SECURITIES AND EXCHANGE COMMISSION 	 Washington, D.C. 20549 	 FORM 10-Q 	 QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) 	 OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended April 30, 1999 Commission File Number 1-4183 CHOCK FULL O' NUTS CORPORATION (Exact Name of Registrant As Specified In Its Charter) New York 13-0697025 (State or Other Jurisdiction of (I.R.S. Employer Incorporation of Organization) Identification No.) 370 Lexington Avenue, New York, N.Y. 10017 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code (212) 532-0300 			 Indicate by check mark whether the registrant (1) 			 has filed all reports required to be filed by Section 			 13 or 15 (d) of the Securities Exchange Act of 1934 			 during the preceding 12 months (or for such shorter 			 period that the registrant was required to file such 			 reports), and (2) has been subject to such filing 			 requirements for the past 90 days. 							 Yes X 	No 	No. of Shares of Common Stock ($.25 par value) outstanding as of 	June 10, 1999 - 11,083,605 	CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES 	INDEX Page No. PART I. FINANCIAL INFORMATION Item 1.	Financial Statements 	Unaudited Condensed Consolidated Balance Sheets - April 30, 1999 and July 31, 1998 1 & 2 of 17 	Unaudited Condensed Consolidated Statements of Operations - Three Months Ended April 30, 1999 and 1998 3 of 17 	Unaudited Condensed Consolidated Statements of Operations - Nine Months Ended April 30, 1999 and 1998 4 of 17 	Unaudited Condensed Consolidated Statements of Cash Flows - Nine Months Ended April 30, 1999 and 1998 5 of 17 	Unaudited Condensed Consolidated Statement of Stockholders' Equity - April 30, 1999 6 & 7 of 17 	Notes to Unaudited Condensed Consolidated Financial Statements - April 30, 1999 8 & 9 of 17 Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations 10, 11, 12, 13 and 14 of 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 of 17 Item 5. Other Information 15 of 17 Item 6. Exhibits and Reports on Form 8-K 16 of 17 Signatures 17 of 17 	PART I. FINANCIAL INFORMATION 	CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES 	CONDENSED CONSOLIDATED BALANCE SHEETS April 30, July 31, 1999 1998 ASSETS (Unaudited) (Note) Current assets: Cash and cash equivalents $ 5,468,420 $ 6,148,068 Receivables, principally trade, less allowances for doubtful accounts and discounts of $1,438,000 and $1,329,000 34,761,406 40,559,581 Inventories 62,576,303 60,641,309 Prepaid expense and other 6,413,699 3,636,446 Total current assets 109,219,828 110,985,404 Property, plant and equipment - at cost $112,837,702 $105,327,427 Less allowances for depreciation and amortization (60,877,584) 51,960,118 (56,346,824) 49,025,603 Real estate held for development or sale, at cost 2,133,463 2,175,344 Other assets and deferred charges 21,445,531 23,223,366 Excess of cost over net assets acquired 15,600,317 15,773,875 $200,359,257 $201,183,592 Note: The balance sheet at July 31, 1998has been derived from the audited financial statements at that date. See notes to unaudited condensed consolidated financial statements. 1 of 17 CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS April 30, July 31 1999 1998 (Unaudited) (Note) LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current installments of long-term debt $ 266,052 Accounts payable 12,655,070 $8,502,778 Accrued expenses 7,498,227 9,159,994 Income taxes 1,256,114 1,093,979 Total current liabilities 21,675,463 18,756,751 Long-term debt, excluding current installments 88,348,675 92,246,967 Other non-current liabilities 3,049,759 3,854,833 Deferred income taxes 8,770,000 8,770,000 Stockholders' equity: Common stock, par value $.25 per share; Authorized 50,000,000 shares: Issued 11,326,924 and 11,306,444 shares 2,831,731 2,826,611 Additional paid-in-capital 52,216,913 52,064,121 Retained earnings 31,406,008 30,848,452 Cost of 475,522 shares in treasury (6,573,719) (6,573,719) Deferred compensation under stock bonus plan and employees' stock ownership plan (1,365,573) (1,610,424) Total stockholders' equity 78,515,360 77,555,041 $200,359,257 $201,183,592 Note: The balance sheet at July 31, 1998 has been derived from the audited financial statements at that date. See notes to unaudited condensed consolidated financial statements. 2 of 17 CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended April 30, Revenues: 1999 1998 Net Sales $ 86,046,704 $95,895,503 Rentals from real estate 505,462 453,296 86,552,166 96,348,799 Cost and expenses: Cost of sales 63,072,813 70,869,138 Selling, general and administrative expenses 24,309,826 20,950,921 Expenses of real estate 432,081 427,060 87,814,720 92,247,119 Operating (loss)/profit (1,262,554) 4,101,680 Interest income 124,783 176,479 Interest expense (1,863,545) (1,952,018) Other (deductions) - net (331,722) (5,386) (Loss)/income before income taxes (3,333,038) 2,320,755 Income tax (benefit)/provision (1,277,000) 1,008,000 Net (loss)/ income $ (2,056,038) $1,312,755 (Loss)/income per share: Basic ($.19) $.13 Diluted ($.19) $.11 See notes to unaudited condensed consolidated financial statements. 