<PAGE>

================================================================================
 
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549
                                        

                                   FORM 10-K

[X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
        ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996.

                                       OR

[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
        EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION
        PERIOD FROM _________ TO __________

                        COMMISSION FILE NUMBER 1-13430

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

            DELAWARE                                    43-1419731
 (State or other jurisdiction of                     (I.R.S. Employer
  incorporation or organization)                     Identification No.)

                                ONE FORDHAM ROAD
                       NORTH READING MASSACHUSETTS 01864
              (Address of principal executive offices) (Zip Code)
      Registrant's telephone number, including area code:  (508) 664-1100
          -----------------------------------------------------------
          Securities registered pursuant to Section 12(b) of the Act:

    TITLE OF EACH CLASS                                 NAME OF EACH EXCHANGE
                                                         ON WHICH REGISTERED
Common stock, without par value                        New York Stock Exchange

          Securities registered pursuant to Section 12 (g) of the Act:
                                     None.

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

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

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

          As of March 14, 1997, the aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant was approximately
$355,741,155, based on the closing sales price of the registrant's Common Stock
as reported on the New York Stock Exchange as of such date ($20 5/8).

          Indicate with a check mark whether the registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a Court.  YES [X]  NO  [ ]

          As of March 14, 1997, 17,248,056 shares of the registrant's Common
Stock were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the Registrant's definitive Proxy Statement to be filed
with the Securities and Exchange Commission on or before April 28, 1997 for the
Annual Meeting of Stockholders to be held on June 18, 1997 are incorporated by
reference into Part III of this Report, as indicated herein.

================================================================================

<PAGE>
 
                                 CONVERSE INC.
                           ANNUAL REPORT ON FORM 10-K

                               TABLE OF CONTENTS
                                                                          Page
                                                                          ----
                                    PART  I.

     Item 1.   Business...............................................
                  General.............................................
                  Products............................................
                  Marketing and Product Development...................
                  Sales and Distribution..............................
                  Licensing Agreements................................
                  Sourcing and Manufacturing..........................
                  Research and Development............................
                  Backlog.............................................
                  Competition.........................................
                  Trademarks and Patents..............................
                  Environmental Matters...............................
                  Employees...........................................
 
 
     Item 2.   Properties.............................................

     Item 3.   Legal Proceedings......................................

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

                                    PART II.

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

     Item 6.   Selected Financial Data................................

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

     Item 8.   Financial Statements and Supplemental Data.............

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

                                   PART  III.

     Item 10.  Directors and Executive Officers of the Registrant

     Item 11.  Executive Compensation.................................

     Item 12.  Security Ownership of Certain Beneficial Owners........

     Item 13.  Certain Relationships and Related Transactions.........

                                   PART  IV.

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

                                   SIGNATURES

               Signatures.............................................
<PAGE>
 
  Information contained or incorporated by reference in this Report 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., "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 contained in "Business--Risk Factors" of this Report
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.
 
                                     PART I
                                     ------
ITEM 1.  BUSINESS.
------------------

                                   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, the Company's backlog was
approximately 39% higher at the end of 1996 as compared to 1995, with increases
in the four core categories of basketball, athleisure, children's and cross
training of approximately 68%, 17%, 42% and 66%, respectively. 

 THE 1996 REPOSITIONING
 
  . Establishing a New Management Team. In 1996, the Company 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 and James E. Solomon as Senior Vice
    President, Marketing and also engaged Ned Frederick to oversee product
    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. Mr. 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.
 
                                       1
<PAGE>
 
  . 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.
 
  . 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. 
 
  . 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 were reduced by
    approximately $31 million, or 21%, as compared to 1995.
 
                                       2
<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
 
                                       3
<PAGE>
 
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 the domestic retail market for basketball footwear
was approximately $2.3 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.
 
 
 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 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. 
 
 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 retail market for children's footwear
was approximately $1.9 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.
 
 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.
 
                                       4
<PAGE>
 
  Management believes that the domestic 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.
 
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 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.
 
                                       5
<PAGE>
 
 
  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 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.
 
