Item 1. BUSINESS 		 Item 101 (a) and (c) of Regulation S-K The Company is the fourth largest roaster, packer, and marketer of coffee in the United States. Its broad range of regular and decaffeinated, ground roast, instant and specialty coffees for the Foodservice and Retail Grocery Industries are sold regionally throughout the United States and Canada under various well known trademarks, including Chock full o' Nuts, LaTouraine and Cain's. Best known among its products is Chock full o' Nuts brand premium, vacuum packed, all-method grind coffee. The Company is also one of the largest marketers of foodservice and private label coffees. The balance of the Company's business is derived from its developing Quikava outlets and from real estate operations.Incorporated in 1932, for many years, the Company's primary business was the operation of counter service restaurants, under the Chock full o' Nuts name. In 1953, the Company expanded its business by marketing the coffee made famous in its restaurants to consumers via supermarkets and other Retail Grocery outlets. Impactful advertising, featuring the "Heavenly Coffee" jingle, made Chock full o' Nuts brand premium coffee a market leader. In 1983, Management discontinued the Company's restaurant operations and concentrated its efforts on the sale of coffee and related food products. In 1994, the Company commenced opening a limited number of Chock Cafes in the New York metropolitain area. In October 1996, the Company adopted a plan to discontinue operations of these company-owned cafes. See Note 4 of notes to consolidated financial statements.
In March 1994, the Company acquired all the assets and liabilities of a company (Quikava) whose menu features a full assortment of the most popular specialty coffee beverages, plus a broad variety of freshly prepared foods and snacks specifically suited for in-car consumption. Quikavas unique double drive-thru format targets the suburban commuter and is uniquely suited to take advantage of the growth of Specialty Coffees away from home, where annual growth rates are significant.
In December 1992, the Company acquired the stock of Cain's Coffee Co. ("Cains") and certain trademarks related to that business. Cain's primary business is the direct sale and distribution of coffee and related products under the Cains label to Foodservice customers in twelve states primarily West of the Mississippi. Cain's also sells coffee and tea to Retail Grocery Customers, using a direct store distribution system.
In November 1992, the Company acquired a controlling interest in a partnership, which owns Dana Brown Private Brands, Inc., a company which markets and sells private label coffee and tea products to food retailers and distributors, locate primarily in the Midwest.
In December 1986, the Company acquired Greenwich Mills Company ("Greenwich"). Established in 1912, Greenwich is a leading manufacturer and supplier of coffee, tea and allied products to Foodservice and private label customers. The majority of their customers are located in markets East of the Mississippi. Greenwich's best known trademark is LaTouraine.
In November 1993, the Company sold Hillside Coffee of California, Inc., whose business consisted of roasting, packing, distributing and marketing specialty coffee under the Hillside name, primarily to supermarkets. See Note 5 of notes to consolidated financial statements.
Corporate Management is currently focused on the following growth initiatives: (1) Maximizing the Company's Foodservice franchise by significantly broadening its customer base for Cain's, Chock full o' Nuts and LaTouraine brand coffee, tea and allied products; (2) Increasing Retail Grocery Market shares for such higher margin products as Chock full o' Nuts brand Cafe Blend, decaffeinated, instant and Rich French Roast coffees; (3) Selectively pursuing new business development opportunities that will deliver significant volume and profit growth; and (4) Expansion of its developing Quikava drive-thru outlets.
The following table sets forth revenues and operating results from continuing operations before interest and corporate expenses attributable to the Company's food products sales and real estate operations, for the fiscal years ended July 31, 1996, 1995 and 1994:
				 Fiscal Years Ended July 31, 		 				 1996 1995 1994 					 (In Thousands)
Revenues Net Sales - Food Products $321,135 $326,141 $263,511 Rentals from Real Estate 2,156 2,061 2,060
Operating Profit: Food Products (1) 15,059 18,205 10,940 Real Estate Operation 671 490 317 			
(1) See Note 5 of notes to consolidated financial statements regarding product line sold.
COFFEE AND RELATED PRODUCTS
Description of Coffee Market According to certain available industry surveys and Company estimates, total United States coffee sales by manufacturers in 1995 were approximately $6 billion. Approximately 30% of total United States coffee sales in 1995 were to Foodservice customers.
Foodservice Sales and Marketing In January 1985, the Company began using Company sales personnel and independent food brokers to market its coffee and allied products to foodservice customers. These include chain and independent restaurants, hospitals, airlines, schools, governmental institutions, vending and office coffee service operators and other institutional distributors. In December 1986, the Company acquired Greenwich, which is a major direct sales and distribution supplier in the Eastern United States of coffee, tea and allied products to Foodservice Customers and private label customers. Greenwich's best-known label is LaTouraine, which enjoys a reputation for high quality. LaTouraine also distributes spices, international coffee mixes, speciality coffees, whole bean and pod Espresso, hot chocolate, iced and hot tea, powdered soft drinks, soup bases, and portion controlled jams, jellies and condiments.
In December 1992, the Company acquired Cain's, which is a major supplier in the Midwest and Southwest of products similar to those sold by Greenwich and LaTouraine to Foodservice Customers.
In fiscal 1996, approximately 46% of sales were derived from processing and marketing coffee and allied products for sale to Foodservice Customers. Sales of coffee products to Foodservice Customers have traditionally been less price-sensitive and depend more on the level of customer service provided. They also tend to generate higher operating margins, due to lower marketing and advertising expenses, than do sales of such products to Retail Customers. In addition, the absence of competitors with a dominant market position, makes the Company's pricing to Foodservice Customers less susceptible, as compared to pricing to Retail Customers, to changes in price in response to pricing actions of any single competitor.
Retail Sales and Marketing The Company currently sells most of its Retail Grocery coffee products to supermarket chains, wholesalers and independent food outlets ("Retail Customers") through independent food brokers. The Company's retail products include coffees sold under the Chock full o' Nuts, Cain's and Safari labels. The Company's best known product, Chock full o' Nuts premium, vacuum packed, all-method grind coffee, is superior to most competitors in being able to produce a more consistent, better tasting, finished brew from a single, all-method grind, regardless of the coffee maker used. The Company also sells an "extended yield" coffee, which produces more cups than equivalent quantities of standard yield coffee. Additionally, the Company sells decaffeinated roast and ground coffee, instant coffees, a premium quality Cafe blend and a Rich French Roast coffee.
The Company and Greenwich roast, pack and market regular, decaffeinated and instant coffees for sale by others under a variety of private labels.
In fiscal 1996, the Company's coffee sales to Retail Customers accounted for approximately 48% of sales and coffee sales under the Chock full oNuts label represented approximately 4% of total Branded Retail Grocery coffee sales in the United States.
Chock full o' Nuts all-method grind coffee is sold in most major metropolitan areas of the United States and in the provinces of Ontario and Quebec, Canada. Sales are concentrated in the New York metropolitan area, upstate New York, New England, Philadelphia, Washington,D.C. and Florida. The Company believes that its distinctive packaging design and one grind concept are important factors in the marketing of its coffee products. Marketing a single grind coffee has enabled the Company's all-method grind coffee to be consistently one of the fastest moving items off supermarket shelves in its core markets.
The sales of Cain's and Safari brand products are concentrated in the Midwest and Southwest.
Suppliers and Manufacturing
The Company's coffee is primarily a blend of readily available Central and South American coffees. The Company purchases approximately 100 million pounds of green coffee beans annually. All such coffee is purchased from approximately 25 importers located in New York City, New Orleans and Miami, who assume the risk of delivering beans that meet the Company's quality requirements at a guaranteed price. The Company generally buys its coffee pursuant to contracts providing for delivery in 4 to 12 weeks and supplements such contracts with purchases on the spot market. All purchases are subject to inspection and approval by the United States Food and Drug Administration.