3 of 17 CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Nine Months Ended April 30, Revenues: 1999 1998 Net Sales $270,260,223 $306,294,851 Rentals from real estate 1,587,256 1,519,010 271,847,479 307,813,861 Cost and expenses: Cost of sales 194,947,136 227,998,972 Selling, general and administrative expenses 69,057,221 64,648,948 Expenses of real estate ___1,244,720 1,257,948 265,249,077 293,905,868 Operating profit 6,598,402 13,907,993 Gain on sale of real estate 1,281,698 Interest income 545,831 418,165 Interest expense (5,618,405) (6,084,065) Other (deductions) - net (458,274) (41,675) Income before income taxes 1,067,554 9,482,116 Income taxes 510,000 3,916,000 Net income $557,554 $5,566,116 Income per share: Basic $.05 $.54 Diluted $.05 $.40 See notes to unaudited condensed consolidated financial statements. 4 of 17 CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended April 30, 1999 1998 Operating Activities: Net income $ 557,554 $5,566,116 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment 4,530,760 4,994,908 Amortization of deferred compensation and deferred charges 2,302,656 2,952,056 Gain on sale of real estate (1,281,698) Other, net (1,123,494) (1,889,791) Changes in operating assets and liabilities: Decrease in accounts receivable 5,689,554 3,024,062 (Increase)/decrease in inventory (1,934,994) 11,627,740 (Increase) in prepaid expense (2,900,185) (679,302) Increase/(decrease)in accounts payable, accrued expenses and income taxes 2,652,660 (8,558,241) NET CASH PROVIDED BY OPERATING ACTIVITIES 9,774,511 15,755,850 Investing Activities: Proceeds from sale of real estate 6,685,941 Sales /(purchases) of marketable securities 122,932 (33,333) Purchases of property, plant and equipment (6,306,482) (3,802,970) Proceeds from/(advances to) co-packer, net 359,424 (1,014,768) NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (5,824,126) 1,834,870 Financing Activities: Proceeds from/(payments of) revolving credit and term loans, net 369,967 (2,930,688) (Payment of) convertible subordinated debentures (5,000,000) (5,281,000) Loan to employees' stock ownership plan (1,000,000) NET CASH (USED IN)FINANCING ACTIVITIES (4,630,033) (9,211,688) (Decrease)/increase in Cash and Cash Equivalents (676,648) 8,379,032 Cash and Cash Equivalents at Beginning of Period 6,148,068 4,585,633 Cash and Cash Equivalents at End of Period $ 5,468,420 $12,964,665 See notes to unaudited condensed financial statements. 5 of 17 CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Common Stock Issued In Treasury Shares Amount Shares Amount In Thousands Balance at July 31, 1998 11,306 $2,827 476 $6,574 Net Income Conversion of debentures 21 5 Deferred compensation under stock bonus plan and employees' stock ownership plan: Amortization Balance at April 30, 1999 11,327 $2,832 476 $6,574 See notes to unaudited condensed consolidated financial statements. 6 of 17 CHOCK FULL O'NUTS CORPORATION AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Deferred Compensation Under Stock Bonus Plan and Additional Employees' Stock Paid-In Retained Ownership Plan Capital Earnings In Thousands Balance at July 31, 1998 $1,610 $52,064 $30,848 Net income 558 Conversion of debentures 153 Deferred compensation under stock bonus plan and employees' stock ownership plan: Amortization 244 Balance at April 30, 1999 $1,366 $52,217 $31,406 See notes to unaudited condensed consolidated financial statements. 7 of 17 CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS April 30, 1999 (A)	The accompanying unaudited condensed consolidated financial statements 	have been prepared in accordance with generally accepted accounting 	principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended April 30, 1999 and 1998 are not necessarily indicative of the results that may be expected for a full fiscal year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended July 31, 1998. (B)	Basic per share data is based on the weighted average number of common 	shares outstanding of 10,582,000 and 10,532,000 for the three and nine months ended April 30, 1999, respectively, and 10,433,000 and 10,392,000 for the three and nine months ended April 30, 1998, respectively. Diluted per share data, assuming conversion of debentures, is based on 20,994,000 and 21,241,000 shares outstanding for the three and nine months ended April 30, 1999, respectively and 21,899,000 and 21,920,000 for the three and nine months ended April 30, 1998, respectively. In addition, net income is increased due to a reduction of interest and amortization charges, net of income taxes, on the assumed conversion of debentures of $972,000 and $2,996,000 for three and nine months ended April 30, 1999, respectively and $1,056,000 and $3,205,000 for the three and nine