  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
                                          --------------------------------------
                                          DECEMBER 31, DECEMBER 30, DECEMBER 28,
                                              1994         1995         1996
                                          ------------ ------------ ------------
                                                  (DOLLARS IN THOUSANDS)
<S>                                       <C>          <C>          <C>
Total sales by licensees:
  Footwear...............................   $ 90,449     $ 84,231     $101,117
  Apparel and accessories................    106,490      178,185      307,011
                                            --------     --------     --------
  Total..................................   $196,939     $262,416     $408,128
                                            ========     ========     ========
Total royalty income:
  Footwear...............................   $  7,653     $  7,046     $  7,944
  Apparel and accessories................      6,559       10,211       19,693
                                            --------     --------     --------
  Total..................................   $ 14,212     $ 17,257     $ 27,637
                                            ========     ========     ========
</TABLE>
 

                                       6
<PAGE>
 
  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. The Company plans to reopen the Mission
facility in 1997 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. Over the past
three years, the Company has spent a total of $23.0 million on 

                                       7
<PAGE>
 
research and development. 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
 
  At the end of Fiscal 1996, the Company's global backlog was $183.3 million,
compared to $131.9 million at the end of Fiscal 1995. 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.
 
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 Inc. ("Nike"), with 1996 estimated U.S. footwear revenues
exceeding $2.5 billion, controls over 30% of the U.S. athletic footwear market.
Reebok International, Inc. ("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 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 AG ("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.
 
                                       8
<PAGE>
 
  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 years. The Reynosa, Mexico manufacturing workforce, representing
approximately 17% of Converse's work force, is represented by a union.
 
RISK FACTORS
 
  Investors should carefully consider the following factors, together with other
information contained and incorporated by reference in this Report, in
evaluating an investment in the Company.
 
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 $38.9 million at December 28, 1996. Although recent
improvements in backlog are encouraging, there can be no assurance that any
profitability that is achieved will be maintained.
 
COMPETITION; CHANGES IN CONSUMER PREFERENCES
 
  As described above under "Business--Competition," the branded athletic
footwear industry is highly competitive. Furthermore, 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."
 
                                       9
<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."
 
 
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 and Product Development." 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 65.2% of the outstanding Common Stock of the
Company at December 28, 1996. 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".
 
SHARES ELIGIBLE FOR FUTURE SALE
 
   The Apollo Stockholders have the right to cause Converse to register the
shares of Common Stock that they own pursuant to a registration rights
agreement. Future sales of shares, or the availability of shares for future
sale, could adversely affect the prevailing market prices for the Common Stock.
 
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. 

                                      10
<PAGE>
 
ITEM 2.  PROPERTIES.
--------------------


  Converse owns or leases the following principal plants, offices and
warehouses:

                                                      FLOOR SPACE
LOCATION                        TYPE OF FACILITY     -------------  OWNED/LEASED
--------                        ----------------     (SQUARE FEET)  ------------
                                                     -------------
                                                                             
North Reading, MA..........  Headquarters                 106,800      Owned 
Wilmington, MA.............  Research and                  23,192      Leased
                             Development Facility
Lumberton, NC..............  Plant                        386,761      Owned
Charlotte, NC..............  Distribution center          431,665      Leased
Reynosa, Mexico............  Plant                         50,188      Owned
Mission, TX................  Plant                         55,552      Leased


  In addition to the above properties, the Company leases space for 35 retail
stores in the U.S. and 2 retail stores in the United Kingdom. The Company also
leases several sales and customer service offices and distribution centers
throughout the world. The Wilmington, Massachusetts lease expires in 1998, with
renewal terms through 2000, the Charlotte, North Carolina lease expires in 2001,
and the Mission, Texas facility lease expires in 1998, with renewal terms
through 2014. For further information regarding the Lumberton and Mission
facilities see "Business--Sourcing and Manufacturing".


ITEM 3.  LEGAL PROCEEDINGS.
---------------------------

A.    Apex-related Litigation
      -----------------------

  On May 18, 1995, Converse consummated the acquisition of Apex One, Inc.
("Apex").  Under the terms of the Apex 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 million, 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.