Manufacturing activities for coffee and related products are presently conducted at the following facilities:
	Location Principal Use
Brooklyn, New York............Coffee Roasting Plant, Warehouse St. Louis, Missouri...........Coffee Roasting Plant, Warehouse Hialeah, Florida..............Coffee Roasting Plant, Warehouse Rochester, New York...........Coffee Roasting Plant, Warehouse Oklahoma City, Oklahoma.......Coffee Roasting Plant and Processing 				 Plant for Tea and Related Food 				 Products, Warehouse Springfield, Missouri.........Processing Plant for Spices, Warehouse
All of the above facilities are owned, except the Rochester, New York and Springfield, Missouri facilities, which are leased. The Company rents executive office space in New York City and maintains warehousing facilities in over forty-five locations throughout the United States. The Company believes that it has sufficient production capacity to meet its current and future needs.
Competition
The coffee business is highly competitive. The Company competes for Retail Customers with a number of nationally and regionally established brands. Its largest competitors are Kraft Foods (Maxwell House, Yuban and Sanka coffees), Procter & Gamble (Folger's coffees) and The Nestle Company (Hills, MJB and Chase & Sanborn coffees), with combined annual sales accounting for approximately 80% of the United States coffee market. The profitability of the Company's coffee sales to Retail Customers is largely dependent on competitive pricing conditions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".
There are many competitors in the business of selling coffee to Foodservice Customers. However, the Company believes that no single competitor's sales constitute more than 20% of this market. Sales of coffee, tea and allied products to Foodservice Customers have traditionally been less price-sensitive and more dependent on the level of service provided to such customers than sales of such products to Retail Customers. In addition, the absence of direct competitors with a dominant market position has traditionally made the Company's pricing to Foodservice Customers less susceptible, as compared to pricing to Retail Customers, to changes in price in response to pricing actions of any single competitor.
Quikava
Quikava is the operator and franchisor of double-drive thru outlets, which offer a variety of specialty coffees, espresso-based drinks, fresh baked goods, sandwiches, other finger foods and snacks. Quikava units are situated on major commuter thoroughfares in suburban markets and offer quick-service of quality beverages and snacks. The Company intends to develop additional Quikava units, both company-operated and franchised. At the fiscal year end, the Company was operating eight company owned units and there were six operating franchished units.
Cafes
In June 1994, with the opening of a flagship store in Midtown Manhattan, the Company began to develop the business of operating retail cafes which offered moderately priced specialty coffees, sandwiches, salads, bakery products, snacks, and other assorted food and beverage products. The cafes had an upscale motif, which featured a rich wood and granite interior and utilized a quick-service format.
The Company developed a number of formats for expansion of its retail cafe concept, including the full cafe (2500 to 3500 square feet with seating for 45-75), the mini-cafe (400-1000 square feet with limited seating), and Chock Full ONuts EXPRESS-Osm (a modular kiosk of 150 square feet).
In October 1996, the Company discontinued the operations of its Cafes. See Note 4 of notes to the consolidated financial statements.
RESEARCH AND DEVELOPMENT
The Company invested a nominal amount in research and development for the three years ended July 31, 1996.
EMPLOYEES
The Company employs approximately 1,275 employees, 13% of whom are represented by labor unions. The Company believes that its relations with both union and non-union employees are good.
REAL ESTATE OPERATIONS
The Company is both lessor and lessee on certain properties and an owner of one property in New York City. Such properties had been part of the Company's original restaurant operations. Additionally, the Company owns a coffee oasting facility in Castroville, California which it leases to the owner of Hillside Coffee of California, Inc.
OTHER MATTERS
Reference is made to Notes 4 and 5 of notes to consolidated financial statements with respect to the acquisition and disposition of certain assets.
			 Item 101 (b) of Regulation S-K
Segment Information is incorporated herein by reference. 			 Item 101 (d) of Regulation S-K
All of the Company's operations are located in the United States. Export sales are not significant.
Item 2.
Item 2. PROPERTIES
The Company leases certain premises which are under long-term leases expiring on various dates through 2009 and certain of which contain renewal options. Reference should be made to Note 6 of the notes to consolidated financial statements for additional information about these leases. The following table sets forth the location and certain information with respect to the Company's plants and certain other properties as of October 10, 1996, all of which premises the Company considers adequate for its present and anticipated needs.
PLANTS AND OTHER PROPERTIES 					 		 		 Approximate Whether 		 Square Feet Owned 					of Or Location Principal Use Floor Space Leased (1) Brooklyn, New York Coffee Roasting Plant, 	Warehouse 55,000 Owned St. Louis, Missouri Coffee Roasting Plant, 	Warehouse 77,000 Owned Secaucus, New Jersey Warehouse and Offices 104,000 Owned Hialeah, Florida Coffee Roasting Plant, 	Warehouse 50,000 Owned Rochester, New York Coffee Roasting Plant, 	Warehouse 50,000 Leased Oklahoma City, Oklahoma Coffee Roasting Plant 	and Processing Plant for 	Tea and Related Food 	Products, Warehouse 150,000 Owned Springfield, Missouri Processing Plant for 	Spices, Warehouse 30,000 Leased 574 Fifth Avenue Real Estate New York, New York Operation 13,000 Leased 422 Madison Avenue Real Estate New York, New York Operation 8,750 Leased 532 Madison Avenue Real Estate New York, New York Operation 12,250 Leased 49 Broadway Real Estate New York, New York Operation 12,000 Leased 1420 Broadway Real Estate New York, New York Operation 6,750 Leased 370 Lexington Avenue Corporate New York, New York Headquarters 11,000 Leased
Waverly Place corner Green Street Real Estate New York, New York Operation 2,500 Leased 336 Broadway Real Estate New York, New York Operation 10,500 Owned Castroville, California Real Estate 66,000 Owned 	Operation 512 Seventh Avenue Real Estate 2,500 Leased New York, New York Operation 1114 Avenue of the Americas Real Estate 2,800 Leased New York, New York Operation 43 West 42 Street Real Estate 340 Leased New York, New York Operation Queen Ann Plaza Quikava Operation 250 Leased Norwell, Mass Brown Avenue Manchester, New Hampshire Quikava Operation 500 Leased Natick Crossing Mall Quikava Operation 1,500 Leased Natick, Mass. 917 Lynnfield Street Quikava Operation 600 Leased Lynn, Mass 1148 Main Street Quikava Operation 600 Leased Haverhill, Mass
84 Milfod Road Quikava Operation 600 Leased Amherst, New Hampshire 374 Bridge Street Quikava Operation 600 Leased N. Weymouth, Mass 895 Bald Hill Road Quikava Operation 600 Leased Warwick, Rhode Island 190 Old Derby Street Headquarters, Quikava 1,196 Leased Hingham, Mass.
(1) -- No Company-leased premises are owned by any officer or director of the Company. See Note 6 of notes to the consolidated financial statements.
Item 3.
Item 3. LEGAL PROCEEDINGS None
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF 	 SECURITY HOLDERS Not applicable. 	PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND 	 RELATED SECURITY HOLDER MATTERS
"Common Share Prices" and related security holder matters are incorporated herein by reference.
Item 6.
Item 6. SELECTED FINANCIAL DATA
"Selected Financial Data" is incorporated herein by reference.
Item 7.
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" is incorporated herein by reference.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of this report.
Item 9.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
Not applicable.
	PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 				 and
Item 11.
Item 11. EXECUTIVE COMPENSATION 				 and
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 				 and
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted, per General Instruction G. The information required by Part III shall be incorporated by reference from the Registrant's definitive proxy statement pursuant to Regulation 14A for the fiscal year ended July 31, 1996 which is to be filed with the Commission.
	 PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) and (2) The response to this portion of Item 14 is submitted as a separate section of this report.
(3) The response to this portion of Item 14 is submitted as a separate section of this report (see below).