months ended April 30, 1998, respectively. However, for the three and nine month periods ended April 30, 1999, the effect of the assumed conversion is anti-dilutive and is therefore excluded from the earnings per share calculations. (C)	Inventories are stated at the lower of cost (first-in, first-out) or 	market. The components of inventory consist of the following: April 30, July 31, 1999 1998 Finished goods $38,771,425 $35,775,998 Raw materials 16,496,717 17,539,666 Supplies 7,308,161 7,325,645 $62,576,303 $60,641,309 (D) 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 November 30, 1999 may not exceed $40,000,000 and after such date may not exceed $20,000,000. Interest on all such loans is equal to the prime rate or at the Company's option the London Interbank Offering Rate ("LIBOR") plus 1.25%, subject to adjustment based on the level of loans outstanding (7.75% at prime and 6.19% at LIBOR,	at April 30, 1999). 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 ($3,000,000 at April 30, 1999) are to be repaid in January 2003. Outstanding loans under the revolving credit agreements are to be repaid in January 2003. 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 require repayment of outstanding loans with excess cash flow, as defined. 8 of 17 (E)	Prepaid expenses and other on the unaudited condensed consolidated 	balance sheets includes deferred income taxes of $951,000. (F)	As of August 1, 1998, the Company adopted Statement of Financial 	Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). The adoption of this Statement had no impact on the Company's net income or stockholders' equity. This pronouncement sets forth requirements for disclosure of the Company's comprehensive income and accumulated	other comprehensive items. Comprehensive income is defined as the change in equity during a period from transactions or other events and circumstances unrelated to net income (e.g., foreign currency translation gains and losses). 	In June 1997, the FASB also issued SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which is effective for the Company's fiscal year ending July 31, 1999. The statement changes the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports. However, information is not to be presented for interim financial statements in the first year of implementation. Adoption of SFAS No. 131 is not expected to have a material effect on the Company's financial statement disclosures. 	In June 1998, the FASB issued Statement No. 133, "Accounting for 	Derivative Instruments and Hedging Activities," which is effective for the	Company's fiscal year ending July 31, 2000. The Statement permits early adoption as of the beginning of any fiscal quarter after its issuance. The Company expects to adopt the new Statement effective August 1, 1999. The Statement will require the Company to recognize all derivatives, as defined, on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company has 	not yet determined what the effect of Statement No. 133 will be on the 	earnings and financial position of the Company. (G)	On December 4, 1998, the Company redeemed $5,000,000 of its 8% Convertible Subordinated Debentures using existing invested funds. Subsequent to April 30, 1999 through June 10, 1999, $1,436,000 of the Company's 8% Convertible Subordinated Debentures and $398,000 of the Company's 7% Convertible Senior Subordinated Debentures were converted into 232,202 shares of Company Common Stock. (H)	The Company uses coffee futures and options for hedging purposes to reduce the effect of changing green coffee prices. The contracts that effectively meet the risk reduction and correlation criteria are recorded using hedge accounting. Effectiveness is measured based upon high correlation between commodity gains and losses on the futures and options and those on the firm commitment. Under hedge accounting, the gain or loss on the hedge is deferred and recorded as a component of the underlying inventory purchase. Gains and losses on hedges that are terminated prior to inventory purchases are recorded in inventory until the inventory is sold. (I)	In November 1997, the Company sold one of its downtown Manhattan properties for approximately $6,900,000. The sale resulted in a pre-tax gain of $1,282,000 or on an after tax basis approximately $750,000, $.07 per basic share and $.03 per diluted share. The proceeds from such sale were used to reduce outstanding bank indebtedness. 9 of 17 CHOCK FULL O' NUTS CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 	Certain statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q constitute "forward-looking statements" within the meaning of the Reform Act. See Other Information Item 5. 	Operations 	The following is Management's discussion and analysis of certain significant factors that have affected the Company's operations during the periods included in the accompanying unaudited condensed consolidated statements of operations. 	