CIATTIS INC /DE/, S-2/A, 1997-05-22

CIATTIS INC /DE/
S-2/A, 1997-05-22
EATING PLACES

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<PAGE>

As filed with the Securities and Exchange Commission on May 22, 1997

Registration No. 333-23233
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Amendment No. 2 to FORM S-2

REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
-----------------------------
CIATTI'S, INC.
(Exact name of registrant as specified in its charter)
-----------------------------
Minnesota 41-1564262
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
-----------------------------
5555 West 78th Street
Edina, Minnesota 55439
(612) 941-0108
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------------------------
Phillip R. Danford
President and Director
Ciatti's, Inc.
5555 West 78th Street
Edina, Minnesota 55439-2702
(612) 941-0108
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------------------------
Copies to:
Thomas G. Lovett IV
Lindquist & Vennum P.L.L.P.
4200 IDS Center
80 South Eighth Street
Minneapolis, Minnesota 55402
(612) 371-3211
-----------------------------
As soon as practicable after the effective date of this offering.
(Approximate date of commencement of proposed sale to the public)
-----------------------------
If any of the securities being registered on the Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: [X]

If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box: [X]

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<CAPTION>
Calculation of Registration Fee
=====================================================================================================
Title of Each Class Proposed Maximum Proposed Maximum
of Securities to Amount to be Offering Aggregate Amount of
be Registered Registered Price Per Unit Offering Price Registration Fee
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Subordinated Fixed-Term Notes $2,000,000 100% $2,000,000 $606.00
=====================================================================================================
</TABLE>

The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment that specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
<TABLE>
<CAPTION>

CIATTI'S, INC.

CROSS REFERENCE SHEET

Form S-2 Item Number and Description Caption of Location in Prospectus
- ------------------------------------ ---------------------------------
<S> <C>

Item 1. Forepart of Registration Statement and Outside
Front Cover Page of Prospectus.......................... Front of the Registration Statement; Outside Front Cover
Page

Item 2. Inside Front and Outside Back Cover Pages of
Prospectus.............................................. Inside Front Cover Page; Additional Information;
Outside Back Cover Page

Item 3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges............................... Outside Front Cover Page; Prospectus Summary; Risk
Factors

Item 4. Use of Proceeds......................................... Prospectus Summary; Use of Proceeds

Item 5. Determination of Offering Price......................... Not applicable

Item 6. Dilution................................................ Not applicable

Item 7. Selling Security Holders................................ Not applicable

Item 8. Plan of Distribution.................................... Outside Front Cover Page; Inside Front Cover Page; Plan
Of Distribution

Item 9. Description of Securities To Be Registered.............. Prospectus Summary; Description of Notes and Terms of
Offering

Item 10. Interests of Named Experts and Counsel.................. Not applicable

Item 11. Information with Respect to Registrant.................. Outside Front Cover Page; Prospectus Summary;
Available Information; Incorporation of Certain
Information by Reference; Selected Consolidated
Financial Data; Management's Discussion and
Analysis of Financial Condition and Results of
Operations; Business; Description of Notes and
Terms of Offering; Certain Transactions

Item 12. Incorporation of Certain Information by
Reference.............................................. Incorporation of Certain Information by Reference

Item 13. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities......... Not applicable

</TABLE>
<PAGE>

PRELIMINARY PROSPECTUS
Subject to Completion

$2,000,000
PRINCIPAL AMOUNT
----------------

CIATTI'S, INC.
One and Three Year Subordinated Fixed-Term Notes
------------------------------------------------

The Fixed-Term Notes (the "Notes") offered hereby are unsecured, general
obligations of Ciatti's, Inc. (the "Company") and are subordinated to all
existing and future Senior Indebtedness (as defined hereafter) of the Company
(of which $992,293 in principal amount was outstanding at March 30, 1997). The
Company has no debt covenants in place restricting the amount of Senior
Indebtedness the Company may incur in the future.

The interest rates of the Notes offered by the Company are expected to
change from time to time, based on the Company's financial needs and current
market conditions. Interest rates will initially be set at 9.00 % for One-Year
Notes and 9.25% for Three-Year Notes. See "Plan of Distribution."

Changes in interest rates will not affect the rates on outstanding Notes.
The Company may prepay the Notes at any time, in whole or in part. See
"Description of Notes and Terms of Offering."

The Notes will be sold directly by officers and employees of the Company.
The minimum investment is $1,000. The Notes are being offered on a continuous
basis. There will be no public market for the Notes. There is no minimum sales
requirement for this offering. The Company reserves the right to reject any
subscription in whole or in part. See "Plan of Distribution."

These Notes are being offered only to Minnesota residents.

For a discussion of certain risk factors which should be considered by
prospective purchasers of the Notes offered hereby, see "Risk Factors,"
beginning at page 5 herein.
---------------------------

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

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

Underwriting
Price to Commissions and Proceeds to
Public Discount Company
- -------------------------------------------------------------------------------
<S> <C> <C> <C>

Per Note 100% 0.0% 100% (1)
- --------------------------------------------------------------------------------
Total $2,000,000 0.0% $2,000,000 (1)
================================================================================
</TABLE>

(1) Before deducting estimated offering expenses of $33,000.

The date of this prospectus is May xx, 1997.

Information contained herein is subject to completion or amendment. A
registration statement relating to these Notes has been filed with the
Securities and Exchange Commission. These Notes may not be sold nor may offers
to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sales of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of any
such State.

<PAGE>

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048, and
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained at prescribed rates from the Public Reference Branch of
the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
also maintains a Web site (http://www.sec.gov) at which reports, proxy
statements and other information regarding the Company may be accessed. Such
reports, proxy statements and other information can also be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street
N.W., Washington, D.C. 20006. The Company's Common Stock is quoted on The Nasdaq
SmallCap Market under the symbol "CIAT".

The Company has filed with the Commission a Registration Statement on Form
S-2 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the Notes offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all information set forth in such Registration Statement and the
exhibits and schedules thereto, as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Notes
offered hereby, reference is made to such registration statement, including the
exhibits and financial schedules filed as part thereof. Such information may be
inspected in the Public Reference Branch of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies thereof may be obtained from the Commission
at prescribed prices.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, which have been filed by the Company with the
Commission (File No. 0-16348), are incorporated by reference in this Prospectus:
(i) the Company's Annual Report on Form 10-KSB for the fifty-two weeks ended
June 30, 1996, (ii) the Company's Proxy Statement dated October 10, 1996 for its
Annual Meeting of Shareholders held November 19, 1996, (iii) the Company's 10-
QSB for the quarter ended September 29, 1996, (iv) the Company's 10-QSB for the
quarter ended December 29, 1996 and (v) the Company's 10-QSB for the quarter
ended March 30, 1997. The Company's Annual Report for the fifty-two weeks ended
June 30, 1996 and the Company's 10-QSB for the quarter ended March 30, 1997 are
being included as part of this Prospectus.

The foregoing documents contain financial and other information concerning
the Company. Such documents constitute a part of this Prospectus, and the
information contained therein should be reviewed together with all other
information contained herein. Any statement contained in a document incorporated
by reference herein shall be deemed to be modified or superseded hereby to the
extent that a statement contained herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.

The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the written or oral request of such
person, a copy of any or all of the documents which are incorporated by
reference into this Prospectus, other than exhibits to such documents (unless
such exhibits are specifically incorporated by reference in such documents).
Requests for such copies should be directed to Joseph W. Fesenmaier, Ciatti's,
Inc., 5555 West 78th Street, Edina, Minnesota 55439-2702. Telephone requests may
be directed to (612) 941-0108, extension 205.

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

This Prospectus, including the information incorporated by reference
herein, contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. Actual results could differ significantly from those projected or
contemplated in the forward-looking statements as a result, in part, of the risk
factors set forth elsewhere in this Prospectus. In connection with the forward-
looking statements which appear in these disclosures, prospective purchasers of
the Company's Notes offered hereby should carefully review all of such risk
factors.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and by the information and
financial statements appearing in the documents incorporated by reference
herein. See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers of the Notes offered hereby. Terms not
defined in this summary are defined elsewhere in this Prospectus.