(b) Reports on Form 8-K: 		None
(c) The response to this portion of Item 14 is submitted as a separate section of this report (see below).
(d) The response to this portion of Item 14 is submitted as a separate section of this report.
Pursuant to Regulation S-K Item 601, following is a list of Exhibits.
Exhibit 3 Articles of incorporation and by laws.
(a) Articles of incorporation filed as an Exhibit to Form 10-K 		for the fiscal year ended July 31, 1994 is incorporated herein 		by reference.
(b) By-laws filed as an Exhibit to Form 10-K for the fiscal year 		ended July 31 1994 is incorporated herein by reference.
Exhibit 4 Instruments defining the rights of security holders, including 		indentures.
(a) Indenture dated as of September 15, 1986 between the Company 		and Manufacturers Hanover Trust Company ("Manufacturers") 		filed as an Exhibit to Form 10-K for the fiscal year ended 		July 31, 1994 is incorporated herein by reference.
(b) Form of the Company's 8% Convertible Subordinated Debenture 		included in Exhibit 4(a)filed as an Exhibit to Form 10-K for 		the fiscal year ended July 31, 1994 is incorporated herein by 		reference.
(c) Instrument of resignation, appointment and acceptance dated 		August 9, 1993 among the Company, Manufacturers and Liberty 		Bank and Trust Company of Oklahoma City filed as an Exhibit 		to Form 10-K for the fiscal year ended July 31, 1994 is 		incorporated herein by reference.
(d) Indenture dated as of April 1, 1987 between the Company and 		IBJ Schroder Bank and Trust Company filed as an Exhibit to 		Form 10-K for the fiscal year ended July 31, 1994 is 		incorporated herein by reference.
(e) Form of the Company's 7% Convertible Senior Subordinated 		Debenture included in Exhibit 4(d) filed as an Exhibit 		to Form 10-K for the fiscal year ended July 31, 1994 is 		incorporated herein by reference.
Exhibit 9 Voting Trust Agreement, not applicable.
Exhibit 10 Material contracts
(a) Rights Agreement, dated as of December 30, 1987, with IBJ Schroder 	Bank and Trust Company, as Rights Agent, the form of Rights Certificate 	and Summary of Rights to Purchase Common Stock filed as an Exhibit to 	Form 10-K for the fiscal year ended July 31, 1994 is incorporated 	herein by reference.
(b) Benefits protection trust with National Westminster Bank USA filed as 	an Exhibit to Form 10-K for the fiscal year ended July 31, 1994 is 	incorporated herein by reference.
(c) Resolution of the Board of Directors adopting severance policy filed 	as an Exhibit to Form 10-K for the fiscal year ended July 31, 1994 is 	incorporated herein by reference.
(d) Chock full o' Nuts Corporation Employees Stock Ownership Plan dated 	December 16, 1988 filed as an Exhibit to From 10-K for the fiscal year 	ended July 31, 1995, is incorporated herein by reference.
(e) Amended and Restated Credit Agreement dated December 4, 1992, amended 	and restated as of January 1, 1996, among Chock full o' Nuts 	Corporation and its Subsidiaries and National Westminster Bank N.A., 	now known as Fleet Bank, N.A., and Chemical Bank, now known as 	the Chase Manhattan Bank, filed herewith.
(f) Form of restricted stock agreement dated January 2, 1988 with key 	employees (including certain officers and directors) filed as an 	Exhibit to Form 10-K for the fiscal year ended July 31, 1994 is 	incorportated herein by reference.
Exhibit 11 Statement re: Computation of Per Share Earnings
Exhibit 12 Statement re: Computation of ratios, not applicable.
Exhibit 13 Not applicable.
Exhibit 18 Letter rechange in accounting principles, not applicable.
Exhibit 21 Subsidiaries of the registrant.
Exhibit 22 Published report regarding matter submitted to vote of security 	 holders, not applicable.
Exhibit 23 Consent of experts and counsel, not applicable.
Exhibit 24 Power of attorney, not applicable.
Exhibit 27 Financial Data Schedule.
Exhibit 99 Additional exhibits, not applicable.
	 	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.
					 CHOCK FULL O' NUTS CORPORATION 						 (Registrant)
October 13, 1996 /s/ Howard M. Leitner 					 Howard M. Leitner, Vice President, 					 Chief Financial and Accounting Officer 	and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
October 13, 1996 /s/ Norman E. Alexander October 13, 1996/s/ Mark A. Alexander 		 Norman E. Alexander Mark A. Alexander 		 Chairman of the Board Director
October 13, 1996 _______________ October 13, 1996 /s/ Martin J. Cullen 			Virgil Gladieux Martin J. Cullen 			Director Vice President and Director
October 13, 1996 /s/ Stuart Z. Krinsly October 13, 1996 /s/ Marvin I. Haas 		 Stuart Z. Krinsly Marvin I. Haas 		 Director President and 						 Chief Executive Officer 						 and Director
October 13, 199 /s/ Howard M. Leitner October 13, 1996___________________ 		 Howard M. Leitner Henry Salzhauer 		 Vice President and Director 		 Chief Financial Officer 		 and Director
October 13, 1996 /s/ R. Scott Schafler October 13, 1996 ___________________ 		 R. Scott Schafler David S. Weil 		 Director Director
ANNUAL REPORT ON FORM 10-K 	ITEM 8, ITEM 14(a)(1) AND (2), (c) and (d)
	LIST OF FINANCIAL STATEMENTS, SUPPLEMENTARY DATA 	AND FINANCIAL STATEMENT SCHEDULES
	CERTAIN EXHIBITS
	YEAR ENDED JULY 31, 1996
	CHOCK FULL O' NUTS CORPORATION
	NEW YORK, NEW YORK 	
FORM 10-K--ITEM 14(a)(1) and (2)
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND SCHEDULES
The following consolidated financial statements of the Registrant and its subsidiaries are included in Item 8: 									Page Report of Independent Auditors......................................... 15 Consolidated Balance Sheets--July 31, 1996 and 1995.................... 16 and Consolidated Statements of Operations--Years Ended July 31, 1996, 1995 and 1994......................................... 18 Consolidated Statements of Cash Flows-- Years Ended July 31, 1996, 1995 and 1994............................. 19 and Consolidated Statements of Stockholders' Equity-- Years Ended July 31, 1996, 1995 and 1994............................. 21 and Notes to Consolidated Financial Statements............................. 23 to
The following consolidated financial statement schedule of the registrant and its subsidiaries is included in Item 14(d):
									Page Schedule II -- Valuation and Qualifying Accounts....................... 37
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
Ernst & Young LLP
Report of Independent Auditors
The Board of Directors and Stockholders Chock Full oNuts Corporation New York, NY
We have audited the accompanying consolidated balance sheets of Chock Full o'Nuts Corporation and subsidiaries as of July 31, 1996 and 1995, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended July 31, 1996. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Chock Full oNuts Corporation and subsidiaries at July 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended July 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP October 10, 1996
CONSOLIDATED BALANCE SHEETS CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES July 31, 1996 and 1995
ASSETS 1996 1995
CURRENT ASSETS: 	Cash and cash equivalents $16,293,783 $8,357,152 	Receivables, principally trade, less 		allowances for doubtful accounts and 	 discounts of $1,133,000 and $1,251,000-- 	Notes 2 and 10(a) 30,989,008 37,689,286 	Inventories--Notes 1 and 2 59,637,802 60,551,535 	Investments in marketable securities, 	at cost (approximates market) 128,099 6,972,928 Prepaid expenses and other -- Note 3 					3,539,776 2,916,690 		 TOTAL CURRENT ASSETS 110,588,468 116,487,591
NET NON-CURRENT ASSETS OF DISCONTINUED OPERATIONS -- Note 4 3,813,609
PROPERTY, PLANT AND EQUIPMENT, at cost- 	Note 2: 		Land 3,114,889 3,114,889 		Buildings and improvements 				 14,675,708 14,457,466 		Leaseholds and leasehold improvements 				 1,825,464 2,443,678 		Machinery and equipment 				 74,067,267 67,499,258 				 93,683,328 87,515,291 		Less allowances for depreciation and amortization 45,172,084 39,056,022 						 				 48,511,244 48,459,269 REAL ESTATE HELD FOR DEVELOPMENT OR SALE 	at cost -- Note 2 7,691,267 7,747,107
OTHER ASSETS AND DEFERRED CHARGES, net--Note 10(b) 				 26,976,132 24,628,629 			
EXCESS OF COST OVER NET ASSETS ACQUIRED, net 5,668,008 5,869,138 								 				 $199,435,119 $207,005,343 See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS - Continued CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES July 31, 1996 and 1995
	 1996 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 10,469,300 $ 12,937,578 Accrued expenses 11,346,483 12,407,281 Income taxes--Note 3 1,719,575 1,530,543 	 TOTAL CURRENT LIABILITIES 23,535,358 26,875,402