Net sales from beverage products decreased to $85,745,000 or 9.0% for the three months ended April 30, 1999 compared to $95,496,000 for the 	comparable period of the prior year. The decrease was primarily due to a decrease in the average selling price of coffee partially offset by a 7.6% increase in coffee pounds sold (primarily attributable to the Park Coffee Company ("Park")acquisition in July 1998). Operating loss from beverage products was $988,000 for the three months ended April 30, 1999 compared to an operating profit of $4,524,000 in the prior year's comparable period. The decrease for the three months resulted primarily from decreases in gross margins and increases in selling, general and administrative expenses for operations other than Park. Decreased gross margins were primarily due to an increase in manufacturing costs resulting from labor and overhead inefficiencies in the manufacturing transition period for Park of approximately of $1.5 million and a decrease in the average selling price of coffee greater than the decrease in the average cost of green coffee. During the three months ended April 30, 1999 prices of green coffee ranged from a high of $1.13 to a low of $.97 per pound. Selling, general and administrative expenses increased, other than those applicable to Park, primarily due to increased advertising, coupon costs, compensation costs, delivery costs (resulting from the manufacturing transition period for Park and increased coffee pounds sold) and professional fees and related expenses incurred in connection with the proposed acquisition of the Company by Sarah Lee Corporation. 	Net sales from beverage products decreased to $268,386,000 or 11.7% for the nine months ended April 30, 1999 compared to $304,042,000 for the comparable period of the prior year. The decrease was primarily due to a decrease in the average selling price of coffee partially offset by a 7.7% increasein coffee pounds sold (primarily attributable to the Park acquisition). Operating profit from beverage products was $7,192,000 a decrease of 52% for the nine months ended April 30, 1999 compared to the prior year's comparable period. The decrease for the nine months resulted primarily from decreases in gross margins and increases in selling, general and administrative expenses for operations other than Park. Decreased gross margins were primarily due an increase in manufacturing costs of approximately $4.5 million similar to that in the three month comparison and to a decrease in the average selling price of coffee greater than the decrease in the average cost of green coffee. During the nine months ended April 30, 1999 prices of green coffee ranged from a high of $1.35 to a low of $.97 per pound. Selling, general and administrative expenses increased, other than those applicable to Park, primarily due to increased delivery costs (resulting from the manufacturing transition period for park and increased coffee pounds sold), coupon costs, compensation costs and professional fees and related expenses incurred in connection with the proposed acquisition of the Company by Sarah Lee Corporation, partially offset by decreased amortization of purchased intangibles and insurance costs. 10 of 17 	Quikava's growth plans involve franchising the concept, thereby generating initial franchise fees and continuing royalty income to cover headquarters' expenses. Franchise operated shop sales were $3,521,000 for nine months ended April 30, 1999 versus $2,364,000, an increase of 49% over the comparable 1998 period. Quikava company- operated shop sales were $1,874,000 for the nine months ended April 30, 1999 compared to $2,253,000 in the comparable period of the prior year. Company operated shops generate potential franchise interest and gain exposure to the concept. Operating losses amounted to $936,000 for the nine months ended April 30, 1999 compared to $1,367,000 in the comparable period of the prior year. The 	operating losses consist primarily of headquarters' expenses (primarily payroll and related expenses for franchising infrastructure) and shop level losses, partially offset by initial franchise fee income and royalty income on franchisee sales. Net loss was $2,056,000 ($.19 per basic and diluted share) for the three months ended April 30, 1999, compared to net income of $1,313,000 ($.13 per basic share and $.11 per diluted share) for the comparable period of the prior year. The decrease was primarily due to decreased operating profits from beverage products, partially offset by an income tax benefit in 1999 versus an income tax in 1998 (attributable to a loss before income taxes in 1999 and income before income taxes in 1998) and to a lesser extent decreased operating losses from Quikava. Net income was $558,000 ($.05 per basic share and diluted share) for the nine months ended April 30, 1999, compared to $5,566,000 ($.54 per basic share and $.40 per diluted share) for the comparable period of the prior year. The decrease was primarily due to decreased operating profits from beverage products and the gain on sale of real estate in fiscal 1998, partially offset by decreased income taxes (primarily attributable to decreased income before income taxes)and to a lesser extent decreased interest expense (resulting from reduced amounts of debt outstanding), increased interest income (resulting from increased invested funds) and decreased operating losses from Quikava. 	