THE COMPANY

The Company owns and operates ten full-service restaurants in Minnesota and
Wisconsin. Included in these full-service restaurants are nine Italian
restaurants operating in Minnesota and Wisconsin under the name "Ciatti's
Italian Restaurant(R)" and one steakhouse restaurant operating in Wisconsin
under the name "Spurs Steakhouse & Saloon(R)". On January 1, 1995, Big D Bagels,
Inc. ("Big D"), the wholly-owned subsidiary of the Company, entered into an
exclusive Development Agreement with Bruegger's Franchise Corporation to develop
bagel restaurants in the Dallas-Fort Worth, Texas area. As of April 30, 1997,
Big D has opened and is operating six bagel restaurants in the Dallas-Fort
Worth, Texas area. All bagel restaurants are operated under the name "Bruegger's
Bagel Bakery(R)" pursuant to the terms of the Development Agreement and related
franchise documents.

Ciatti's, Inc. and its wholly-owned subsidiary, Big D Bagels, Inc., are
Minnesota corporations. The Company's principal office and mailing address is
Ciatti's, Inc., 5555 West 78th Street, Edina, Minnesota 55439-2702 and its
telephone number is (612) 941-0108. Unless the context otherwise requires,
references to the Company include the Company and its wholly-owned subsidiary,
Big D Bagels, Inc. References to the Company's development and operation of its
bagel restaurants will generally mean Big D Bagels, Inc.

THE OFFERING

Securities Offered........... The Company is offering up to $2.0 million in
principal amount of its unsecured subordinated
notes (the "Notes") in minimum denominations of
$1,000. The Notes are fixed-term notes having
maturities of one or three years after the date
of issue.

Subordination................ The Notes are unsecured general obligations of
the Company and are subordinated in right of
payment to all existing and future Senior
Indebtedness (as defined hereafter), $992,293
of which was outstanding at March 30, 1997. The
Notes are not secured by any lien on the
Company's assets and are not insured or
guaranteed by any public or private entity. See
"Description of Notes and Terms of Offering -
Subordination."

Interest Rates and Payment... Interest rates are being initially set at 9.00%
for One Year Notes and 9.25% for Three Year
Notes. Interest on the Notes accrues from the
date of issuance and will be paid semi-annually
on January 1 and July 1.

The interest rate of a Note will not adjust
prior to Maturity.

3
<PAGE>

Prepayment by Company........ The Notes are prepayable at the election of the
Company, in whole or in part, at any time if
otherwise permitted under the restrictions and
covenants pertaining to Senior Indebtedness.
See "Description of Notes and Terms of
Offering - Prepayment by the Company."

Modification, Termination
or Extension of Offering... The Company reserves the right to modify at any
time the terms of the offering or the Notes.
Any modification will apply only to Notes
offered after the date of the modification,
except as described under "Description of Notes
and Terms of Offering." The Company reserves
the right to terminate the offering at any
time. From time to time, the Company may issue
additional debt securities in private
placements or through additional registered
public offerings.

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

"Bruegger's" and "Bruegger's Bagel Bakery" are trademarks of Bruegger's
Corporation. "Ciatti's Italian Restaurant" and "Spurs Steakhouse
& Saloon" are registered trademarks of the Company.

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

The Notes offered hereby are securities of Ciatti's, Inc. They are not
direct or indirect interests in Big D Bagels, Inc. Neither Bruegger's Franchise
Corporation, nor any of its subsidiaries, has endorsed or approved the offering
or is in any way participating in it. Please see "Additional Information" on
page 28 for a more detailed disclaimer of Bruegger's Franchise Corporation's
involvement.

4
<PAGE>

RISK FACTORS

Investors should carefully consider the following matters in connection
with an investment in the Notes in addition to the other information contained
or incorporated by reference in the Prospectus or in any applicable Prospectus
Supplement. Information contained or incorporated by reference in this
Prospectus or in any applicable Prospectus Supplement contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may," "will," "expect," "anticipate," "estimate" or "continue" or the
negative thereof or other variations thereon or comparable terminology. The
following matters constitute cautionary statements identifying important factors
with respect to such forward-looking statements, including certain risks and
uncertainties, that could cause actual results to differ materially from those
in such forward-looking statements.

Recent Losses

During the fiscal year ended June 30, 1996 and the thirty-nine weeks ended
March 30, 1997 the Company incurred losses of approximately $1,363,000 and
$1,905,000, respectively. While the Company expects that its full service
restaurants will operate on a profitable basis in the near future, the Company
expects to incur losses from its bagel restaurants.

Dependence Upon Bagel Restaurants For Future Growth

Substantially all of the Company sales in the past have been generated from
the operation of its full service restaurants. During the fiscal year ended June
30, 1996, the Company's full service restaurants generated sales of $17.0
million, while its bagel restaurants generated sales of only $627,000. Further,
during the thirty-nine week period ended March 30, 1997, the Company's full
service restaurants generated sales of $11.8 million while its bagel restaurants
generated sales of only $1.3 million. The Company currently operates six bagel
restaurants. The retail bagel segment is an emerging concept, the long-term
appeal and potential of which have not yet been fully determined. Future growth
in sales and profits will depend to a substantial extent on the Company's
ability to increase the number of its bagel restaurants. The Company's ability
to successfully expand its bagel restaurant operations will depend upon a number
of factors, including the availability and cost of suitable locations, the
hiring, training and retention of skilled restaurant management and personnel,
the ability of the Company to generate funds from operations, obtain adequate
restaurant financing on favorable terms or to obtain cash concessions from
landlords, the competitive environment, and the ability to obtain the necessary
governmental permits and approvals. There can be no assurance that the Company
will be able to open new bagel restaurants and, if opened, that those
restaurants can be operated profitably or that the opening of any new locations
will not result in reduced sales at existing bagel restaurants. See "Business -
Restaurant Operations" and "Business - Restaurant Development."

Dependence upon Bruegger's and Quality Dining, Inc.

The development of the Dallas-Fort Worth area for bagel restaurants by Big
D is subject to the terms and conditions of a Development Agreement and related
franchise agreements with Bruegger's Franchise Corporation ("Bruegger's). Under
the terms of the Development Agreement, Big D is required to comply with a
number of requirements with respect to construction and maintenance of bagel
restaurants. Big D is required to have nine bagel restaurants open by January 1,
1998 and thirty bagel restaurants open by July 1, 2001. The Development
Agreement provides that Big D and Bruegger's will enter into a pre-agreed-upon
franchise agreement for each bagel restaurant opened by Big D. The franchise
agreement grants Big D the right to establish and operate a bagel restaurant and
to use the Bruegger's system and various trademarks. The bagel restaurants must
conform to Bruegger's methods, such as its core products, decor, fixtures,
furnishings, and maintenance. Under the franchise agreement, Big D is obligated
to pay fees to Bruegger's, including, but not limited to, a $20,000 franchise
fee upon the opening of each bagel restaurant. In the event the Company fails to
comply with certain terms of the Development Agreement or of the Franchise
Agreement with respect to a specific restaurant, Bruegger's has the right to
terminate the applicable agreement. In May 1996, Bruegger's was acquired by
Quality Dining, Inc., a publicly held corporation. On May 12, 1997, Quality
Dining, Inc. announced that its Board of Directors approved a plan to divest its
Bruegger's bagel-related businesses. The Company does not know what

5
<PAGE>

effect, if any, this divestiture will have on the Company. See "Business -
Relationship with Bruegger's and Quality Dining, Inc."