  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 

                                      11
<PAGE>

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 $2.0 million 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 $17.8 million. 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 approximately $8.9 million, $3.5 million
and $5.4 million 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 $750,000, 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
$774,000.  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.

  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 $4.0 million payment to the Apex estate and a $500,000 payment
to certain creditors of Apex during the first quarter of 1997, resulting in a
pretax loss of approximately $4.5 million.  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 $13.3 million during the first quarter of 1997.
See notes 3 and 16 to the Consolidated financial statements contained herein.

B.  Other Litigation
    ----------------

  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.

                                      12
<PAGE>

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

  Not applicable.



                                    PART II
                                    -------
                                        
ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
-------------------------------------------------------------------------------

The Company's common stock ("Common Stock") is traded on the New York Stock
Exchange ("NYSE") 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 NYSE
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
</TABLE>
 
  As of March 14, 1997 there were 17,248,056 shares of Common Stock issued and
outstanding, which shares were held by 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. 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.

ITEM 6.  SELECTED FINANCIAL DATA.
---------------------------------

  The following selected consolidated financial data of Converse should be read
in conjunction with Converse's historical consolidated financial statements and
the notes thereto contained herein. The following selected historical
consolidated financial data has been derived from the historical consolidated
financial statements of Converse. Prior to the Distribution effected on November
17, 1994, Converse was a wholly-owned subsidiary of Furniture Brands
International, Inc. ("Furniture Brands"). Furniture Brands and its principal
domestic subsidiaries, including Converse, emerged from Chapter 11
reorganization on August 3, 1992. In accordance with AICPA Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code," Furniture Brands was required to adopt "fresh-start" reporting, and such
principles have been applied to the consolidated financial statements of
Converse and the tables presented below. Accordingly, Converse's consolidated
financial statements at dates and for periods after August 2, 1992 are not
comparable to the consolidated financial statements for prior periods. The
historical consolidated financial statements of Converse for 1994 and prior
periods may not reflect the results of operations or financial position that
would have been obtained had Converse been a separate, independent company
during such periods.

  The unaudited pro forma consolidated statement of operations data for the year
ended December 31, 1994 has been derived from the historical consolidated
financial statements of Converse and gives effect to the Distribution, the new
Credit Facility of Converse entered into in connection therewith and the
application of the net proceeds therefrom as if they occurred at the beginning
of the year.  The pro forma information is presented for illustrative purposes
only and is not necessarily indicative of operating results that would have
occurred had the Distribution been consummated at the beginning of the year.

                                      13
<PAGE>

<TABLE>
<CAPTION>
 
                                          FIVE MONTHS ENDED (1)                            FISCAL YEAR ENDED     
                                  ------------------------------------  -----------------------------------------------------------
                                       AUG. 2, 1992       JAN. 2, 1993  JAN. 1, 1994  DEC. 31, 1994  DEC. 30, 1995   DEC. 28, 1996
                                  ----------------------  ------------  ------------  -------------  --------------  --------------
<S>                               <C>                     <C>           <C>           <C>            <C>             <C>
                                                                      (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Net sales.......................              $ 133,976       $134,879      $380,427       $437,307       $407,483       $ 349,335
Cost of sales...................                 93,372         88,204       254,338        286,555        293,948         263,098
                                              ---------       --------      --------       --------       --------       ---------
Gross profit....................                 40,604         46,675       126,089        150,752        113,535          86,237
Selling, general and
 administrative expenses........                 41,760         43,366       108,059        128,876        146,332         114,888
 