Liquidity and Capital Resources 	As of April 30, 1999, working capital was approximately $87,500,000 and the ratio of current assets to current liabilities was 5.0 to 1. 	As of April 30, 1999, the Company had unused borrowing capacity of 	approximately $36 million under its credit facilities of $40 million with Fleet Bank, N.A. and The Chase Manhattan Bank (see Note D of Notes to Unaudited Condensed Consolidated Financial Statements). 	See Note G of Notes to Unaudited Condensed Consolidated Financial Statements relative to a partial redemption of the Company's 8% Convertible Subordinated Debentures and certain conversions of the 8% Convertible Subordinated Debentures and 7% Convertible Senior Subordinated Debentures. 	The Company plans on expanding its Quikava franchised operations, which are currently operating in 42 locations. The sales of Company operated and franchised units are not material to the Company's consolidated sales. Total Quikava store level operations are not currently profitable but are being partially offset by franchise fee and royalty income and, in addition, Quikava headquarters' expenses of approximately $1,000,000 on an annual basis 	are not being absorbed. 	The Company believes that its cash flow from operations, its cash 	equivalents and funds available under 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. 11 of 17 	Green Coffee Market 	Coffee is one of the leading commodities traded on futures exchanges. 	Supplies fluctuate with the weather and prices can be and have been volatile. The supply and price is affected by multiple factors, such as weather, weather forecasts, consumption trends, changes in stock levels, export restrictions observed by members of the Association of Coffee Producing Countries ("ACPC") members, activities of hedge funds, politics and economics in the coffee producing countries, many of which are lesser developed nations. While coffee trades primarily on the futures market, coffee of the quality level sought by the Company can trade on a negotiated 	basis at a substantial premium above commodity coffee pricing, depending upon the supply and demand at the time of purchase. In the sixties some coffee exporting countries plus a group of coffee 	importing countries together formed the International Coffee Organization ("ICO"). The principal aim of the organization was to stabilize coffee prices in the world market. One of the instruments which the ICO used to achieve this was a system allocating an export quota to each of the coffee producing countries. In July 1989, this system was abandoned due to disagreements involving several exporting as well as importing countries. In 1994, a new International Coffee Agreement came into force which no longer included the price stability mechanism. As a consequence, the function of the ICO changed. This organization now provides a forum where exporting and importing countries can discuss matters pertaining to coffee. In addition, the ICO publishes statistics about the coffee market. 	It has thus become an administrative organization. 	When the export quota system was abandoned in 1989, coffee prices declined in the global market. Certain exporting countries were dissatisfied with the new situation and tried to regain their grip on the international coffee market. In 1993, they established the ACPC to boost coffee prices in the global market by keeping part of annual production out of the world market. The ACPC members account for around 70% of world coffee exports. The ACPC attempts to achieve better prices by agreeing export quotas for each member country and an export volume ceiling for the organization as a whole. 	The effect of the ACPC on coffee prices is difficult to determine in light of the dramatic price increases resulting from the 1994 frosts in Brazil discussed below. Nonetheless, the ACPC met in November 1994 and resolved to sustain green coffee prices. In January 1996, the ACPC agreed to extend its current limitations on the supply of green coffee which were scheduled to expire in June 1996 through the 1996/1997 green coffee year. No further actions have been taken by the ACPC subsequent to that date. The Company is unable to predict whether the ACPC will be successful in achieving its goals. Based on published statistics the supplies of green coffees held by consumers (roasters and buyers) are currently, near historically low levels. 	