding pertaining to these debt instruments of $154,777 as
of March 29, 1997 has been classified as current within the accompanying
consolidated balance sheet.

As of March 29, 1997, approximately $135,000 was available under the A
Facility borrowing base, inclusive of availability as a result of the
Collateral Letter of Credit and Seasonal Accommodation, for borrowing which
may be used for revolving loans, letters of credit, foreign exchange contracts
and acceptances. The aggregate of letters of credit, foreign exchange
contracts and acceptances may not exceed $100,000 at any time; revolving loans
are limited only by the facility's maximum availability less any amount
outstanding for letters of credit, foreign exchange contracts or acceptances.
As of March 29, 1997, utilization under the A Facility, inclusive of the
Collateral Letter of Credit and Seasonal Accommodation, consisted of revolving
loans of $93,741 and bankers acceptances of $34,546. In addition, outstanding
letters of credit of $3,559 as of March 29, 1997 were reserved against the
maximum available borrowing base. As a result, $3,154 of the maximum available
borrowing base remained unutilized as of March 29, 1997. As of March 29, 1997,
the B Facility, which also expires on November 17, 1997, had loans outstanding
of $26,490. The Company is not permitted further borrowings against the B
Facility.

Loans under the A Facility bear interest either at the Prime Lending Rate
(as defined therein) plus a margin of 1.25%, or at Adjusted LIBOR (as defined
therein) plus a margin of 2.5% per annum. The foregoing LIBOR margin may be
reduced following Converse's achievement of improved ratios under certain
financial tests specified in the Credit Facility. At March 29, 1997, revolving
loans outstanding under the A Facility bore interest at 8.26%, based upon the
weighted average of the Prime and Adjusted LIBOR rates, as defined. Loans
under the B Facility bear interest at the Prime Lending Rate plus a margin of
4%, or at Adjusted LIBOR plus a margin of 5.5% per annum. At successive six-
month terms of the loan, the rate of interest on loans outstanding under the B
Facility automatically increases 0.5%. At March 29, 1997, loans outstanding
under the B Facility were Adjusted LIBOR rate loans bearing interest at
11.24%.

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 March 29, 1997, total short-term borrowings outstanding under
these financing arrangements totaled $16,366. 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, as defined in such
agreements.

In conjunction with the Company's acquisition of 100% of the outstanding
common stock of Apex One, Inc. ("Apex"), 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. On December 28, 1996,
$9,644 of these notes were outstanding. As of March 29, 1997, substantially
all of these remaining notes have been delivered to the Company by the former
owners of Apex in conjunction with the lawsuit settlement agreements. See Note
8.

5. LOSS ON INVESTMENT IN UNCONSOLIDATED SUBSIDIARY

As more fully described in Note 3 to the Consolidated Financial Statements
for the year ended December 28, 1996, on August 11, 1995 the Company ceased
funding the operations of its unconsolidated subsidiary, Apex. At December 28,
1996, an accrual of $5,424 remained, which represented the Company's estimates
of its

F-34
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

liabilities relating to Apex. During the first quarter of 1997, this remaining
accrual was reversed in conjunction with the Apex litigation settlements. See
Note 8.

6. RESTRUCTURING

As more fully described in Note 4 to the Consolidated Financial Statements
for the year ended December 28, 1996, 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 March 29, 1997:
<TABLE>
<CAPTION>
DECEMBER 28, CHARGES/ MARCH 29,
1996 WRITE- CHANGES IN 1997
BALANCE OFFS ESTIMATES BALANCE
------------ -------- ---------- ---------
<S> <C> <C> <C> <C>
Contract termination costs......... $1,502 $ 858 -- $ 644
Employee severance and related
costs............................. 2,456 646 -- 1,810
Lease termination costs............ 564 -- (564) --
------ ------ ----- ------
$4,522 $1,504 $(564) $2,454
====== ====== ===== ======
</TABLE>

During the first quarter of 1997, the Company re-opened the manufacturing
facility located in Mission, Texas for cutting and limited production due to
an unexpected increase in demand for athleisure products. Accordingly, the
remaining lease termination restructuring reserve was reversed. The remaining
liabilities represent fixed amounts to be paid out over the next two years.