Royalty income..................                  3,102          4,538        10,808         14,212         17,257          27,638
Restructuring expense (credit)..                   ----           ----          ----           ----         14,182          (1,177)
Earnings (loss) from
 operations.....................                  1,946          7,847        28,838         36,088        (29,722)            164
Loss (credit) on investment
 in unconsolidated
 subsidiary.....................                   ----           ----          ----           ----         52,160          (1,362)
Interest expense................                  2,753          3,152         7,501          7,423         14,043          17,776
Other expense, net..............                    564            165         1,904            504          3,966           6,319
                                              ---------       --------      --------       --------       --------       ---------
Earnings (loss) before                                                                                                              
 reorganization items, income
 tax expense (benefit), and
 cumulative effect of a change
 in accounting principle........                 (1,371)         4,530        19,433         28,161        (99,891)        (22,569) 
Reorganization items............                (99,531)          ----          ----           ----           ----            ----
                                              ---------       --------      --------       --------       --------       ---------
Earnings (loss) before income                                                                                                       
 tax expense (benefit) and
 cumulative effect of a change
 in accounting principle........               (100,902)         4,530        19,433         28,161        (99,891)        (22,569) 
Income tax expense (benefit)....                    313          3,570         7,329         10,565        (28,144)         (4,134)
                                              ---------       --------      --------       --------       --------       ---------
Earnings (loss) before
 cumulative effect of a change                                                                                                      
 in accounting principle........               (101,215)           960        12,104         17,596        (71,747)        (18,435) 
 
Cumulative effect on prior                                                                                                         
 years of a change in
 accounting for retirement
 benefits other than  pensions..                 (6,766)          ----          ----           ----           ----            ---- 
                                              ---------       --------      --------       --------       --------       ---------
Net earnings (loss).............              $(107,981)      $    960      $ 12,104       $ 17,596       $(71,747)       ($18,435)
                                              =========       ========      ========       ========       ========       =========
Net earnings (loss) (per share).                                                              $1.05         $(4.30)          (1.10)
PRO FORMA STATEMENT OF
 OPERATIONS DATA (UNAUDITED):
 Interest expense(2)............                                                             10,148
 Income tax expense (3).........                                                              9,479
 Net Earnings(4)................                                                             16,004
 Net Earnings per share (4)(5)..                                                              $0.96
BALANCE SHEET DATA
(AT PERIOD END):
 Working capital................              $ 119,523       $108,975      $111,080       $131,122       $ 89,680       $ (32,648)
 Total assets...................                167,956        167,010       179,954        223,726        224,507         222,603
 Long-term debt, less current                                                                                                      
  maturities....................                 75,587         70,300        69,262         77,087        112,824           9,644 
 Total stockholders' equity                                                                                                         
  (deficiency)..................                  4,926          3,191        10,270         44,987        (22,685)        (38,868) 
</TABLE>

                                      14
<PAGE>

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

(1)  Effective January 2, 1993, Converse changed its fiscal year end from the
     last Saturday in February of each year to the Saturday closest to December
     31 of each year.  This change, coupled with "fresh-start" reporting,
     results in reporting fiscal 1992 in two 22-week periods.

(2)  Reflects the elimination of interest expense on Converse's allocated debt
     prior to the Distribution ($80,000 at November 17, 1994) and records
     interest expense under the Credit Facility entered into in connection with
     the Distribution ("A Facility" borrowings of $35,000 plus average seasonal
     borrowing of $10,000 at an average rate of 8.4% per annum, "B Facility"
     borrowings of $40,000 at an average rate of 9.15% per annum, letters of
     credit fees of $600 per year, unused line fees of $335 per year and
     amortization of deferred facility fees [A Facility commitment fees of
     $4,000 amortized over three years and B Facility commitment fees of $1,200
     amortized over three years, $400 amortized over twenty-seven months
     beginning nine months after transaction date and $800 amortized over two
     years beginning one year after transaction date]).

(3)  Reflects a reduction in income tax expense relating to pro forma
     adjustments at an effective income tax of 37.2%.

(4)  Includes the effect of $500 in fees that the Company paid to Furniture
     Brands for consulting services under a Services Agreement that terminated
     after one year, an annual consulting fee of $500 that the Company pays to
     Apollo Advisors, L.P. and an annual collateral management fee of $100
     payable to the principal lender under the Credit Facility.

(5)  Pro forma net earnings per share calculated assuming 16,692,156 shares of
     Common Stock were outstanding throughout the period.  Outstanding stock
     options are considered Common Stock equivalents but are not dilutive for
     purposes of computing pro forma net earnings per share.