LONG-TERM DEBT -- Note 2 105,235,468 106,568,896
OTHER NON-CURRENT LIABILITIES 1,586,231 1,468,358
DEFERRED INCOME TAXES -- Note 3 5,591,000 7,156,000
STOCKHOLDERS' EQUITY--Notes 2 and 7: Common stock, par value $.25 per share; Authorized 50,000,000 shares; 	Issued 11,211,068 shares 2,802,767 2,802,767 Additional paid-in capital 51,357,008 51,357,008 Retained earnings 17,434,755 18,970,435 	 71,594,530 73,130,210
Deduct: Cost of 475,522 shares in treasury (6,573,719) (6,573,719) Deferred compensation under stock 	bonus plan and employees' stock 	ownership plan (1,533,749) (1,619,804) 	 TOTAL STOCKHOLDERS' EQUITY 63,487,062 64,936,687
LEASES--Note 6 ___________ 		 $199,435,119 $207,005,343
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES Years ended July 31, 1996, 1995 and 1994
		 1996 1995 1994 Revenues: Net sales $321,134,537 $326,140,872 $263,511,410 Rentals from real estate 		 2,156,070 2,061,015 2,059,647 	 323,290,607 328,201,887 265,571,057 Costs and expenses: Cost of sales 	 229,477,193 230,962,257 175,237,889 Selling, general and administrative expenses 		77,223,407 77,396,552 77,599,496 Expenses of real estate 		 1,484,681 1,571,090 1,742,462 	 308,185,281 309,929,899 254,579,847 OPERATING PROFIT--Note 5 		15,105,326 18,271,988 10,991,210
Interest and dividend income 		 865,145 903,887 867,517 Interest expense 		(8,783,798) (9,191,495) (8,802,413) Gain on sale of product line -- Note 5 12,475,246 Other income -- Note 10(d) 		 520,692 763,597 775,292 INCOME BEFORE INCOME TAXES 		 7,707,365 10,747,977 16,306,852 Income taxes--Note 3: Current: Federal 1,905,000 3,276,000 6,935,000 State and local 		 488,000 161,000 348,000 Deferred 683,000 573,000 781,000 		 3,076,000 4,010,000 8,064,000 INCOME FROM CONTINUING OPERATIONS 		 4,631,365 6,737,977 8,242,852
Discontinued operations -- Note 4: (Loss) from operations, net of income tax credits of $1,073,000, $1,009,000 and $193,000 		(1,757,044) (1,874,689) (358,538) (Loss) on disposition, net of deferred income tax credit of $2,590,000 		(4,410,000) 		(6,167,044) (1,874,689) (358,538) NET(LOSS) /INCOME 	 $(1,535,679) $4,863,288 $7,884,314
Income/(loss)per share--Note 1: Primary: Continuing operations 		 $.43 $ .63 $ .76 Discontinued operations 		 (.57) (.18 ) (.03) Net(loss)/income 		 $(.14) $.45 $ .73 Fully diluted: Continuing operations 		 $.40 $.51 $ .56 Discontinued operations 		 (.27) (.09) (.02) Net income 		 $.13 $.42 $.54 		
See notes to consolidated financial statements
			 CONSOLIDATED STATEMENTS OF CASH FLOWS CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES Years Ended July 31, 1996, 1995 and 1994
					 1996 1995 1994
Operating Activities - Continuing Operations: Income from continuing operations before income taxes 				 $ 7,707,365 $10,747,977 $16,306,852
Adjustments to reconcile pretax income from continuing operations to net cash provided by continuing operations: Depreciation and amortization of property, plant and equipment 				 6,380,262 5,799,063 6,177,822
Amortization of deferred compensation and deferred charges 					4,561,305 4,606,372 4,426,062
Gain on sale of product line (12,475,246)
Other, net (1,000,099) (330,359) (1,275,714) Changes in operating assets and liabilities: Decrease/(increase) in receivables 6,818,278 (6,076,849) (4,226,971)
Decrease/(increase) in inventories 913,733 (15,008,487) (7,151,651)
(Increase)/decrease in prepaid expenses(281,086) (1,511,194) 647,202
(Decrease)/increase in accounts payable, accrued expenses and income taxes (5,098,044) (801,909) 650,113
Net cash provided by/(used in) operating activities - continuing operations 				 20,001,714 (2,575,386) 3,078,469
Operating Activities - Discontinued Operations: Discontinued operations exclusive of income taxes 				 (9,830,044) (2,883,689) (551,538)
Adjustments to reconcile pretax loss from discontinued operations to net cash used in discontinued operations Provision for close down and write-off of equipment 7,000,000 Depreciation and amortization 					 431,623 247,841 13,602 Other (192,929) (146,047) (405,570) Net cash (used in) discontinued operations 				 (2,591,350) (2,781,895) (943,506)
Income Taxes (1,320,000) (2,428,000) (7,090,000)
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES 16,090,364 (7,785,281) (4,955,037)
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES Years Ended July 31, 1996, 1995 and 1994
Investing Activities - Continuing Operations: Purchases of marketable securities 				 (152,018,726) (11,473,787) (29,117,568) Proceeds from sale and collection of principal of marketable securities 				 158,863,555 31,086,939 3,331,488 Purchases of property, plant and equip- ment ( 7,411,199) (6,547,330) (4,614,761) Advance to co-packer (3,132,245) Proceeds from sale of product line 38,055,704 Proceeds from sale of property, plant and equipment 4,078,764 Other (13,147) (1,796,425) Net Cash (used in)/provided by investing activities - continuing operations 				 (3,711,762) 17,144,586 5,858,438 Net cash (used in)investing activities - discontinued operations - purchases of property and equipment 				 (2,608,543) (2,457,240) (1,066,195) NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (6,320,305) 14,687,346 4,792,243 Financing activities - Continuing Operations: Loan to employees stock ownership plan 				 (500,000) (500,000) Purchase of treasury stock (1,850,000) Principal payments of long-term debt (1,333,428) (3,856,369) Proceeds from long-term debt 2,355,091 NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES 				 (1,833,428) (4,356,369) 505,091 INCREASE IN CASH AND CASH EQUIVALENTS - CONTINUING OPERATIONS 				 7,936,631 2,545,696 342,297 Cash and cash equivalents at beginning of year - continuing operations 				 8,357,152 5,811,456 5,469,159 CASH AND CASH EQUIVALENTS AT END OF YEAR- CONTINUING OPERATIONS $16,293,783 $8,357,152 $5,811,456
Supplemental Information
Cash paid during the year: 1996 1995 1994 Interest $8,259,325 $8,532,841 $8,103,742 Income taxes 678,905 1,080,706 5,129,630
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES Years Ended July 31, 1996, 1995 and 1994
					 					 Common Stock 				 Issued In Treasury 			 Shares Amount Shares Amount 					 In Thousands
Balance at July 31, 1993 10,592 $2,648 276 $4,724 Net Income 3% stock dividend 303 75 Conversion of debentures 3 1 Purchase of treasury stock 200 1,850 Deferred compensation under stock bonus plan and employees' stock ownership plan: Amortization Increase in unfunded pension losses Balance at July 31, 1994 10,898 2,724 476 6,574
Net income 3% stock dividend 313 79 Conversion of debentures Deferred compensation under stock bonus plan and employees' stock ownership plan: Amortization, Loan to employees stock ownership plan Decrease in unfunded pension losses Balance at July 31, 1995 				11,211 2,803 476 6,574
Net (loss) Deferred compensation under stock bonus plan and employees' stock ownership plan: Amortization Loan to employees stock ownership plan Balance at July 31, 1996 11,211 $2,803 476 $6,574
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Continued CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES Years Ended July 31, 1996, 1995, and 1994 				 Deferred 			 Compensation 				Under Stock 				Bonus Plan 			 and Employees' Unfunded Additional 			 Stock Ownership Pension Paid-In Retained 				 Plan Losses Capital Earnings 						 In Thousands
Balance at July 31, 1993 $2,227 $ 425 $47,256 $10,457 Net income 7,884 3% stock dividend 2,048 (2,123) Conversion of debentures 19 Purchase of treasary stock Deferred compensation under stock bonus plan and employees' stock ownership plan: Amortization (563) Increase in unfunded pension losses 1,341 Balance at July 31, 1994 1,664 1,766 49,323 16,218
Net income 4,863 3% stock dividend 2,032 (2,111) Conversion of debentures 2 Deferred compensation under stock bonus plan and employees' stock ownership plan: Amortization (544) Loan to employees stock ownership plan 500 Decrease in unfunded pension losses (1766) Balance at July 31, 1995 1,620 - 51,357 18,970
Net (loss) (1,535) Deferred compensation under stock bonus plan and employees' stock ownership plan: Amortization (586) Loan to employees stock ownership plan 500 Balance at July 31, 1996 $1,534 $ - $51,357 $17,435
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES July 31, 1996, 1995 and 1994
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Fiscal year: The Companys year ends on the last Friday in July. Fiscal years are designated as ending July 31 for convenience of reference.
Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates: The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Receivables - Concentration of Credit Risk: The Companys primary business is the roasting, packing and marketing of a broad range of regular and decaffeinated, ground roast, instant and specialty coffees for the Foodservice and Retail Grocery Industries. These products are sold regionally throughout the United States and Canada. The Company performs periodic credit evaluations of its customers financial condition and generally does not require collateral. Credit losses relating to customers have consistently been within Managements expectations.
Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Inventories: Inventories are stated at the lower of cost (first-in, first-out) or market and consist of:
July 31, 1996 1995
Finished goods $35,715,505 $37,169,924 Raw materials 18,931,470 19,928,214 Supplies 4,990,827 3,453,397 				 $59,637,802 $60,551,535
Property, Plant and Equipment: Depreciation and amortization of property, plant and equipment are computed by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes.
Long-Lived Assets: In accordance with Financial Accounting Standards Board (FASB) Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, the Company records impairment losses on long-lived assets used in operations, including intangible assets, when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets.
Pre-opening Costs: Quikava pre-opening costs are charged to operations as incurred.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
Excess of Cost over Net Assets Acquired: The Company evaluates goodwill impairment at the end of each year based on recoverability measured by undiscounted estimated operating profits (i.e., pretax earnings before interest expense and goodwill amortization). Under this approach, the carrying value would be reduced if it is probable that Managements best estimate of future operating profits during the goodwill amortization period will be less than the carrying amount of the related goodwill. Excess of cost over net assets acquired is being amortized on a straight-line basis over periods of 40 and 15 years. Accumulated amortization amounted to $1,755,000 and $1,554,000 at July 31, 1996 and 1995, respectively.
Other Intangibles: Other intangibles consist principally of trademarks, covenants not to compete and customer lists. Such items are being amortized on a straight-line basis over periods of 40, 5 and 7.5 years, respectively. See Note 10(b).
Advertising Expenses: The cost of advertising is expensed as incurred. The Company incurred $3,130,000, $4,615,000 and $3,436,000 in advertising costs during 1996, 1995 and 1994, respectively.
Stock Based Compensation: In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, which provides an alternative to APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for stock-based compensation issued to employees. The Statement allows for a fair value based method of accounting for employee stock options and similar equity instruments. The Company has determined it will continue to report stock-based compensation for all options that are earned under APB Opinion No. 25.
Per Share Data: Primary per share data is based on the following weighted average number of common shares outstanding during each year retroactively adjusted for stock dividends:10,736,000 in 1996 and 1995 and 10,797,000 in 1994. Fully diluted per share data, assuming conversion of debentures, is based on 22,557,000, 22,557,000 and 22,619,000 common shares outstanding for the years ended July 31, 1996, 1995 and 1994.
NOTE 2--LONG TERM DEBT
Long-term debt consists of the following: 						 July 31 					 1996 1995
7% Convertible senior subordinated debentures due 2012 $ 51,693,000 $ 51,693,000 8% Convertible subordinated debentures due 2006 43,266,000 43,266,000 Revolving credit and term loan 10,276,468 11,609,896 		 					$105,235,468 $106,568,896
The 7% and 8% debentures require annual sinking fund payments of $3,000,000 and $3,750,000, respectively, which after giving effect to previous conversions and redemptions, commence April 1, 2000 and March 15, 1998, respectively, and provide for balloon payments of $18,000,000 and $12,500,000 on April 1, 2012 and September 15, 2006, respectively. The debentures are convertible at the option of the debenture holders into shares of the Company's common stock at a price of $8.23 per share and $7.81 per share, respectively (subject to adjustment). As of July 31, 1996, approximately 11,821,000 common shares are reserved for issuance upon conversion of debentures.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
Under the Company's amended and restated revolving credit and term loan agreements (collectively the "Loan Agreements") with Fleet Bank, N.A. and The Chase Manhattan Bank (the "Banks"), the Company may, from time to time, borrow funds from the Banks, provided that the total principal amount of all such loans outstanding through December 31, 1996 may not exceed $40,000,000 and after such date may not exceed $20,000,000. Interest (8.25% at July 31, 1996) on all such loans is equal to the prime rate, subject to adjustment based on the level of loans outstanding. Outstanding borrowings under the Loan Agreements may not exceed certain percentages of and are collateralized by, among other things, the trade accounts receivable and inventories, and substantially all of the machinery and equipment and real estate of the Company and its subsidiaries. All loans made under the term loan agreement ($10,000,000 at July 31, 1996) are to be repaid in December 1999. Outstanding loans under the revolving credit agreements are to be repaid in December 1999. Pursuant to the terms of the Loan Agreements, the Company and its subsidiaries, among other things, must maintain a minimum net worth and meet ratio tests for liabilities to net worth and coverage of fixed charges and interest, all as defined. The Loan Agreements also provide, among other things, for restrictions on dividends (except for stock dividends) and requires repayment of outstanding loans with excess cash flow, as defined.
As of July 31, 1996, long-term debt matures as follows: $766,000 (year ending July 31, 1998), $3,750,000 (year ending July 31, 1999), $14,719,468 (year ending July 31, 2000) and $86,000,000 thereafter.
The Company believes that the fair value of its 7% and 8% convertible subordinated debentures approximates $43,939,000 and $39,859,000, respectively, as indicated by the public trading prices of such debt.