On October 1, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission for a Rights Offering to its existing
shareholders. In response to Ciatti's filing of the Registration Statement,
Bruegger's asserted that Bruegger's has certain rights of consent and of first
refusal regarding the sale of securities of Ciatti's. Bruegger's is the
franchisor and Big D, the Company's wholly-owned subsidiary, is the franchisee
under a Development Agreement in which Big D has the exclusive right to develop
Bruegger's bagel restaurants in the Dallas-Fort Worth, Texas area. Ciatti's and
Bruegger's were unable to agree upon resolution of the matter and, on November
8, 1996, Ciatti's and Big D filed a lawsuit in United States District Court for
the District of Minnesota against Bruegger's and its parent corporation, Quality
Dining, Inc. ("Quality Dining"). In April 1997 the parties held settlement
discussions and on May 20, 1997 entered into a Settlement Agreement dated as of
April 24, 1997. Under the terms of the Settlement Agreement , Bruegger's agreed
to extend the dates on which the Company was required to complete the opening of
certain bagel restaurants under the Development Agreement, and the Company and
Big D agreed to enter into certain indemnification and license arrangements with
Bruegger's. The parties also agreed that Bruegger's would have no right of first
refusal to purchase securities of Ciatti's so long as Ciatti's remained a
publicly held corporation and that Bruegger's would have no right of consent for
certain issuances of securities by Ciatti's, including any issuance of
securities by Ciatti's (i) if the issuance does not result in the acquisition of
over 40% of the voting power of any class of securities of Ciatti's after the
completion of the issuance by any shareholder (other than Phillip R. Danford of
L.E. "Dan" Danford, Jr.) who previously held less than 40% of the voting power
of such securities and (ii) such issuance does not result in Phillip R. Danford
and L.E. "Dan" Danford, Jr. collectively owning less than 10% of the voting
power of all classes of securities of Ciatti's. The Development Agreement, as
amended by the Settlement Agreement, is herein referred to as the "Development
Agreement."

Subordination of Notes

The Notes are subordinated to Senior Indebtedness of the Company, which
includes indebtedness to financial institutions and certain other obligations .
See "Description of Notes and Terms of Offering - Subordination." In the event
that the Company is in default on any Senior Indebtedness, the Company will be
precluded from making any payment of principal or interest on the Notes until
the default is cured or the Senior Indebtedness is paid in full.

Guarantee of Subsidiary's Leases by Ciatti's, Inc.

Although the Company's wholly-owned subsidiary, Big D Bagels, Inc., is the
developer and operator of the Company's bagel restaurants, Ciatti's, Inc. has
guaranteed certain of the leases entered into by Big D. If Big D were to default
on these leases, and the assets of Big D were otherwise insufficient to satisfy
these obligations, the landlords would have a claim against Ciatti's and its
assets.

The Competitive Restaurant and Food Service Industry

The restaurant and food service industry is highly competitive and
fragmented. There are numerous restaurants and other food service operations
that compete directly and indirectly with the Company. Many of these entities
have significantly greater financial resources and higher total sales volume
than does the Company. The restaurant business is often affected by changes in
consumer taste and discretionary spending priorities, national, regional and/or
local economic conditions, demographic trends, consumer confidence in the
economy, traffic patterns, weather conditions, employee availability, and the
type, number and location of competing restaurants. Any change in these factors
could adversely affect the Company. In addition, factors such as inflation and
increased food, labor and other employee compensation costs could adversely
affect the Company. In the Dallas-Fort Worth area, the Company expects to
encounter competition from Einstein Bagels and Bagel Boulevard, as well as a
number of local, owner-operated bagel shops that in many cases have developed a
loyal local clientele. See "Business."

Need for Additional Capital

Under the Company's Development Agreement with Bruegger's, it is required
to open a total of thirty bagel restaurants prior to July 1, 2001. The Company
estimates that it will cost approximately $350,000 for the capital

6
<PAGE>

expenditures and initial franchise fee for each location. In addition, the
Company estimates it will cost approximately $500,000 for the construction of a
commissary, which the Company plans to build in fiscal 1998. Accordingly, the
Company will need funds in addition to those raised by these Notes to support
its expansion plans and comply with the terms of its Development Agreement with
Bruegger's. There can be no assurance that the Company will be able to obtain
such additional financing.

Borrowing from Affiliates

In order to finance certain working capital requirements, on February 11,
1997, the Company borrowed $50,000 from L.E. "Dan" Danford, Jr., the Chairman of
the Board of Directors of the Company, pursuant to an unsecured 10.5% Promissory
Note that is payable in four installments from October 1997 through June 1998.
The Company anticipates that it may be necessary for it to borrow additional
funds from Mr. Danford in the future. There are, however, no guarantees that
funds will be available from Mr. Danford when needed by the Company.

Increases in Food Costs

The Company's profitability is dependent on its ability to anticipate and
react to changes in food costs. Various factors beyond the Company's control,
including climatic changes, may affect food costs. While in the past management
has been able to anticipate and react to increasing food costs through
purchasing practices and price adjustments, there can be no assurance that it
will be able to do so in the future.

Need to Establish Market Penetration in Dallas-Fort Worth, Texas Area

Experience obtained from industry sources demonstrates that the
profitability of any individual bagel restaurant often depends to a high degree
on the penetration of a particular market by the bagel restaurant operator. The
Company assumes that individual bagel restaurants will typically become
profitable only after the Company has opened a number of bagel restaurants
sufficient to make the franchise name well-known in that market. The Company
estimates that in the Dallas-Fort Worth area the minimal number of bagel
restaurants needed for such penetration is between twelve and twenty.

Control by Directors, Executive Officers and Affiliates

The Company's directors, executive officers and members of their families
currently beneficially own 59.6% of the Company's outstanding Common Stock. As a
result, these shareholders currently exercise and are expected to continue to
exercise influence and, if acting together, control all matters requiring
approval by the shareholders of the Company, including the election of
directors, approval of amendments to the Company's Articles of Incorporation and
approval of mergers or other business combination transactions. Such control by
existing shareholders could have the effect of delaying, deferring or preventing
a change in control of the Company.

Local Food Tastes

The bagel concept has become successful in many parts of the United States,
but is new in the southern portion of the country. Although the Company believes
that bagels can be successfully introduced to the Company's development area as
it has been done in other metropolitan areas of the country, there can be no
assurances that this effort will be successful in Texas.

Labor Costs, Availability of Employees

Similar to its Italian and steakhouse restaurants, the Company needs to
hire essentially unskilled workers for each bagel restaurant, although fewer
workers are required for a bakery compared to a full service restaurant. While
the Company pays wages higher than the statutory minimum wage in every bagel
restaurant, the minimum wage nevertheless has a direct proportionate impact on
the actual wages the Company is required to offer to compete for available
employees. Any increases mandated by state or federal laws, such as those that
became effective October 1, 1996, may have a negative impact on the Company's
profitability because, in most instances, competition with other restaurants
does not allow such increases to be passed on to the customer.

7
<PAGE>

Costs of Construction Materials

The construction of any bagel restaurant involves several building
materials, such as construction-grade and furniture-grade lumber, stainless
steel, and plastic laminates, which are highly sensitive to nationwide price
fluctuations. Any significant price increases of such materials will increase
the construction costs of any bakery and will consequently have an adverse
effect on its profitability.

Reliance on Commissary of Third Party

Currently, the Company obtains its shaped bagel dough, as well as other
food supplies through the commissary of another Bruegger's operator in Austin,
Texas. Based upon industry information, the Company does not consider it
economically advantageous to invest in the construction of its own commissary
until it has opened approximately ten to fifteen of its own bagel restaurants,
which the Company expects to occur in fiscal 1998. While the current arrangement
represents the most cost effective way of obtaining bagel dough and other
supplies, an unscheduled interruption of the Austin commissary, which is not
under the control of the Company, would have a severe and immediate impact on
the continuation of the Company's business in Dallas-Fort Worth, Texas.

Government Regulation

The Company's business is subject to extensive state and local government
regulation in the various jurisdictions in which its full service and bagel
restaurants are located, including regulations relating to alcoholic beverage
control, public health and safety and fire codes. The failure to obtain or
retain required licenses could adversely affect the operation of the Company's
restaurants. While the Company has not experienced, and does not anticipate any
problems in obtaining required licenses, permits or approvals, any difficulties,
delays or failures in obtaining such licenses, permits or approvals could delay
or prevent the opening of a restaurant in a particular area. In addition,
although the Company does not expect federally mandated wage increases which
became effective October 1, 1996 to have a significant impact on the Company's
financial results, additional increases in state or federal minimum wage
requirements or changes in applicable state law with respect to minimum wages
for "tipped" employees may have an adverse impact on the Company. See
"Business-Government Regulation."

No Financial Covenants; Absence of Sinking Fund

The Notes do not have the benefit of covenants designed to protect holders
of the Notes in the event of a material adverse change in the Company's
financial condition or results of operations or to impose restrictions on the
Company's ability to create Senior Indebtedness, pay dividends or make other
payments. The Notes do not contain provisions that permit the holders of the
Notes to require that the Company repurchase or prepay the Notes in the event of
a takeover, recapitalization or similar restructuring, and the Notes do not
contain covenants specifically designed to protect holders of the Notes in the
event of a highly leveraged transaction involving the Company. In addition, the
Notes will not have the benefit of sinking fund payments by the Company. See
"Description of the Notes and Terms of Offering."