7. COMMITMENTS AND CONTINGENCIES

Converse is or may become a defendant in a number of pending or threatened
legal proceedings in the ordinary course of its business. Converse believes
that the ultimate outcome of any such proceedings will not have a material
adverse effect on its financial position or results of operations.

8. APEX ONE, INC. LITIGATION RESOLUTION

As more fully described in Note 16 to the Consolidated Financial Statements
for the year ended December 28, 1996, during the first quarter of 1997, the
Company settled substantially all claims with the former owners of Apex as
well as substantially all claims with former Apex creditors and the Apex
bankruptcy estate. As a result of these settlements, the Company recorded a
net pretax gain of approximately $13,051 during the first quarter of 1997. As
of April 1997, one former owner of Apex has not settled with Converse.
Subsequent to December 28, 1996, the Supreme Court of the State of New York
issued a judgment in favor of Converse against this former owner. This former
owner of Apex continues to hold subordinated notes issued by Converse in the
amount of $774. This amount is included within accrued expenses in the
accompanying March 29, 1997 consolidated balance sheet, offset by a receivable
of $774. As of March 29, 1997, there are no remaining material claims against
Converse relating to its 1995 acquisition of Apex.

9. RECENTLY ISSUED ACCOUNTING STANDARDS

During 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share" (FAS 128). FAS 128 requires the Company to disclose
a basic and diluted earnings per share calculation. Basic earnings per share
excludes common stock equivalents from the EPS calculation, while diluted EPS
is calculated consistent with the Company's primary earnings per share
calculation. The Company will adopt the provisions of FAS 128 within the 1997
year-end consolidated financial statements. Basic and diluted earnings per
share, as computed under FAS 128, would have been $0.74 and $0.71 per share,
respectively, for the period ended March 29, 1997.

F-35
<PAGE>

CONVERSE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
(UNAUDITED)

10. SUBSEQUENT EVENT
On April 30, 1997, the Company accepted a commitment letter of BT Commercial
Corporation ("BTCC") to supply a new $150,000,000 revolving credit facility
(the "New Credit Facility"), which will replace the Company's existing Credit
Facility. The New Credit Facility will have term of five years, will provide
for borrowings and other credit accommodations in a manner similar to the A
Facility under the Company's existing Credit Facility and will be secured by
substantially the same assets. Borrowings will initially bear interest at the
rates currently provided under the A Facility but will have provisions for
reduction in the event the Company achieves certain financial ratios. See Note
4. The commitment letter is conditioned upon receipt by the Company of a
specified amount from the sale of equity or subordinated debt securities and
other customary matters.

F-36
<PAGE>

[All American Logo]

[All Original Logo]

[All Authentic Logo]

[All Sports Logo]

[Converse All Star Logo]

<PAGE>

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

NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTI-
TUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE NOTES
OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UN-
LAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PRO-
SPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HERE-
OF.

-----------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 12
Use of Proceeds.......................................................... 15
Capitalization........................................................... 16
Price Range of Common Stock and Dividend Policy.......................... 16
Selected Consolidated Historical and
Pro Forma Financial Information......................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 30
Management............................................................... 41
Certain Transactions..................................................... 44
Security Ownership of Certain Beneficial Owners and Management........... 46
Description of Notes..................................................... 47
Description of Capital Stock............................................. 55
Certain United States Federal Tax Consequences........................... 57
Underwriting............................................................. 61
Legal Matters............................................................ 62
Experts.................................................................. 62
Additional Information................................................... 63
Incorporation of Certain Documents by Reference.......................... 63
Index to Consolidated Financial Statements............................... F-1
</TABLE>

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- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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$70,000,000

CONVERSE INC.

7% CONVERTIBLE SUBORDINATED
NOTES DUE 2004

-------

PROSPECTUS

MAY 15, 1997

-------

SMITH BARNEY INC.

DILLON, READ & CO. INC.

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION

GOLDMAN, SACHS & CO.

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