NOTE 3--INCOME TAXES The provision for income taxes for continuing operations differs from the expected Federal income tax for the reasons shown in the following table:
					 1996 1995 1994 Federal income tax provision expected at the statutory rate $2,620,504 $3,761,792 $ 5,707,398 Effect on Federal income tax of: Difference between tax and book basis 	 of product line sold 1,721,214 State and local income taxes, 	net of Federal income tax benefit 					322,080 106,260 226,200 Amortization of excess of cost over 	net assets acquired 68,000 68,000 88,200 Other 65,416 73,948 320,988
				 $3,076,000 $4,010,000 $8,064,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
NOTE 3--INCOME TAXES - Continued 	 Deferred tax liabilities and assets are comprised of the following at July 31, 						 1996 1995 Net deferred non-current tax liabilities: Net difference between tax and book basis 	of property, plant and equipment $5,897,000 $7,668,000 Unfunded pension liabilities 431,000 250,000 Compensation under stock bonus plan and employees' stock ownership plan (273,000) (332,000) Other (464,000) (430,000) 	$5,591,000 $7,156,000 Net deferred current tax assets: Restructuring charges $ 130,000 Net difference between tax and book 	 basis of inventory $344,000 317,000 Officers termination benefits 91,000 Allowance for doubtful accounts and discounts 419,000 343,000 Accrued expenses - close-down 650,000 Accrued cash bonus 190,000 Payment of underfunded pension plan (525,000) (525,000) Other 45,000 45,000 						 $ 933,000 $ 591,000
NOTE 4--DISCONTINUED OPERATIONS
In October 1996, the Companys Board of Directors adopted a plan to discontinue operationsof the Chock Cafes. Accordingly, the operating results of the Chock Cafe operations,including provisions for estimated lease termination costs, employee benefits and losses during the phase-out period of approximately $1,800,000and a write-off of leasehold improvements and equipment and deferred charges of approximately $5,200,000 have been segregated from continuing operations and reported as a separate line item on the statement of operations.
The Company has restated its prior financial statements to present the operating results of the Chock Cafes as a discontinued operation. The assets and liabilities of such operations at July 31, 1995 have been reflected as a net non-current asset based substantially on the original classification of such assets and liabilities.
Operating results (exclusive of any corporate charges or interest expense and the aforementioned provisions) from discontinued operations are as follows:
				 1996 1995 1994
Net Sales 				$3,783,397 $2,236,855 $127,043
Costs and expenses Costs of sales 5,903,142 4,184,197 426,454 Selling, general and administrative expenses 710,299 705,197 252,127 				 6,613,441 4,889,394 678,581 Operating (loss) (2,830,044) (2,652,539) (551,538) Other deductions 231,150 (Loss) before income taxes (2,830,044) (2,883,689) (551,538) Income tax credits (1,073,000) (1,009,000) (193,000) (Loss) from operations $(1,757,044) $(1,874,689) $(358,538)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
NOTE 5--PRODUCT LINE SOLD
In October 1993, the Company and Gourmet Coffees of America ("GCA") entered into an agreement to sell Hillside Coffee of California, Inc. (Hillside) to GCA. Hillside's business consisted of roasting, packing, distributing and marketing specialty coffee to supermarkets. Pursuant to the agreement which was consummated on November 19, 1993, the Company received (a) $38,500,000 and (b) shares of stock representing approximately one-half of one percent of the equity of GCA. The Company recorded an approximate $6,200,000 after tax gain upon consummation of the sale. The net sales and operating profits of Hillside, before intercompany management charges, for the period August 1, 1993 to November 19, 1993 included in the results of operations were $9,556,000 and $2,179,000, respectively.
NOTE 6--LEASES
The Company and subsidiaries lease manufacturing plants, warehouses, office space and Quikava locations and related premises. Leases which provide for payment of property taxes, utilities and certain other expenses, expire on various dates through 2009 and contain renewal options. As of July 31, 1996, the Company's obligation for future minimum rental payments, assuming the exercise of renewal options, aggregated $15,331,000. Payments required in the following five fiscal years amount to $4,079,000 (1997), $3,379,000 (1998), $2,692,000 (1999), $2,019,000 (2000) and $1,180,000 (2001). Rental expense charged to continuing operations under operating leases for the years ended July 31, 1996, 1995 and 1994 was $4,150,000, $4,893,000 and $4,496,000, respectively.
As of July 31, 1996, future minimum rental payments due from tenants under sub-leases of retail facilities and related premises aggregated $15,010,000. Amounts receivable in the following five fiscal years amount to $2,093,000 (1997), $2,110,000 (1998), $1,832,000 (1999), $1,531,000 (2000) and $1,251,000 (2001).
NOTE 7--STOCKHOLDERS' EQUITY
A non-contributory employee stock ownership plan ("ESOP") has been established to acquire shares of the Company's common stock for the benefit of all eligible employees. The Company has made loans to the ESOP to be repaid in equal annual installments over 8 years with interest primarily at 9% and 10%. Deferred compensation equal to the loans has been recorded as a reduction of stockholders' equity representing the Company's prepayment of future compensation expense. As the Company makes annual contributions to the ESOP, these contributions will be used to repay the loans to the Company, together with accrued interest. As the loans are repaid, common stock is allocated to ESOP participants and deferred compensation is reduced by the amount of the principal payment on the loans.
The Company has a Warrant Dividend Plan which provides for distribution to shareholders of a right to purchase one share of the Company's common stock currently for $24.13 (subject to anti-dilution adjustments) as a dividend on each of the Company's outstanding common shares. These rights are not currently exercisable and will only become exercisable upon the happening of certain events. Under certain circumstances, the rights entitle the holders to receive, upon payment of the then current exercise price of the right, that number of shares of Company common stock having a market value of two times the then current exercise price of the right. The rights will expire on December 30, 1997 and are redeemable at $.05 per right at any time prior to the occurrence of certain events.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
NOTE 7--STOCKHOLDERS EQUITY--continued
The Company's incentive compensation plan provides, among other things, for incentive or non-qualified stock options, stock appreciation rights, performance units, restricted stock and incentive bonus awards. During the years ended July 31, 1996, 1995 and 1994, respectively, non-qualified stock options for the purchase of 16,000, 250,000 and 109,000 shares, at prices of $5.25, $5.75 and $8.50 per share, were granted to key executives under the plan. During the year ended July 31, 1995 options to purchase 8,500 shares were forefeited. At July 31, 1996, there were outstanding options for 366,500 shares. The 1995 options were granted to the Chief Executive Officer. Options granted are exercisable at the fair market value at date of grant and, subject to termination of employment, expire ten years from the date of grant, are non-transferable other than on death, and are exercisable in three equal annual installments commencing three years from date of grant.
Under the incentive compensation plan, as of July 31, 1996, 47,000 common shares are outstanding which were issued to key executives in 1987 and 1988. These shares are subject to restricted stock agreements which provide that the shares will vest ratably over periods through 2001. Such shares are subject, upon the occurrence of certain events, to either forfeiture or accelerated vesting. The fair value of the shares on the dates of issuance is being charged to operations as compensation during the period the restrictions remain in effect. At July 31, 1996, 121,000 shares were available under the plan.
NOTE 8--PENSION PLANS
The Company has non-contributory defined benefit pension plans covering all employees who have completed one year of service, have attained age twenty and one-half and are not covered by union-sponsored plans. The benefits are based on years of service and the employee's compensation during the last 60 months of employment. The pension plans are funded to accumulate sufficient assets to provide for accrued benefits. In addition, contributions are made to multi-employer plans which provide defined benefits to union employees.