Risk of Prepayment at the Option of the Company

The Company, at its option and if permitted under the restrictions and
covenants pertaining to Senior Indebtedness, may at any time prepay, in whole or
in part, any or all of the outstanding Notes of any type selected by interest
rate or maturity. The Notes will be prepaid at 100% of the principal amount plus
accrued, but unpaid interest. Any such prepayment may have the effect of
reducing the overall return that any investor may receive on an investment in
the Notes by reducing the term of the investment. In addition, no assurance can
be given that an investor in the Notes will be able to reinvest the proceeds of
any such prepayment for the remainder of the original term of the Notes at an
interest rate comparable to the rate paid on the Notes. See "Description of
Notes and Terms of Offering - Prepayment by the Company."

Limited Blue Sky Registration

The Notes being offered by this Prospectus are offered only to residents of
the State of Minnesota. Accordingly, any resale of these Notes to persons
outside Minnesota may be limited.

8
<PAGE>

Absence of Public Market

There is no existing market for the Notes and there can be no assurance as
to the liquidity of any market that may develop for the Notes, the ability of
holders of the Notes to sell their Notes or the price at which holders will be
able to sell their Notes. If such a market were to develop, the Notes could
trade at prices that may be higher or lower than the initial offering price
thereof depending on many factors, including prevailing interest rates, the
Company's operating results and the markets for similar securities. The Company
does not intend to apply for listing of the Notes on any securities exchange or
on the Nasdaq SmallCap Market.

9
<PAGE>

RATIO OF EARNINGS TO FIXED CHARGES

The following are the consolidated ratios of earnings to fixed charges for
the periods presented:

<TABLE>
<CAPTION>
Fiscal Year 39 weeks ended
----------------------------------------- Mar. 30,
1992 1993 1994 1995 1996 1997
----- -------- ----- ----- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges 1.64x 4.90x 3.93x
Deficiency of earnings to fixed charges $235,000 $1,523,000 $1,914,000
</TABLE>

For purposes of calculating the ratios of earnings to fixed charges,
earnings are defined as earnings (loss) before income taxes plus fixed charges.
Deficiency of earnings to fixed charges represents the amount of loss before
income taxes plus fixed charges. Fixed charges consist of interest expense,
amortization of debt discount and the interest factor in rental charges.

USE OF PROCEEDS

The net proceeds to the Company from the sale of all the Notes is
$1,967,000 (net of offering expenses of $33,000). There can be no assurance,
however, that any Notes will be sold.

The Company is issuing these Notes to raise working capital, including
additional capital to expand the number of bagel restaurants owned and operated
by Big D in Dallas-Fort Worth, Texas. Under the Development Agreement, Big D
must have nine bagel restaurants open by January 1, 1998 and thirty bagel
restaurants open by July 1, 2001. In addition to expanding the number of bagel
restaurants, the Company may use some of the capital raised to construct a
commissary to supply fresh dough and other products to its bagel restaurants.
The Company may also use part of any capital raised for major remodeling and
updating of some of its Italian restaurants, as well as for other business
opportunities. If the Company decides to pursue a strategy of building bagel
restaurants at a rate faster than that required by the Development Agreement, it
may need funds in addition to those generated from this offering. In such event,
the Company will attempt to raise additional funds through debt or equity
offerings. If the Company is unable to successfully raise funds from this
offering or the rights offering in a timely manner, it may be necessary for it
to raise additional capital through other means of financing. Although the
Company believes that it will be able to secure the necessary capital, there can
be no assurances that the Company will be successful in such efforts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."

The following table sets forth the anticipated use of the net proceeds from
this offering if the maximum number of Notes are sold:

<TABLE>
<CAPTION>
<S> <C>
Expansion of Number of Bagel Restaurants (including commissary) $1,667,000
Remodeling Italian Restaurants 200,000
Working Capital 100,000
----------
Total $1,967,000
==========
</TABLE>

The above amounts and categories for use of the proceeds of the Offering
represent management's best estimate based upon current conditions and
assumptions as to anticipated levels of investment among the foregoing
categories. Although no material changes are contemplated in the proposed use of
proceeds, the Company reserves the right to adjust such amounts by reason of
business conditions existing at the time of expenditure.

If less than the maximum number of Notes are sold, the Company intends to
first use the proceeds to construct additional bagel restaurants. Pending
application of the proceeds of the Offering, the proceeds will be invested in
short-term liquid securities.

10
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data for the fiscal years
ended June 28, 1992, June 27, 1993, July 3, 1994, July 2, 1995 and June 30, 1996
have been derived from audited financial statements of the Company for the
fiscal years then ended. The selected consolidated financial data for the
thirty-nine weeks ended March 30, 1997 and March 31, 1996 have been prepared by
the Company without audit. Results from interim periods are not necessarily
indicative of the full fiscal year. This data should be read in conjunction
with the consolidated financial statements, related notes and other financial
information, included or incorporated by reference, elsewhere in this
Prospectus.

Consolidated Statement of Operating Data
(in thousands, except share and per share data)

39 weeks ended
Fiscal year (1) -------------------
------------------------------------------------------------ Mar. 31, Mar. 30,
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
Full-service restaurants $ 20,935 $ 22,359 $ 22,969 $ 18,935 $ 16,962 $ 12,787 $ 11,789
Bagel restaurants - - - - 627 331 1,351
------------------------------------------------------------ -------------------
Total sales 20,935 22,359 22,969 18,935 17,589 13,118 13,140

Cost of food and beverage 6,275 6,760 6,848 5,781 5,191 3,857 3,998
------------------------------------------------------------ -------------------
Gross profit 14,660 15,599 16,121 13,154 12,398 9,261 9,142

Restaurant operating expenses
Labor and benefits 7,034 7,590 7,383 6,266 6,145 4,536 4,691
Direct and occupancy 6,348 7,001 7,039 5,722 6,375 4,666 4,746
------------------------------------------------------------ -------------------
Total restaurant and operating
expenses 13,382 14,591 14,422 11,988 12,520 9,202 9,437

General and administrative 1,071 1,173 1,347 1,054 1,305 823 932
Impairment of assets write-down - - - - 78 - 640
------------------------------------------------------------ -------------------
1,071 1,173 1,347 1,054 1,383 823 1,572
------------------------------------------------------------ -------------------

Earnings (loss) from operations 207 (165) 352 112 (1,505) (764) (1,867)

Other income (expense), net (84) (70) 92 88 (18) 1 (47)
Income tax (expense) benefit (92) (107) (134) (6) 160 102 9
------------------------------------------------------------ -------------------

Net earnings (loss) $ 31 ($342) $ 310 $ 194 ($1,363) ($661) ($1,905)
============================================================ ===================

Net earnings (loss) per common and
common equivalent share $0.04 ($0.42) $0.40 $0.25 ($1.85) ($0.90) ($2.56)
============================================================ ===================

Weighted average number of common and
common equivalent shares outstanding 813,315 805,118 769,586 763,226 736,917 734,950 742,819

Consolidated Balance Sheet Data (at end of period)
(in thousands)
Fiscal year (1)
------------------------------------------------------------ Mar. 30,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- ----
Current assets $ 1,610 $ 2,308 $ 2,763 $ 2,713 $ 2,184 $ 760
Current liabilities 2,081 2,219 2,201 1,969 2,569 2,199
Total assets 8,318 7,899 7,206 7,684 6,652 4,276
Long-term obligations, less
current maturities 1,706 1,491 655 1,179 907 807
</TABLE>

(1) The Company's fiscal year ends on the Sunday closest to June 30. Fiscal
1994 was a fifty-three week year while fiscal 1992, 1993, 1995 and 1996 were
fifty-two week years.

11
<PAGE>

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

This Prospectus, including the information set forth in this section and
the information incorporated by reference herein, contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Actual results could differ
significantly from those projected in the forward-looking statements as a
result, in part, of the risk factors set forth in this Prospectus. In connection
with the forward-looking statements which appear in these disclosures,
prospective purchasers of the Notes offered hereby should carefully review the
factors set forth in this Prospectus under "Risk Factors."