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

                    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, 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. 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, 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").

                                      15
<PAGE>

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
(Credit)/loss 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>
 
 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%).
 
 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.
 
 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

                                      16
<PAGE>

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.
 
 
 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 $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 Consolidated Financial Statements of the Company 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.
 
 (Credit) Loss 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 Consolidated Financial Statements of the Company 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 Consolidated Financial Statements
of the Company 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 Consolidated Financial Statements of the Company 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.
 
Net Loss Per Share
 
  The Company recorded a net loss per share of $1.10 in Fiscal 1996 versus a
net 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.

                                      17
<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
 
                                      18
<PAGE>
 
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
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 Consolidated
Financial Statements of the Company 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
Consolidated Financial Statements of the Company 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 of
the Notes to 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.
 
 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.
 
                                      19
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES
 
 Cash Flow
 
  Net cash required for operating activities was $8.0 million for Fiscal 1996.
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
 
  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 (see "Financing Arrangements" below
for a discussion of the Credit Facility). 
 
  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.

                                      20
<PAGE>

  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 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 December 28, 1996, the Company had a $163.3 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 $28.3 million of direct borrowings. The Credit
Facility is secured by substantially all of the Company's assets located in
the United States and Canada.
 
  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 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 8.20% per annum at December 28, 1996.
 
  During 1996, the B Facility was reduced from $40.0 million outstanding at
December 30, 1995 to $28.3 million at December 28, 1996. 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. Loans outstanding under the B Facility accrue interest at the Prime
Lending Rate plus 4.0% or Adjusted LIBOR plus 5.5% at December 28, 1996
(subject to an increase of 0.5% in May 1997). The average weighted interest
rate on the B Facility was 10.95% per annum 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 $117.8
million as of December 28, 1996 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.

                                      21
<PAGE>
 
  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 believes that it will be in compliance with these amended
financial covenants through the current term of the facility.
 
  The Company maintains asset based financing arrangements in certain European
countries with various lenders. Borrowings outstanding under these financing
arrangements totaled $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
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 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 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 Consolidated Financial
Statements of the Company included herein.
 
 Capital Expenditures
 
  Capital expenditures were $5.3 million, $5.8 million and $8.5 million in
Fiscal 1996, Fiscal 1995 and Fiscal 1994, respectively. During 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 the end of Fiscal 1996, the Company's global backlog was $183.3 million,
compared to $131.9 million at the end of Fiscal 1995. 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.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
----------------------------------------------------

  The information required by this Item is submitted in a separate section of
this report.  See Item 14 for index to financial statements required by this
item.


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

  On April 14, 1995, the Company dismissed KPMG Peat Marwick LLP ("KPMG") as its
independent accountants and engaged Price Waterhouse LLP as its independent
accountants for the Company's 1995 Fiscal year.  The Company's decision to
change its independent accounting firm was made in connection with a
reevaluation of this function in connection with the Company's spin-off from
Furniture Brands, its former parent, which occurred on November 17, 1994.
The Audit Committee of the Company's Board of Directors recommended the change
of independent auditors to Price Waterhouse LLP.  The Executive Committee of the
Company's Board of Directors voted to approve this change.

  The report of KPMG on the Company's financial statements for 1994 did not
contain any adverse opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope or accounting principles.  In addition,
during Fiscal year 1994 and the subsequent interim period preceding April 14,
1995, there were no disagreements with KPMG on any matter of accounting
principles or practices, financial statement disclosure, auditing scope or
procedure, which disagreement, if not resolved to the satisfaction of KPMG,
would have caused KPMG to make a reference to the subject matter of the
disagreement in connection with its report.  The Company reported this change in
accountants on  Form 8-K on April 19, 1995.  At that time, the Company requested
that KPMG furnish it with a letter addressed to the Securities and Exchange
Commission stating whether or not it agrees with the above statements.  The
Company filed a copy of such letter as an exhibit to its report on Form 8-K by
amendment on April 26, 1995, promptly after such letter was received.