A summary of the components of net periodic pension cost for the defined benefit plans for the three years ended July 31, 1996 and total contributions charged to pension expense for the union-sponsored plans follows (in thousands):
					 1996 1995 1994
Service cost-benefits earned 	during the year $1,729 $1,813 $1,471 Interest cost on projected benefit 	obligation 1,985 1,961 1,782 Actual return on plan assets (1,866) (1,723) (1,654) Net amortization and deferral 144 253 156 NET PENSION COST OF DEFINED BENEFIT 	PLANS 1,992 2,304 1,755 	 UNION-SPONSORED PLANS 319 287 422 TOTAL PENSION EXPENSE $2,311 $2,591 $2,177
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
NOTE 8--PENSION PLANS--Continued
The following table sets forth the funded status and amounts recognized in the consolidated balance sheet at July 31, for the defined benefit pension plans (in thousands): __________1996_____________ _________1995______________ 		 Plan Whose Plan Whose Plan Whose Plan Whose 		 Assets Exceed Accumulated Assets Exceed Accumulated 		 Accumulated Benefits Accumulated Benefits 		 Benefits Exceed Assets Benefits Exceed Assets
Actuarial present value of benefit obligations:
Vested benefit obligation 		 $ (22,241) $(2,160) $(20,659) $(2,306) Accumulated benefit obligation $ (22,993) $(2,163) $(20,973) $(2,309) Projected benefit obligation $ (25,520) $ 2,163 $(23,075) $(2,309)
Plan assets, consisting primarily of U.S. treasury notes, other U.S. agency issues, guaranteed insurance contracts and corporate invest- ments, at fair value 		 23,010 1,864 21,056 2,046
Projected benefit obligation (in excess of)plan assets 		 (2,510) (299) (2,019) (263) Unrecognized prior service cost 			223 114 270 124 Unrecognized net loss 		 5,338 392 4,414 39 Unrecognized net asset at August 1, 1987; net of amortization 		 (514) (57) (593) (65) 								 Net pension asset(liability) recognized in the consolidated balance sheet $2,537 $150 $(2,072) $(165)
The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 8.3% and 4% and 8.0% and 4%, respectively, at July 31, 1996 and 1995. The expected long-term rate of return on plan assets was 8.0%, 8.0% and 8.5% in 1996, 1995 and 1994, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
NOTE 9--QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the unaudited quarterly results of continuing operations (see Note 4) for the years ended July 31, 1996 and 1995:
						 Fiscal 1996 						 Three Months Ended 				 October 31 January 31 April 30 July 31 				 (Thousands of Dollars Except Per Share Data)
Net sales $77,373 $82,243 $85,617 $75,902
Gross profit $21,589 $22,977 $25,059 $22,034
Income from 	 continuing operations: $ 1,354 $ 1,389 $ 1,460 $ 428 Per share: Primary $ .13 $ .13 $ .14 $ .04
Fully diluted $ .11 $ .12 $ .10 $ .04
						 Fiscal 1995 						 Three Months Ended 				 October 31 January 31 April 30 July 31 				 (Thousands of Dollars Except Per Share Data)
Net sales $73,265 $91,163 $80,310 $81,404
Gross profit $22,990 $25,770 $23,907 $22,511
Income From 	 continuing operations: $ 1,226 $ 1,754 $ 1,925 $ 1,833
Per share: Primary $ .11 $ .16 $ .18 $ .17
Fully diluted $ .10 $ .13 $ .13 $ .14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
NOTE 10--OTHER ITEMS
a. Receivables other than trade at July 31, 1996 and 1995 amount to $2,418,000and $2,656,000, respectively. See Note 10(c).
b. Other assets and deferred charges consist of (in thousands):
July 31, 1996 1995
Deferred financing costs (1) $2,896 $ 3,412 Non-compete agreements, net 2,766 4,468 Trademarks, net 4,542 4,667 Customer lists, net 4,666 5,819 Due from co-packer 3,375 Prepaid pension expense 2,924 1,966 Other 5,807 4,297 							 $26,976 $24,629 				
(1) Being amortized over the terms of the related indebtedness (see Note 2).
c. In connection with closing a business and termination of a pension 	 plan the Company has paid a liability for an underfunded pension 	 plan of approximately $1,500,000 and recorded a similar amount 	 receivable from the previous owner of such business pursuant to 	 the acquisition agreement. The previous owner of the business is 	 contesting the liability to the Company. The Company, based upon 	 its interpretation of the acquisition agreement and after 	 consultation with counsel, believes the previous owner of the 	 business is responsible for an amount approximating the underfunded 	 pension liability and has commenced litigation seeking such amount.
d. In fiscal 1996, other income includes $460,000 from the sale of real 	 estate. In fiscal1995, other income includes $589,000 from the sale 	 of a former manufacturing plant. In fiscal 1994, other income 	 includes $700,000 from the sale of the Companys private label tea 	 and drink mix business.
NOTE 11 -- INDUSTRY SEGMENT INFORMATION
The Company's financial information by industry segment for 1996, 1995 and 1994 may be found on page 35 and is incorporated herein by reference.
SELECTED FINANCIAL DATA CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
						YEAR ENDED JULY 31 		 1996 1995 1994 1993 1992 		 (Dollar Amounts in Thousands, Except Per Share Amounts)
Net sales $321,135 $326,141 $263,511 $251,641 $203,640 Income/(loss) from continuing operations 	 4,631 6,738 8,243 1,062 (5,822) Working capital 	 87,053 89,612 81,590 72,022 45,027(1) 	 Working capital ratio 	 4.7 to 1 4.3 to 1 3.6 to 1 3.8 to 1 3.2 to 1 	 Total assets 	 199,435 207,005 208,807 195,304 184,648 	 Long-term debt 	 105,235 106,569 110,427 108,092 107,053 	 Stockholders' equity 	 63,487 64,937 58,262 52,985 52,406 	 Per common share (2): Income/(loss) from continuing operations .43 .63 .76 .10 (.56) 	 Stock dividends declared 3% 3% 3% 3% 	 Stockholders' equity 5.91 6.05 5.43 4.84 4.84 				
(1) Does not include $23,053 in 1992 of marketable securities classified as non current.
(2) Per share data has been retroactively adjusted for a 3% stock dividend in July 1995, 1994, 1993 and 1992.
FORWARD-LOOKING STATEMENTS
Certain statements under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Form 10-K and in the letter of the President and Chief Executive Officer and Chairman of the Board and elsewhere in the Companys Annual Report to Shareholders, constitute forward looking statements within the meaning of the Reform Act. Such forward looking statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. Such factors include, among others, the following: general economic and business conditions; competition; success of operating initiatives; development and operating costs; advertising and promotional efforts; brand awareness; the existence of or adherence to development schedules; the existence or absence of adverse publicity; availability, locations and terms of sites for Quikava outlets; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; business abilities and judgement of personnel; availability of qualified personnel; labor and employee benefit costs; changes in or the failure to comply with government regulations; construction costs and other factors.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
RESULTS OF OPERATIONS
The discussion and analysis that follows relates solely to continuing operations of the Company.
Net sales decreased $5,006,000 or 1.5% for the year ended July 31, 1996, compared to the prior year. The decrease in net sles was due to a decrease in the average selling price of coffee, partially offset by a 17% increase in coffee pounds sold.
Operating profits from food products were $15,059,000, a decrease of 17% for the year ended July 31, 1996, compared to $18,205,000 for the prior year. The decrease resulted primarily from decreased gross profit margins. Decreased gross margins were due to a decrease in the average selling price of coffee greater than the decrease in the average cost of green coffee, partially offset by inceased coffee pounds sold. During the year ended July 31, 1996, prices for green coffee ranged from a high of $1.54 per pound to a low of $.91 per pound. Selling, general and administrative expenses were slightly lower than the prior year, with decreases in advertising, coupon, payroll and payroll related expenses partially offset by increased brokerage and delivery costs.
Income from continuing operations was $4,631,000 or $.43 per share for the year ended July 31, 1996, compared to $6,738,000 or $.63 per share for the prior year. The difference was primarily due to decreased operating profits, partially offset by decreased income taxes.