Results of Operations

The following sets forth certain financial data expressed as a percentage
of sales for the fiscal years ended June 28, 1992, June 27, 1993, July 3, 1994,
July 2, 1995 and June 30, 1996 and the thirty-nine weeks ended March 30, 1997
and March 31, 1996. Fiscal 1994 was a fifty-three week year while fiscal 1992,
1993, 1995 and 1996 were fifty-two week years.

39 weeks ended
Fiscal year ---------------------------
------------------------------------------------ Mar. 31, Mar. 30,
1992 1993 1994 1995 1996 1996 1997
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
Full-service restaurants 100.0% 100.0% 100.0% 100.0% 96.4% 97.5% 89.7%
Bagel restaurants - - - - 3.6% 2.5% 10.3%
------------------------------------------------ ----------------------
Total sales 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Cost of food and beverage 30.0% 30.2% 29.8% 30.5% 29.5% 29.4% 30.4%
------------------------------------------------ ----------------------
Gross profit 70.0% 69.8% 70.2% 69.5% 70.5% 70.6% 69.6%

Restaurant operating expenses
Labor and benefits 33.6% 33.9% 32.1% 33.1% 34.9% 34.6% 35.7%
Direct and occupancy 30.3% 31.3% 30.7% 30.2% 36.2% 35.5% 36.1%
------------------------------------------------ ----------------------

Total restaurant and operating
expenses 63.9% 65.2% 62.8% 63.3% 71.1% 70.1% 71.8%

General and administrative 5.1% 5.3% 5.9% 5.6% 7.5% 6.3% 7.1%
Impairment of assets write-down - - - - 0.4% - 4.9%
------------------------------------------------ ----------------------
5.1% 5.3% 5.9% 5.6% 7.9% 6.3% 12.0%
------------------------------------------------ ----------------------

Earnings (loss) from operations 1.0% (0.7%) 1.5% 0.6% (8.5%) (5.8%) (14.2%)

Other income (expense), net (0.4%) (0.3%) 0.4% 0.4% (0.1%) - (0.3%)
Income tax (expense) benefit (0.5%) (0.5%) (0.6%) - 0.9% 0.8% -
------------------------------------------------ ----------------------

Net earnings (loss) 0.1% (1.5%) 1.3% 1.0% (7.7%) (5.0%) (14.5%)
================================================ ======================
</TABLE>

Comparison of Thirty-nine Weeks Ended March 30, 1997 to Thirty-nine Weeks Ended
March 31, 1996

Sales. Consolidated sales of $13,139,917 for the first thirty-nine weeks of
fiscal 1997 increased $21,899, or 0.2%, from consolidated sales of $13,118,018
reported during the first thirty-nine weeks of fiscal 1996. The increase in
consolidated sales during fiscal 1997 was due to a decline in sales at the
Company's full-service restaurants offset by an increase in sales at the
Company's bagel restaurants, as described below.

Full-service restaurant sales of $11,789,394 for the first thirty-nine
weeks of fiscal 1997 decreased 7.8% from sales of $12,787,315 for the same
period of fiscal 1996. This decrease in full-service restaurant sales was due,
in part, to the Company closing its Glendale, Wisconsin restaurant on September
8, 1996. After adjusting for the sale of this restaurant, year-to-date same
store full-service restaurant sales were down $463,260, or 3.8%, when compared
to the same periods of

12
<PAGE>

last year. The Company believes the extensive advertising campaign entered into
during the third quarter of this year will have a positive influence on full-
service restaurant sales. However, the continued competitiveness of the full-
service restaurant industry may make sales increases difficult to achieve.

Sales of $1,350,523 for the first thirty-nine weeks of fiscal 1997
increased $1,019,820, or 308.4%, over bagel restaurant sales of $330,703 for the
same period of fiscal 1996. This increase in sales was primarily a function of
the Company having five bagel restaurants open as of March 30, 1997, while only
having three bagel restaurants open as of March 31, 1996. The Company is
required by its development agreement to have nine stores open by January 1,
1998 and thirty stores open by July 1, 2001.

Cost of Food and Beverage. Cost of food and beverage as a percentage of
sales increased 30.4% for the first thirty-nine weeks of fiscal 1997 from 29.4%
for the same period of fiscal 1996. The increase in the cost of food and
beverage for the first thirty-nine weeks of fiscal 1997 was primarily due to
increases, during the first two quarters of this fiscal year, in the costs of
selected products at the Company's full-service restaurants without
corresponding menu price increases. The Company believes that its new menu at
its full-service restaurants, which was implemented during the second and third
quarters of fiscal 1997, has allowed the Company to stabilize the cost of food
and beverage and does not expect the cost of food and beverage to increase
significantly in the future.

Labor and Benefits. Labor and benefit costs as a percentage of sales
increased to 35.7% for the first thirty-nine weeks of fiscal 1997 compared to
34.6% during the same period of last year. The increase in labor and benefits
costs as a percent of sales for the first thirty-nine weeks of fiscal 1997 was
mainly due to increases in labor and benefit costs as a percentage of sales at
the Company's full-service restaurants during the first and second quarters of
this fiscal year. The Company believes that the introduction of a new menu at
its full-service restaurants has helped the Company stabilize its labor and
benefit costs and does not expect these costs to increase significantly in the
future.

Although the Company does not expect the federally mandated minimum wage
increases which became effective October 1, 1996 to have a significant impact on
the Company's financial results, additional increases in state or federal
minimum wage requirements or changes in applicable state law with respect to
minimum wages for "tipped" employees may have an adverse impact on the Company.

Direct and Occupancy. Direct and occupancy costs increased to 36.1% of
sales for the first thirty-nine weeks of fiscal 1997 compared to 35.5% of sales
during the same period of last year. The increase in direct and occupancy costs
as a percentage of sales was due primarily to fixed costs such as rent and
depreciation at the Company's bagel restaurants being spread across a small
sales base. If sales at the Company's bagel restaurants increase in the future,
these fixed costs will decrease as a percentage of sales.

Offsetting the increase in direct and occupancy costs as a percentage of
sales at the Company's bagel restaurants was a decrease in direct and occupancy
costs at the Company's Italian and steakhouse restaurants. This decrease was
mainly due to a reduction in advertising and promotion expense to 2.6% of full-
service restaurant sales during the first thirty-nine weeks of fiscal 1997 from
3.5% of full-service restaurant sales in the first thirty-nine weeks of fiscal
1996. The Company expects its advertising and promotion costs to increase to
approximately 4.0% of sales for the remainder of fiscal 1997 as the phases of
the Company's new advertising plan are implemented.

The Company also expects to spend approximately 4.0% of bagel restaurant
sales for advertising and promotion expenses in order to implement several
direct mailing and local store marketing campaigns in the Dallas-Fort Worth,
Texas area.

General and Administrative. General and administrative costs increased to
7.1% of sales for the first thirty-nine weeks of fiscal 1997 compared to 6.3% of
sales for the same period of last year. The increase in general and
administrative costs was primarily due to increases in general and
administrative expenses at the Company's bagel restaurants. The Company incurred
approximately $156,000 of additional general and administrative costs related to
operating additional bagel restaurants in the first thirty-nine weeks of fiscal
1997. The Company does not expect general and administrative costs at its full-
service restaurants to increase significantly during the remainder of the fiscal
year. General and

13
<PAGE>

administrative costs at the Company's bagel restaurants may increase slightly as
the Company opens additional bagel restaurants during the remainder of the
fiscal year.

Impairment of Assets Write-down. During the second quarter of fiscal 1997,
the Company recognized an impairment loss of $640,286 for the long-lived assets
at its Madison, Wisconsin restaurant. During this time period, a major national
competitor opened a steakhouse restaurant in close proximity to the Company's
restaurant. The competitor's restaurant has the Company's restaurant out-
positioned in the market area, and sales at the Company's restaurant have
suffered due to the opening of this restaurant. In addition, the Company
attempted several advertising and promotional campaigns during the first twenty-
six weeks of fiscal 1997 that did not produce the results management expected.
Based on these items, management revised its forecasts for this restaurant and
projected operating losses and cash flow deficits for the remainder of the
restaurant's lease, which expires in 2005. Accordingly, the Company has fully
written off the long-lived assets at this restaurant.