                                      22
<PAGE>

  During the two Fiscal years prior to this change and through April 14, 1995,
the Company had not consulted with Price Waterhouse LLP on any items which
concerned the subject matter of a disagreement or a reportable event with the
former accountants or any other matter described in Regulation S-K Item 304 (a)
(2).

PART III
--------

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
----------------------------------------------------------

                                  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 38 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 oriented investment fund. Mr. Black has been
director and officer of Apollo Capital Management, Inc. ("Apollo 

                                      23
<PAGE>
 
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.,
Profitt'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.
 
  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.

                                      24
<PAGE>

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
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.
 
  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 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.

                                      25
<PAGE>

  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.
<PAGE>
 
ITEM 11.  EXECUTIVE COMPENSATION.
---------------------------------


  The information required by this Item is incorporated by reference from the
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held June 18, 1997, which will be filed with the Securities and Exchange
Commission on or before April 28, 1997 (the "1997 Proxy Statement").

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


  The information required by this Item is incorporated by reference from the
1997 Proxy Statement.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
---------------------------------------------------------


  The information required by this Item is incorporated by reference from the
1997 Proxy Statement.

 
                                    PART IV
                                    -------



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


(a)  List of documents filed as part of this report.

  1.  Financial statements:

  The following consolidated financial statements are included in Item 8 and
presented as a separate section of this report:

                                                          Page
                                                          ----

  Report of Independent Accountants, 1996 and 1995        F-2

  Independent Auditors' Report, 1994                      F-3

 
  Consolidated Balance Sheet at
  December 30, 1995 and December 28, 1996                 F-4

                                      27
<PAGE>
 
  For each of the fiscal years ended December 31, 1994,
  December 30, 1995 and December 28, 1996:
 
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 - F-23
 
  2. Financial Statement Schedule:
 
        Schedule II - Valuation and Qualifying Accounts      F-24

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

  3.  Exhibits

  2.1  Distribution and Services Agreement dated as of November 17, 1994,
       between INTERCO and Converse Inc. ("Services Agreement") (3)

  2.2  Amendment to Services Agreement dated as of November 28, 1995. (10)

  2.3  Securities Purchase Agreement, dated as of April 28, 1995, by and among
       Converse Inc., Apex One, Inc., and the Sellers of Apex One, Inc. (7)

  3.1  Restated Certificate of Incorporation (3)

  3.2  By-laws (3)

  4.1  Form of Promissory Notes (7)
  
  4.2  Form of Warrants (7)
  
 10.1  Credit Agreement dated as of November 17, 1994, among Converse
       Inc., its subsidiaries, BT Commercial Corporation and certain other
       lenders (the "Credit Agreement") (3)
 
 10.2  First Amendment to Credit Agreement (9)
       
 10.3  Waiver to Credit Agreement (8)
       
 10.4  Second Amendment and Waiver to Credit Agreement (9)
       
 10.5  Third Amendment and Waiver to Credit Agreement. (10)
       
 10.6  Fourth Amendment to Credit Agreement (13)
       
 10.7  Fifth Amendment to Credit Facility*
       
 10.8  Sixth Amendment to Credit Facility*
 
 10.9  Converse Inc. 1994 Stock Option Plan, as Amended and Restated (12)

 10.10 Converse Inc. 1995 Non-Employee Director Stock Option Plan (10)
 
 10.11 Amendment and Reaffirmation of Lease dated June 29, 1988, between
       Godley Construction Company Inc. ("Godley") and Converse Inc. and
       Lease Agreement dated as of March 26, 1974, between Godley and
       Charlotte Footwear, Inc. (1)

                                      28
<PAGE>

    10.12 Sublease Agreement dated as of September 28, 1993, between Kmart
          Corporation and Converse Inc. (1)

    10.13 Registration Rights Agreement  dated as of November 17, 1994,
          between Apollo Interco Partners, L.P. and Converse Inc. (3)

    10.14 INTERCO/Converse Tax Sharing Agreement dated as of November 17,
          1994, between INTERCO and Converse Inc. (3)