Brazil, the world's largest coffee producer, experienced frosts in June and July of 1994 which reportedly damaged approximately 40% of the green coffee crop. The announcement of the Brazilian frost damage caused a substantial increase in green coffee prices and other coffee- product prices worldwide. The Company purchases a modest amount of its green coffee from Brazil. In the third and fourth quarter of 1994 the Company experienced a significant increase in the price of green coffee which carried over into the first three quarters of 1995. The Company was not able to immediately pass through to customers all of the price increases in the third and fourth quarters of 1994 and the first quarter of 1995 following the significant increase in green coffee prices that resulted from the Brazilian aforementioned frosts. Subsequent to such period through January 1997, the Company's green coffe purchases and commitments returned to pricing levels closer to those that existed prior to the frosts. In February 1997, green coffee bean 12 of 17 	prices began to rise significantly reaching a high of $3.18 per pound in 	May 1997. This bull market was somewhat unique in that the fundamental 	cause was very tight stocks of arabica coffee in consuming countries. 	Historically, bull markets have been the direct result of weather 	developments in Brazil, specifically cold weather and drought that damages	the following crop. 	During the fiscal 1998, the green coffee market was in the $1.09 to 	$2.11 per pound range, and towards the end of such year at the lower end of this range. From August 1997 until February 1998, coffee remained relatively high, most of the time at above $1.70 per pound, when a fast, substantial and sustained drop occurred caused by a significantly large Brazilian crop. This left the Company with large quantities of high-priced inventory while sales slowed as retailers waited for the green coffee market to affect the price they pay for roasted coffee and pressure intensified as major competitors cut prices in response. The result was lower net income in the third quarter of fiscal 1998 compared to the first and second quarters and an approximate break-even in the fourth quarter. 	During the first nine months of fiscal 1999, the coffee market was in the $.97 to $1.35 per pound range. The large Brazilian crop continues to overhang the coffee market, notwithstanding the effects in Central America of Hurricane Mitch, and the price of coffee currently is at the lower end of that range. 	The Company is unable to predict weather events in particular countries that may adversely affect coffee supplies and price. Except for late 1994 and early 1995, the Company generally has been able to pass green coffee price increases through to its customers, thereby maintaining its gross margins. The Company cannot predict whether it will be able to pass inventory price increases through to its customers in full in the future. 	A significant portion of the Company's green coffee supply is contracted 	for future delivery, generally between three and twelve months forward 	(with declining percentages of the supply being subject to future contracts in the latter portions of each year), to ensure both an adequate supply and reduced risk of price fluctuations. In addition, the Company uses options and futures for hedging purposes to reduce the risks of changing green coffee prices. Green coffee is a large market with well-established brokers, importers and warehousemen through which the Company manages its requirements. 	In addition to forward purchases, the Company keeps physical inventory in 	each of its production facilities and third-party warehouses representing 	anywhere from four to ten weeks of supply requirements. 	All coffee purchase transactions are in U.S. dollars, the industry's 	standard currency. The Company believes that it is not dependent upon any 	one importer or broker for its supply of green coffee from any particular 	country. 	Retail Customers are very price-sensitive about the purchase of coffee in 	supermarkets. When retail prices increase dramatically, take away declines 	and consumers switch to less expensive brands and high yield roasts. 	Likewise, FoodService Customers in times of price increase tend to stretch 	the use of inventory. 	