Other Income (Expense) Net. Other income (expense) decreased to a net
expense of $47,007 for the first thirty-nine weeks of fiscal 1997 from a net
income of $1,037 during the same period of last year. This decrease in other
income (expense) was primarily due to a decrease in investment income in fiscal
1997 as a result of fewer funds available for investment. In addition, interest
expense increased during fiscal 1997 due to the additional debt financing that
was arranged during the fourth quarter of fiscal 1996.

Income Tax Expense (Benefit). For the first thirty-nine weeks of fiscal
1997 the Company recorded an income tax benefit of $8,883 as compared to an
income tax benefit of $102,750 for the same period of last year. The fiscal 1996
tax benefit recorded was limited to the amount of taxes recoverable from the
carryback of losses; there was no tax benefit recorded for the carryforward of
losses generated in the first thirty-nine weeks of fiscal 1997. The Company's
fiscal 1997 tax benefit was due to the receipt of state and federal income taxes
in excess of the amount recorded as an income tax receivable as of June 30,
1996. The fiscal 1997 tax benefit was offset by $5,700 of state and franchise
taxes paid during the period.

As of March 30, 1997, the Company has $144,000 of alternative minimum tax
credit carryforwards and $1,824,000 of net operating loss carryforwards. These
tax carryforwards may only be utilized against future earnings and there is no
assurance that the Company will realize these benefits. The utilization of these
carryforwards may be limited if there are significant changes in the ownership
of the Company.

Seasonality. The Company's highest sales from its Italian and steakhouse
restaurants have historically occurred during the months of July through
December. The Company is currently unable to determine whether the operation of
its bagel restaurants will result in any change in its seasonality.

Effects of Inflation. Inflationary factors such as increases in food and
labor costs directly affect the Company's operations. Because most of the
Company's employees are paid hourly rates related to federal and state minimum
wage and tip credit laws, changes in these laws may result in an increase in the
Company's labor costs. The Company cannot always implement immediate price
increases to offset higher costs, and no assurance can be given that the Company
will be able to do so in the future.

Comparison of Year Ended June 30, 1996 to Year Ended July 2, 1995

Sales. Sales for fiscal 1996 decreased $1,345,904, or 7.1%, to $17,589,187
from fiscal 1995 sales of $18,935,091. The decrease in sales was primarily due
to the increased competition of national chain restaurants in each of the
markets in which the Company's Italian and steakhouse restaurants operate. In
addition, the Minneapolis, Minnesota restaurant, which was closed on December
24, 1994, contributed approximately six months of additional sales to fiscal
1995.

Offsetting the decrease in sales by the Company's Italian and steakhouse
restaurants was the opening of four bagel restaurants during fiscal 1996. These
stores were opened in the Dallas-Forth Worth, Texas area during the last nine
months of fiscal 1996.

14
<PAGE>

Cost of Food and Beverage. The cost of food and beverage was 29.5% of
sales in fiscal 1996. These costs were down significantly from the 30.5% of
sales reported in fiscal 1995 due to the Company changing its food vendor in
order to take advantage of lower pricing.

Labor and Benefits. Labor and benefit costs were 34.9% of sales in fiscal
1996, an increase from the 33.1% of sales reported in fiscal 1995. This
increase in labor and benefit costs as a percent of sales was primarily due to
decreased sales at the Company's Italian restaurants. In addition, the Company
incurred higher labor and benefit costs as a percentage of sales during the
early phase of operating its new bagel restaurants.

Direct and Occupancy. Direct and occupancy costs primarily include
individual restaurant advertising, promotion, supplies, utilities, occupancy and
depreciation expenses. These costs were 36.2% of sales in fiscal 1996, an
increase from the 30.2% reported in fiscal 1995. This increase was due to the
following three reasons. First, the Company increased its advertising and
promotion costs from 2.3% of sales during fiscal 1995 to 3.6% of sales in fiscal
1996. Second, lower sales levels caused fixed costs such as occupancy and
depreciation to be spread over a smaller sales base, thus significantly
increasing those respective percentages as compared to sales. Third, the
Company incurred significant costs related to the start-up of its bagel
restaurants.

General and Administrative. General and administrative costs increased to
7.5% of sales for fiscal 1996, up from the 5.6% of sales reported in fiscal
1995. This increase was primarily due to the Company recording a reserve of
$147,368 for the entire balance of an outstanding note receivable related to the
closing of its Milwaukee, Wisconsin, restaurant.

Impairment of Assets Write-down. During the fourth quarter of fiscal 1996,
the Company resolved to close its Italian restaurant located in Glendale,
Wisconsin, effective September 8, 1996. Accordingly, the Company recorded a
$77,691 charge during the fourth quarter of 1996 to reduce the cost of the
assets at this location by the excess of the cost over the accumulated
depreciation and amortization.

Other Income (Expense) Net. Other income (expense) decreased to a net
expense of $17,601 in fiscal 1996 from a net income of $87,854 in fiscal 1995.
The Company's interest expense increased to $92,634 in fiscal 1996 from $68,295
in fiscal 1995 as a result of higher debt in 1996 due to the construction of the
Company's bagel restaurants in the Dallas-Fort Worth area. The Company's
investment income decreased to $59,526 in fiscal 1996 from $77,469 in fiscal
1995 primarily as a result of fewer funds available for investment. In
addition, other income decreased to $15,507 in fiscal 1996 from $78,680 in 1995
as 1995 included a gain of $55,000 from the closure of the Company's
Minneapolis, Minnesota restaurant.

Income Tax Expense (Benefit). The income tax benefit for fiscal 1996 was
$160,000 as compared to income tax expense of $6,000 in fiscal 1995. The income
tax benefit recorded was limited to the amount of taxes recoverable from a
carryback of the current year loss; there was no tax benefit recorded for the
effect of the carryforward of losses generated in fiscal 1996. As of June 30,
1996 the Company has $144,000 of alternative minimum tax credit carryforwards
and $559,000 of net operating loss carryforwards.

Liquidity and Capital Resources
- -------------------------------

At March 30, 1997 the Company had cash and cash equivalents on hand of
$227,297, which represents a decrease of $1,375,639 from the $1,602,936 in cash
and cash equivalents reported as of June 30, 1996. Net cash used in operating
activities was $846,145 for the first thirty-nine weeks of fiscal 1997. In
addition to the net loss of $1,904,889, the Company reduced its accounts payable
balance by $395,646 during the first thirty-nine weeks of fiscal 1997. The
reduction in the Company's accounts payable balance related primarily to
payments made to vendors of $215,816 for capital expenditures for the Company's
fourth bagel restaurant. These uses of cash were partially offset by non-cash
depreciation expenses of $726,977 and an impairment of assets write-down of
$640,286. In addition, the Company received proceeds from an income tax
receivable of $165,576, and had increases in other accrued liabilities of
$111,456.

Net cash used in investing activities was $415,794 during the first thirty-
nine weeks of fiscal 1997. This cash was used primarily for purchases of
equipment and leasehold improvements for the Company's fifth bagel restaurant in
the Dallas-Fort Worth, Texas area.

15
<PAGE>

Net cash used in financing activities was $113,700 for the first thirty-
nine weeks of fiscal 1997. The net cash used in financing activities is the net
amount of repayments of amounts due under the Company's debt financing of
$163,700 and borrowings from the Chairman of the Board of Directors of the
Company of $50,000.

Big D Bagels, Inc. ("Big D"), a wholly-owned subsidiary of Ciatti's, Inc.,
entered into a Development Agreement with Bruegger's Franchise Corporation
("Bruegger's) effective January 1, 1995. This agreement requires Big D to build
30 bagel restaurants by July 1, 2001. During fiscal 1996, four bagel
restaurants were built, thus meeting the initial terms of this agreement. Big D
is required to open five additional bagel restaurants by January 1, 1998. As of
April 30, 1997, Big D has opened two additional bagel restaurants and has
entered into lease agreements for an additional five bagel restaurant sites.
The Company intends, however, to open bagel restaurants at a faster rate than
that obligated under the Development Agreement, subject to available financing.
The Company believes each new site will require approximately $350,000 for
capital expenditures, including the initial franchise fee.