    10.15 Amendment to INTERCO/Converse Tax Sharing Agreement dated February
          21, 1996 (10)

    10.16 Consulting Agreement dated as of November 17, 1994, between Apollo
          Advisors, L.P. and Converse Inc. (3)

    10.17 Converse Inc. Executive Incentive Plan (1)

    10.18 Converse Inc. Team Incentive Plan (1)

    10.19 Converse Inc. Retirement Plan (1)
          
    10.20 Converse Inc. Supplemental Executive Retirement Plan (10)
          
    10.21 Agreement among Julius W. Erving, the Erving Group and Converse
          Inc., dated October 1, 1984 as amended by an Amendment dated September
          16, 1988, a Second Amendment dated July 18, 1989, a Third Amendment
          dated October 17, 1991, and a Fourth Amendment dated February 7, 1994
          (2)

    10.22 Fifth Amendment to Agreement among Julius W. Erving, The Erving
          Group, Inc. and Converse Inc. (5)

    10.23 Sixth Amendment to Agreement among Julius W. Erving, the Erving
          Group, Inc. and Converse Inc. (11)

    10.24 Seventh Amendment to Agreement among Julius W. Erving, the Erving
          Group, Inc. and Converse Inc. *

    10.25 Agreement of Sale between INTERCO and Converse Inc. dated
          September 30, 1994 relating to a distribution facility in Chester,
          South Carolina (2)

    10.26 Lease Agreement dated as of January 3, 1995 between Talbot Operations
          Inc. and Converse Inc. (4)

    10.27 Employment Agreement between Converse and Glenn N. Rupp (12)

    10.28 Employment Agreement between Converse and James Solomon (13)

    10.29 Employment Agreement between Converse and Donald J. Camacho (10)

    10.30 Form of Employment Agreement dated as of October 25, 1995, between
          Converse and each of the following: Jack A. Green, Herbert R.
          Rothstein, Ronald J. Ryan, Alistair Thorburn, Thomas L. Nelson and
          James E. Lawlor (10)

    10.31 Amended and Restated Accommodation Letter*

    16.   Letter Regarding Change in Certifying Accountant (6)

    21.   List of subsidiaries*

                                      29
<PAGE>

    23.1      Consent of KPMG Peat Marwick LLP*

    23.2      Consent of Price Waterhouse LLP*

    27        Financial Data Schedule

*         Filed herewith

(1)  Filed as an Exhibit to Converse Inc. Form 10 dated October 14, 1994 filed
     with the SEC on October 14, 1994, and incorporated by reference herein.    

(2)  Filed as an Exhibit to Converse Inc. Form 10/A Amendment    
     No. 1, filed with the SEC on November 8,
    
(3)  Filed as an Exhibit to Converse Inc. Form 10/A Amendment No. 2, filed with
     the SEC on November 23, 1994, and incorporated by reference herein.
    
(4)  Filed as an Exhibit to Converse Inc. Form 10-K dated March 17, 1995, and
     incorporated by reference herein.
    
(5)  Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for the
     quarter ended April 1, 1995, and incorporated by reference herein.
    
(6)  Filed as an Exhibit to Converse Inc. Current Report on Form 8-K/A dated
     April 14, 1995, and incorporated by reference herein.
    
(7)  Filed as an Exhibit to Converse Inc. Current Report on Form 8-K dated May
     18, 1995, and incorporated by reference herein.
    
(8)  Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for the
     quarter ended July 1, 1995, and incorporated by reference herein.

(9)  Filed as an Exhibit to Converse Inc. Quarterly Report on Form 10-Q for the
     quarter ended September 30, 1995, and incorporated by reference herein.

(10) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-K for the
     year ended December 30, 1995, and incorporated by reference herein.

(11) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-Q for the
     quarter ended March 30, 1996, and incorporated by reference herein.

(12) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-Q for the
     quarter ended June 29, 1996, and incorporated by reference herein.

(13) Filed as an Exhibit to Converse Inc. Annual Report on Form 10-Q for the
     quarter ended September 28, 1996, and incorporated by reference herein.

  (b) No reports on Form 8-K were filed by the Company during the last quarter
      of Fiscal 1995.