Year 2000 Issue In 1998, the Company established an oversight committee, to review all of the Company's computer systems and programs, as well as the computer systems of the third parties upon whose data or functionality the Company relies in any material respect, and to assess their ability to process transactions in the Year 2000. The Company has a formal Year 2000 Program focusing on three key 13 of 17 readiness areas: 1) Internal hardware/software and non- information technology systems; 2) Supplier readiness; and 3) Customer readiness. For each readiness area, the Company has identified steps to perform and developed timetables for Year 2000 compliance. The Company has conducted an assessment of internal applications and hardware. Some software applications have been made Year 2000 compliant and resources have been assigned to address other applications based on their criticality and the time required to make them Year 2000 compliant. All software remediation is scheduled to be completed no later than the Fall of 1999. The Year 2000 compliance evaluation of hardware, including roasters, grinders, bagging machines, telecommunication equipment, workstations and other items, is nearing completion. The Company has identified and contacted key suppliers. To date, the Company has received responses from the majority of its key suppliers, most of which indicate that the suppliers are in the process of developing remediation plans. Based on the supplier's progress to adequately address the Year 2000 issue, the Company is developing a supplier action list and contingency plan to include alternative sources of supply. The Company has identified and been in contact with Key customers. The customers have responded that they are or will be Year 2000 compliant. The Company has expensed approximately $350,000 for Year 2000 costs in fiscal 1998, approximately $100,000 for Year 2000 costs in the first nine months of fiscal 1999 and estimates future expenditures for Year 2000 compliance to be approximately $150,000. There can be no assurance, however, that there will not be a delay in, or increased costs associated with, the programs described in this section. Since the programs described in this section are ongoing, all potential Year 2000 complications have not yet been identified. Therefore, the potential impact of these complications on the Company's financial condition and results of operations cannot be determined at this time. If computer systems used by the Company, its suppliers or customers fail or experience significant difficulties related to the Year 2000, the Company's results of operations and financial conditions could be materially affected. Disclosure About Interest Rate Risk The Company is subject to market risk from exposure to fluctuations in interest rates. At April 30, 1999, the Company's long-term debt, other than capitalized leases, consists of $84 million of fixed rate long-term debt (its convertible subordinated debentures) and $4 million of variable rate debt under its revolving credit and term loans. The Company does not enter into derivative financial instruments for trading or speculative purposes. The Company does not expect changes in interest rates to have a material effect on income or cash flows in fiscal 1999, although there can be no assurance that interest rates will not significantly change. Disclosure About Commodity Price Risk The Company uses coffee futures and options for hedging purposes to reduce the effect of changing green coffee prices. At April 30, 1999, the total value of coffee contracts was approximately $12.9 million. These contracts meet the risk reduction and correlation criteria for hedge accounting and gains and losses are deferred and recorded as a component of the underlying inventory purchase. If the market value of green coffee at April 30, 1999 ($1.04) were to increase or decrease by $.15, the effect of such an increase would be to decrease inventory by approximately $300,000 and the effect of such a decrease would not have a significant effect. The Company generally has been able to pass green coffee prices increases through to its customers, thereby maintaining its gross margins. The Company cannot predict whether it will be able to pass inventory price increases through to its customers in full in the future. 14 of 17 	Part II. Other Information 	Item 1. 	Legal Proceedings 	Since April 26, 1999, seven putative class action lawsuits have been filed by alleged Shareholders of the Company against certain officers and directors of the Company and the Company, in the Supreme Court of the State of New York, styled LAURA BENJAMIN V. CHOCK FULL O'NUTS CORP., ET AL., C.A. No. 999108759, SANDRA KAFENBAUM, ET AL.V.MARK A. ALEXANDER, ET AL., C.A. No. 99602054, STANILOFF V. ALEXANDER, ET AL., C.A. No. 99602054, VICTOR V. CHOCK FULL O'NUTS CORP., ET AL., C.A. No. 99602254, GUTTERMAN V. ALEXANDER, ET AL., C.A. No. 99602412, JANNER V. CHOCK FULL O'NUTS CORP. ET AL., C.A. No. 9910826, and BOLLINGER V. CHOCK FULL O'NUTS ET AL., C.A. No 99109951. A motion to consolidate the pending class actions for pre-trial and trial purposes has been filed by plaintiffs' counsel with the Court. In addition, since April 26, 1999, two shareholder's derivative complaints have been filed by alleged Shareholders of the Company against certain officers and directors of the Company and, nominally, the Company, (i) in the Supreme Court of the State of 	New York, styled HARBOR FINANCE PARTNERS AND ALAN FREBURG V. MARVIN I. HAAS, ET AL., No. 99-602013, (ii) in the United States District Court for