On October 1, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission with respect to a rights offering of its
common stock to its existing shareholders. The Company filed the Registration
Statement to obtain additional funds that the Company would contribute to Big D.
In connection with the filing of the Registration Statement and subsequent
communications with Bruegger's, Bruegger's asserted that it had certain rights
of consent and first refusal in connection with the rights offering. As a
result of Bruegger's actions, the Company was forced to delay the commencement
of the rights offering until resolution of the legal issues. On November 8,
1996, the Company filed a lawsuit in the United States District Court for the
District of Minnesota against Bruegger's and its parent corporation, Quality
Dining, Inc. The lawsuit was settled on May 20, 1997. See "Legal Proceedings."
The Company has not yet announced its plans for proceeding with the Rights
Offering.

The Company plans to finance its working capital and capital resource needs
with its current cash, future cash generated from operations, proceeds from this
note offering and additional debt or equity financing. In addition, during the
third quarter of fiscal 1997, the Company borrowed $50,000 from the Chairman of
the Board of Directors of the Company and may borrow additional amounts pending
the receipt of funds from other sources. See "Certain Transactions." The
Company believes that these sources will be sufficient to enable it to satisfy
its working capital needs for the next twelve months. If the Company decides to
pursue a strategy of building bagel restaurants at a rate faster than that
required by the Development Agreement, it may need funds in addition to those
generated from this note offering. In such event, the Company will attempt to
raise additional funds through debt or equity offerings. If the Company is
unable to successfully raise funds from this note offering or the rights
offering in a timely manner, it may be necessary for it to raise additional
capital through other means of financing. Although the Company believes that it
will be able to secure the necessary capital, there can be no assurances that
the Company will be successful in such efforts.

16
<PAGE>

BUSINESS

General

The Company owns and operates ten full-service restaurants in Minnesota and
Wisconsin. Included in these full-service restaurants are nine Italian
restaurants operating in Minnesota and Wisconsin under the name "Ciatti's
Italian Restaurant(R)" and one Steakhouse restaurant operating in Wisconsin
under the name "Spurs Steakhouse & Saloon(R)". On January 1, 1995, Big D Bagels,
Inc. ("Big D"), the wholly-owned subsidiary of the Company, entered into an
exclusive Area Development Agreement with Bruegger's Franchise Corporation to
develop bagel restaurants in the Dallas-Fort Worth, Texas area. As of April 30,
1997, Big D is operating six bagel restaurants in the Dallas-Fort Worth, Texas
area.

Restaurant Demographics

Full-Service Restaurants
------------------------

The Company currently operates eight Italian restaurants in Minnesota and
one Italian and one steakhouse restaurant in Wisconsin. The Company's Italian
and steakhouse restaurants range in size from 6,500 to 9,800 square feet. Each
seats between 70 and 100 customers in the lounge and between 110 and 220
customers in the dining area. Two of the Company's restaurants have a meeting
room/banquet facility and some of the Company's restaurants also offer outdoor
patio dining on a seasonal basis.

The following table sets forth the opening date and square footage of the
Company's full-service restaurants:

<TABLE>
<CAPTION>
Approximate
Date Opened Location Square Footage
----------- -------- --------------
<S> <C> <C>
September, 1984 St. Paul, Minnesota 8,600
February, 1985 Madison, Wisconsin 9,800
November, 1987 Falcon Heights, Minnesota 7,000
November, 1988 Eden Prairie, Minnesota 7,800
June, 1989 Burnsville, Minnesota 7,800
February, 1990 Maplewood, Minnesota 7,800
November, 1990 St. Cloud, Minnesota 6,700
October, 1991 Edina, Minnesota 6,500
November, 1991 LaCrosse, Wisconsin 7,100
April, 1992 Woodbury, Minnesota 7,000
</TABLE>

The St. Paul restaurant is located in an urban area. The Madison, Falcon
Heights, Eden Prairie, Burnsville, Maplewood, Edina and Woodbury restaurants are
located in suburban areas. The St. Cloud restaurant is located in a community of
approximately 50,000 residents, 50 miles northwest of the Minneapolis-St. Paul
metropolitan area and the LaCrosse, Wisconsin restaurant is located in a
community of approximately 50,000 residents, 90 miles southeast of the
Minneapolis-St. Paul metropolitan area. The actual cost of opening an Italian or
steakhouse restaurant, including leasehold improvements, furniture, fixtures,
and equipment and other pre-opening costs has varied from $480,000 to $930,000
per restaurant.

The Company has not opened a Italian or steakhouse restaurant since April
1992 and has no plans to open any additional full-service restaurants in the
future.

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<PAGE>

Bagel Restaurants
-----------------

Big D currently operates six bagel restaurants in the Dallas-Forth Worth
area. Generally, these bagel restaurants range in size from 2,130 to 3,000
square feet and seat between 45 and 50 customers. The Company has recently
opened a 520 square foot bagel restaurant as part of a service
station/convenience store in Irving, Texas. These bagel restaurants also offer a
limited area for outdoor patio dining.

The following table sets forth the opening date and square footage of the
Company's bagel restaurants:

<TABLE>
<CAPTION>
Approximate
Date Opened Location Square Footage
----------- -------- --------------
<S> <C> <C>
October, 1995 Plano, Texas 3,000
December, 1995 Plano, Texas 2,250
February, 1996 Dallas, Texas 2,500
June, 1996 Fort Worth, Texas 2,130
November, 1996 Dallas, Texas 2,200
April, 1997 Irving, Texas 520
</TABLE>

Restaurant Formats

Italian Restaurants
-------------------

The Company's restaurants have traditionally had an Italian format. The
Company's Italian restaurants serve appetizers, pizza, soups, salads,
sandwiches, pasta, chicken, seafood, bread and desserts, together with alcoholic
and non-alcoholic beverages. Menu items are prepared at each restaurant pursuant
to the Company's uniform recipes and ingredient specifications.

The Company has traditionally designed the dining areas and lounges of its
Italian restaurants to convey an atmosphere of casual elegance. The dining area
of each restaurant features booths and individual tables with either chairs or
banquettes. Each restaurant differs in interior design and decor, depending upon
the location and nature of the space. The Company has recently redesigned one of
its restaurants to be a more informal, open-kitchen style restaurant. Most
restaurants accept reservations for a limited portion of their dining area. The
Company has lounge areas, which have full-service liquor licenses, available in
most restaurants for customers waiting to be seated for dining. In most of the
Company's restaurants, appetizers and other menu items are available in the
lounge as well as in the restaurant.

Each Italian restaurant employs a standardized menu with entree prices
ranging from $5.99 to $8.99 at lunch, and $7.99 to $14.99 at dinner. During
fiscal year 1996, food sales comprised approximately 77% and beverage sales
comprised approximately 23% of total sales.

The Company's Italian restaurants are typically open for lunch and dinner
daily during the year, except for Thanksgiving, Christmas Eve and Christmas Day.
Hours of operation may vary depending on local custom and customer traffic. Menu
service is normally available from 11:00 a.m. to 10:00 p.m. (9:00 p.m. on
Sunday). A Sunday brunch is served in some of the Minnesota restaurants from
10:00 a.m. to 2:00 p.m. Each restaurant's lounge is typically open from 11:00
a.m. until 12:00 a.m. (10:00 p.m. on Sundays). In addition to in-restaurant
dining, all of the menu items are available for carry-out. Carry-out sales
constitute a small portion of the Company's total sales.

Steakhouse Restaurant
---------------------

In 1993, the Company converted its Madison, Wisconsin, Italian restaurant
into a Spurs Steakhouse & Saloon(R) restaurant. The Company's Steakhouse
restaurant has a more casual atmosphere than the Company's Italian restaurants,
with a menu that features a Texas theme, featuring a variety of steaks, ribs,
chicken, seafood, sandwiches, salads, soup and

18
<PAGE>

appetizers. Prices at the steakhouse restaurant range from $4.99 to $17.95 and
the hours of operation are consistent with those of the Company's Italian
restaurants.

Bagel Restaurants
-----------------

The Company's bagel restaurants specialize in 12 varieties of freshly baked
bagels and branded cream cheeses, as well as their freshly ground, premium
branded coffee which is brewed fresh every 19 minutes. Bruegger's bagels are
unique because certified bagel masters make the bagels by kettle-boiling them in
malt and water and then baking them in a stone hearth oven. In addition, each
bagel restaurant offers deli-style bagel sandwiches, freshly-made soups, and
other food and beverage items. The bagel restaurants are open from approximately
6:30 a.m. to 7:00 p.m. each day, depending upon location, and offer both carry-
out and in-store dining.