  UPON WRITTEN REQUEST TO THE COMPANY'S SECRETARY, THE COMPANY WILL FURNISH
SHAREHOLDERS WITH A COPY OF ANY OR ALL SUCH EXHIBITS REQUESTED AT A CHARGE OF
TEN CENTS PER PAGE, WHICH REPRESENTS THE COMPANY'S REASONABLE EXPENSES IN
FURNISHING SUCH EXHIBITS.

                                      30
<PAGE>

                                   SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in North Reading,
Massachusetts on March 21, 1997.

                                    CONVERSE INC.
                                       
                                    By: /s/ Glenn N. Rupp
                                       ----------------------------------------
                                       Glenn N. Rupp, Chairman of the Board and
                                       Chief Executive Officer

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

<TABLE>
<CAPTION>
 
SIGNATURE                                             TITLE                      DATE
---------                                             -----                      ----      
<S>                                    <C>                                  <C>
/s/ Glenn N. Rupp
______________________________         Chairman of the Board, Chief         March 21, 1997
Glenn N. Rupp                          Executive Officer and Director
                                       (Principal Executive Officer)

/s/ Donald J. Camacho
______________________________         Senior Vice President and            March 21, 1997
Donald J. Camacho                      Chief Financial Officer  (Principal
                                       Financial and Accounting Officer)

/s/ Donald J. Barr
______________________________         Director                             March 21, 1997
Donald J. Barr
 
/s/ Leon D. Black
______________________________         Director                             March 21, 1997
Leon D. Black

/s/ Julius W. Erving
______________________________         Director                             March 21, 1997
Julius W. Erving


______________________________         Director                             March 21, 1997
Robert H. Falk

/s/ Gilbert Ford
______________________________         Director                             March 21, 1997
Gilbert Ford

/s/ Michael S. Gross
______________________________         Director                             March 21, 1997
Michael S. Gross


______________________________         Director                             March 21, 1997
John J. Hannan

/s/ Joshua J. Harris 
______________________________         Director                             March 21, 1997
Joshua J. Harris 

/s/ John H. Kissick 
______________________________         Director                             March 21, 1997
John H. Kissick 
 

______________________________         Director                             March 21, 1997
Richard B. Loynd 
 
/s/ Michael D. Weiner 
______________________________         Director                             March 21, 1997
Michael D. Weiner 
</TABLE>

                                      31
<PAGE>
 
                         CONVERSE INC. AND SUBSIDIARIES
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
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
</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 cash proceeds from
   debt.................        12,587            40,278             8,492
  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.
 
  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 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.
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 is recognized as
earned.
 
 Advertising
 
  Advertising production costs are expensed the first time an advertisement is
run. Media placement costs are expensed in the month the advertising appears.
 
 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.
 
  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.
 
  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 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
 
                                     F-27
<PAGE>
 
                        CONVERSE INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
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>
 
                                  SCHEDULE II
 
                       VALUATION AND QUALIFYING ACCOUNTS
                         (DOLLAR AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                   ADDITIONS
                                                   CHARGED TO
                                         BEGINNING COSTS AND            ENDING
              DESCRIPTION                 BALANCE   EXPENSES  DEDUCTION BALANCE
              -----------                --------- ---------- --------- -------
<S>                                      <C>       <C>        <C>       <C>
Year Ended December 31, 1994:
  Allowance for doubtful accounts.......  $1,519     $  880    $  846   $ 1,553
  Inventory reserve.....................   1,761        127       415     1,473
  Deferred tax asset valuation
   allowance............................     --         --        --        --
Year Ended December 30, 1995:
  Allowance for doubtful accounts.......  $1,553     $1,366    $  682   $ 2,237
  Inventory reserve.....................   1,473      6,424       681     7,216
  Deferred tax asset valuation
   allowance............................     --       6,650       --      6,650
Year Ended December 28, 1996:
  Allowance for doubtful accounts.......  $2,237     $  670    $  913   $ 1,994
  Inventory reserve.....................   7,216        306     1,951     5,571
  Deferred tax asset valuation
   allowance............................   6,650      4,934       --     11,584
</TABLE>