Net sales increased $62,629,000 or 23.8% for the year ended July 31, 1995, compared to the prior year. The increase in net sales was due to an increase in the average selling price of coffee, partially offset by a decrease in coffee pounds sold and the loss of $9,557,000 of sales from Hillside (due to its disposition).
Operating profits from food products were $18,205,000, an increase of 66% for the year ended July 31, 1995, compared to $10,940,000 for the prior year. The increase resulted primarily from increased gross profit margins partially offset by increased selling, general and administrative expenses and the loss of operating profits of $2,179,000 from Hillside (due to its disposition). Increased gross margins were due to an increase in the average selling price of coffee greater than the increase in the average cost of green coffee, partially offset by decreased coffee pounds sold. The price of green coffee was volatile during the year ended July 31, 1995 and green coffee prices ranged from a low of $1.21 per pound to a high of $2.31 per pound. The Company consistently values its inventory and commitments at the lower of cost or market. Selling, general and administrative expenses increased primarily due to increased advertising and payroll costs, partially offset by reduced coupon costs.
Income from continuing operations was $6,738,000 or $.63 per share for the year ended July 31, 1995, compared to $8,243,000 or $.76 per share for the prior year. The difference was primarily due to increased operating profits, offset by increased income taxes on such operating profits and the gain on sale of Hillside (the Companys specialty coffee product line) of $6,224,000 after income taxes or $.58 per share in the prior year.
General inflation has been relatively low for the last several years; however, green coffee prices have changed significantly during fiscal 1994, 1995 and 1996. While the Company manages its inventory to have rapid turnover, the changes in green coffee prices have impacted the Companys gross profit percentage.
LIQUIDITY AND CAPITAL RESOURCES
As of July 31, 1996, working capital was approximately $87,000,000 and the ratio of current assets to current liabilities was 4.7 to 1.
As of July 31, 1996, the Company had unused borrowing capacity of approximately $30 million under its credit facilities of $40 million with Fleet Bank N.A. and The Chase Manhattan Bank (see Note 2 of notes to consolidated financial statements).
The Company plans on expanding its Quikava, company operated and franchised operations, which in total are currently operating in 14 locations. The sales of these operations are not material to the Companys consolidated sales. Total Quikava store level operations are not currently profitable, primarily due to pre-opening expenses. In addition, Quikava headquarters expenses in excess of $1,000,000 on an annual basis are not being absorbed.
The Company believes that its cash flow from operations, its cash equivalents and its amended and restated revolving credit and term loan agreements with its Banks provide sufficient liquidity to meet its working capital, expansion and capital requirements.
SEGMENT INFORMATION CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES
						 Year Ended July 31 					1996 1995 1994 						 (Amounts in Thousands)
Net sales - food products $ 321,135 $326,141 $263,511
Rental revenues $ 2,156 $ 2,061 $ 2,060 	 Operating profit: Food products $ 15,059 $18,205 $ 10,940 Real estate 671 490 317 Eliminations (625) (423) (266) 		 				 $ 15,105 $18,272 $ 10,991
Identifiable assets: Food products $ 156,888 $165,566 $152,293 Real estate 9,493 9,564 9,913 Corporate 33,054 31,875 46,591 				 $ 199,435 $207,005 $208,797 Depreciation and amortization: Food products $ 6,203 $ 5,596 $ 6,123 Corporate 177 203 55 	 				 $ 6,380 $ 5,799 $ 6,178
Capital expenditures: Food products $ 7,397 $ 6,533 $ 4,577 Corporate 14 14 38 				 $ 7,411 $ 6,547 $ 4,615
				
The food products segment is engaged in the (a) roasting, packing and marketing of regular,instant, decaffeinated and specialty coffees and (b) packing and marketing of regular and decaffeinated tea for sale to Retail, Foodservice and Private Label customers. Additionally, other related food products are marketed and sold to Foodservice customers. See Notes 4 and 5 of notes to consolidated financial statements. Operations of real estate represent rental and other income principally from the Company's original restaurant facilities.
All of the Company's operations are located in the United States. Export sales are not significant.
Identifiable assets under the caption "Corporate" include (1) cash and cash equivalents, investments in marketable securities and short-term investments of $16,422,000 (1996), $15,330,000 (1995) and $31,726,000 (1994) and (2) net assets of discontinued operations of $941,000 (1996), $3,814,000 (1995) and $1,458,000 (1994).
CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES COMMON SHARE PRICES
The Company's Common Stock is traded on the New York Stock Exchange under the symbol CHF. The Company has approximately 14,000 shareholders of record as of October 10, 1995. 			 1996 1995
			 High Low High Low
1st Quarter 6 3/4 5 7/8 6 1/4 5 1/8 2nd Quarter 6 1/8 5 1/8 6 1/4 5 1/4 3rd Quarter 5 1/2 4 3/4 6 5/8 5 3/8 4th Quarter 5 1/4 4 5/8 7 6 3/8
The Company distributed a 3% stock dividend on July 27, 1995.
Pursuant to certain provisions of a revolving credit and term loan agreement, the Company may not declare or pay any dividend (except for stock dividends).
Item 14(d) CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E 				 Additions 		 Balance at Charged to Balance 		 Beginning Costs and at End Description of Period Expenses Other Deductions(1) of Period
Year ended July 31, 1996: Allowance for doubtful accounts and discounts 		 $1,251,000 $2,315,902 $2,433,902 $ 1,133,000
Year ended July 31, 1995: Allowance for doubtful accounts and discounts 		 $928,000 $2,597,705 $2,274,705 $ 1,251,000
Year ended July 31, 1994: Allowance for doubtful accounts and discounts 		$1,081,000 $1,940,779 $24,6642 $2,118,443 $928,000
(1) Discounts taken by customers and uncollectible accounts written-off, 	net of recoveries.
EXHIBIT 11 - STATMENT RE: COMPUTATION OF PER SHARE EARNINGS
YEAR ENDED JULY 31,
				 1996 1995 1994
					 (AMOUNTS IN THOUSANDS, 					 EXCEPT PER SHARE DATA)
PRIMARY AVERAGE SHARES OUTSTANDING 10,736 10,736 10,797
INCOME FROM CONTINUING OPERATIONS $4,631 $6,738 $8,243
NET (LOSS)/INCOME $(1,536) $4,863 $7,884
PER SHARE AMOUNTS:
INCOME FROM CONTINUING OPERATIONS $.43 $.63 $0.76
NET (LOSS)/INCOME $(.14) $.45 $0.73
FULLY DILUTED
AVERAGE SHARES OUTSTANDING 10,736 10,736 10,797
ASSUMED CONVERSION OF CONVERTIBLE DEBENTURES 11,821 11,821 11,822
	 TOTAL 22,557 22,557 22,619
INCOME FROM CONTINUING OPERATIONS $4,631 $6,738 $8,243
ADD CONVERTIBLE DEBENTURES INTEREST AND AMORTIZATION OF DEFERRED CHARGES, NET OF INCOME TAXES 4,386 4,670 4,373
	 TOTAL $9,017 $11,408 $12,616
NET (LOSS)/INCOME $(1,536) $4,863 $7,884
ADD CONVERTIBLE DEBENTURES INTEREST AND AMORTIZATION OF DEFERRED CHARGES, NET OF INCOME TAXES 4,452 4,670 4,373
	TOTAL $2,916 $9,533 $12,257
PER SHARE AMOUNTS:
INCOME FROM CONTINUING OPERATIONS $.40 $.51 $.56
NET INCOME $.13 $.42 $.54
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
As of October 13, 1996, the Company had directly and indirectly the following active subsidiaries, all of which are included in the Companys consolidated financial statements furnished herewith:
Subsidiaries of Chock full oNuts Corporation
Chock Realty Corporation California 100%
CFN of New York, Inc. New York 100%
Cains Coffee Co. Delaware 100%
Cains Holding Company Delaware 100%
Quikava, Inc. Massachusetts 100%