the Southern District of New York, styled RICHARD A. ASH V. NORMAN F. ALEXANDER, ET AL., No. 99 Civ. 3820. Each of the class action suits and the shareholder's derivative suits set forth substantially similar allegations of purported misconduct and breach of fiduciary duties by certain officers and directors of the Company and the Board related to their conduct and consideration of certain business combinations. Additionally, in the ASH action, plaintiff (purportedly on behalf of the Company) has alleged a claim arising under the Federal securities laws. The shareholder plaintiffs seek, in each case unspecified damages, attorneys' fees and equitable relief, including, among other things, orders requiring the individual defendants to carry out their fiduciary duties, enjoining them from proceeding with alleged violations complained of in the complaints, and requiring certain directors to disgorge all profits allegedly earned from purported insider stock transactions during the relevant time period. The Board has received a letter from another shareholder demanding that the Company bring direct claims against the directors substantially similar to the claims set forth above. By letter dated May 14, 1999, Company counsel informed counsel for the shareholder who had lodged the demand that the Board of Directors had unanimously rejected the demand. 	Item 5. 	Other Information 	Certain statements under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Form 10-Q constitute "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements are based on current expectations and information available to management at this time. They may involve known 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. Factors which could cause actual results to differ from the forward looking statements include, among others, the following: general economic and business conditions; the availability of green coffee; green coffee prices; competition; the success of operating initiatives; development and operating costs, including green coffee prices; advertising and promotional efforts; brand awareness; the existence of or adherence to development schedules; the existence or absence of adverse publicity; 5 of 17 	availability, locations and terms of sites for Quikava franchised outlets; changes in business strategy or development plans; quality of management; availability, terms and deployment of capital; business abilities and judgment of personnel; availability of qualified personnel; labor and employee benefit costs; changes in or the failure to comply with government regulations; construction costs and the Year 2000 issue. Item 6. Exhibits and Reports on Form 8-K a) Exhibits - Financial Data Schedule - Exhibit 27 - see below b) Reports on Form 8-K None 16 of 17 Appendix A to item 601 (c) of Regulation S-K (Article 5 of Regulation S-X Chock full o'Nuts Corporation and Subsidiaries) Item Number Item Description Amount 5-02 (1) Cash and cash items $ 5,468,420 5-02 (2) Marketable securities $ -0- 5-02 (3) (a) (1) Notes and accounts receivable - trade $ 36,199,406 5-02 (4) Allowances for doubtful accounts $ 1,438,000 5-02 (6) Inventory $ 62,576,303 5-02 (9) Total current assets $109,219,828 5-02 (13) Property, plant and equipment $112,837,702 5-02 (14) Accumulated depreciation $ 60,877,584 5-02 (18) Total assets $200,359,257 5-02 (21) Total current liabilities $ 21,675,463 5-02 (22) Bonds, mortgages and similar debt $ 88,348,675 5-02 (28) Preferred stock - mandatory redemption $ -0- 5-02 (29) Preferred stock - no mandatory redemption $ -0- 5-02 (30) Common stock $ 2,831,731 5-02 (31) Other stockholders' equity $ 75,683,629 5-02 (32) Total liabilities and stockholders' equity$ 200,359,257 5-03 (b) 1 (a) Net sales of tangible products $ 270,260,233 5-03 (b) 1 Total revenues $ 271,847,479 5-03 (b) 2 (a) Cost of tangible goods sold $ 194,947,136 5-03 (b) 2 Total costs and expenses applicable to sales and revenues $ 196,191,856 5-03 (b) 3 Other costs and expenses $ -0- 5-03 (b) 5 Provision for doubtful accounts and notes $ 1,529,000 5-03 (b) (8) Interest and amortization of debt $ 5,618,405 5-03 (b) (10) Income before taxes and other items $ 1,067,554 5-03 (b) (11) Income tax expense $ 510,000 5-03 (b) (14) Income/loss continuing operations $ 557,554 5-03 (b) (15) Discontinued operations $ -0- 5-03 (b) (17) Extraordinary items $ -0- 5-03 (b) (18) Cumulative effect - changes in accounting principles $ -0- 5-03 (b) (19) Net income or loss $ 557,554 5-03 (b) (20) Earnings per share - basic $ .05 5-03 (b) (20) Earnings per share - diluted $ .05 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant duly caused this Report of Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized. CHOCK FULL O' NUTS CORPORATION (Registrant) June 14, 1999 Marvin I. Haas President and Chief Executive Officer June 14, 1999 Howard M. Leitner Senior Vice President and Chief Financial and Accounting Officer 17 of 17 ??