The design and general lay-out of the Company's bagel restaurants is based
on plans and guidelines issued by Bruegger's. Bruegger's updated its plans and
designs for all bagel restaurants in 1995 and all of the Company's existing
bagel restaurants have been constructed following this new design. It is
anticipated that the new design will be the national standard for a number of
years. The Company's ability to make material changes to such design is limited
and any such change requires the written approval of Bruegger's. The new design
and ambiance is bright and clean looking, using materials to withstand heavy
customer use.

Bruegger's also issues standard plans for furniture, fixtures and equipment
("FF&E"), including standard menu boards and art work. The Company, similarly to
other franchisees of Bruegger's, is required to equip each bakery with such
FF&E. In a number of cases, Bruegger's offers franchisees an option to purchase
major equipment from two different manufacturers.

Restaurant Operations

The Company has established uniform operational standards for all of its
restaurants, which are maintained by each restaurant's management team in
accordance with the Company's manuals that emphasize quality of ingredients,
food preparation and presentation, maintenance of the restaurant premises and
employee training and conduct. These manuals include a Construction
Specifications Manual, a Furniture, Fixtures and Equipment Specifications
Manual, a Pre-Opening Manual, a Recipe Manual and an Operations Manual. The
Company has also developed a Training Manual for each position in its Italian
restaurants.

The Company's President supervises the operations of all restaurants with
the assistance of a Director of Operations for Full-Service restaurants and a
Director of Operations for bagel restaurants. Additionally, a Vice President for
Administration, a Corporate Controller, a Director for Purchasing, a Director
for Training and a Corporate Chef administer their respective areas of
responsibility at the corporate office.

Each restaurant normally employs a general manager and assistant managers.
General managers have primary responsibility for restaurant operations,
including customer relations, food service, cost control, maintenance,
personnel, implementation of Company policies and procedures, and restaurant
profitability. Assistant managers share day-to-day responsibility for restaurant
operations. The Company has a bonus program to compensate its managers and
assistant managers for achieving sales, service and profitability goals.

Supervisory personnel visit each restaurant an average of one day a week.
During these visits each aspect of the restaurant's operations is scrutinized to
ensure that the restaurant is being operated in conformance with Company
policies and procedures and that the Company's high levels of customer service
are being maintained.

For its Italian restaurants, the Company periodically prepares and revises
menu items, recipes and lists of approved ingredients. Menu items, recipes and
the ingredients used in preparing them are chosen based upon quality, cost and
customer acceptance. Each restaurant's food and beverage inventories and
supplies are purchased by the general managers directly from suppliers approved
by the Company.

19
<PAGE>

All supplier invoices are paid at the Company's home office after approval
by the appropriate general manager. The Company believes it has a good working
relationship with its suppliers. The Company limits the number of its suppliers
to take advantage of volume discounts, to achieve better quality control and to
simplify the purchasing process for the general managers. Although the Company
purchases a majority of its food ingredients and restaurant supplies from a
single distributor, which is not uncommon in the restaurant industry, the
Company believes that its food and beverage supplies can be obtained from more
than one supplier if any one supplier is unable to meet the Company's demand or
quality specifications.

The Company maintains centralized financial and accounting controls for its
restaurants. Restaurant personnel are required to report sales and deposit
information to the Company on a daily basis. On a weekly basis, general managers
complete and forward to the Company a food and liquor inventory, supplier
invoices, payroll reports and other various information.

Restaurant Development

Bagel Restaurants
-----------------

Effective January 1, 1995, the Company entered into a Development Agreement
with Bruegger's Franchise Corporation. Bruegger's, which was acquired in May
1996 by Quality Dining, Inc., has aggressively expanded its franchise system to
most major markets of the country. Bruegger's has indicated that its objectives
are to establish the Bruegger's brand as the leading, most recognized brand in
the bagel industry, to enhance Bruegger's existing position as the largest chain
of fresh bagel bakeries in the United States and to be the industry leader in
the markets it enters. As of June 30, 1996, Bruegger's, directly or through
franchises, operated in 52 metropolitan markets in 32 states. On May 12, 1997,
Quality Dining, Inc. announced that its Board of Directors approved a plan to
divest its Bruegger's bagel-related businesses. The Company does not know what
effect, if any, this divestiture will have on the Company. See "Business -
Relationship with Bruegger's and Quality Dining, Inc."

All franchisees are required to open a contractually specified number of
bakeries in their territory within a specified period of time or they will lose
their territorial franchise rights. As of January 1, 1997, there were 440 bagel
restaurants open for business, owned and operated by either Bruegger's or by
franchisees. The reported goal of Bruegger's is to have 2,000 Bruegger's
bakeries systemwide by the end of October 2000. Although Bruegger's is generally
considered the largest bagel concept in the country, there are several franchise
or company-owned systems with aggressive development plans in direct competition
in all areas of the country.

The Company intends to devote significant resources to the development of
its bagel restaurants. This decision to concentrate on Bruegger's reflects the
Company's judgment concerning the potential market for bagel-based restaurant
concepts, the continuing appeal of the Bruegger's format to customers and the
Company's ability to successfully manage its growth. Under the terms of the
Development Agreement between the Company and Bruegger's, the Company is
required to build 30 bagel restaurants in the Dallas-Fort Worth area by July 1,
2001.

The Company is concentrating its development efforts in the socioeconomic
well-to-do areas of the greater Dallas-Fort Worth area. Experience gained from
other Bruegger's franchises has shown that the typical customer tends to be well
educated and financially well-off. Five bagel restaurants have been opened in
the north-central portion of the Dallas area, and one was opened in the western
portion of Fort Worth.

The ability of the Company to open additional bagel restaurants will depend
to a large degree on the availability of suitably sized spaces in desired areas
at economically justifiable terms. Other bagel chains, as well as coffee houses,
are vying for the same locations, thus providing strong competition for space.

The cost of leasehold improvements for the existing bakeries varied from
$150,000 to $300,000 per bakery, depending on the size of the space,
contributions by the lessor, and the condition of the buildings. The cost of
equipment for the existing bakeries has ranged from $150,000 to $200,000 for
each bakery. Other preopening expenses, including design services, smallwares,
training, and initial inventory has varied from $28,000 to $45,000 for each
bakery, including the initial franchise fee.

20
<PAGE>

Relationship with Bruegger's and Quality Dining, Inc.

The development by Big D of bagel restaurants is based upon franchise
documents entered into between Big D and Bruegger's. The principal documents are
a Development Agreement dated as of January 1, 1995 and a Franchise Agreement
pertaining to each existing bagel restaurant. On May 12, 1997, Quality Dining,
Inc. announced that its Board of Directors approved a plan to divest its
Bruegger's bagel-related businesses. The Company does not know what effect, if
any, this divestiture will have on the Company.

The Development Agreement gives Big D the right to construct, own and
operate bagel restaurants in the counties of Tarrant and Dallas, Texas and
certain areas immediately north of the City of Dallas, including the City of
Plano, Texas (the "Development Area"). The Development Agreement grants Big D
the exclusive right and obligation to develop thirty (30) bagel restaurants
within the Development Area by July 1, 2001 on the following schedule:
<TABLE>
<CAPTION>

Minimum number
of bagel restaurants
Big D must have in
Deadline operation by deadline
- ----------------- ---------------------
<S> <C>
July 1, 1996 4
January 1, 1998 9
October 1, 1998 14
July 1, 1999 19
July 1, 2000 24
July 1, 2001 30
</TABLE>

Big D is to choose the sites for the bagel restaurants at its sole expense
but must seek site approval from Bruegger's in writing prior to beginning
construction. The Development Agreement also defines the relationship of Big D
to Bruegger's as that of independent contractor and states that none of the
rights granted therein may be assigned or otherwise transferred. In addition,
Ciatti's, Inc. agreed that any sales of its interest in Big D shall be subject
to a right of first refusal and prior written consent by Bruegger's. Bruegger's
has additional rights to acquire equity securities of Ciatti's, Inc. if Ciatti's
stock ceases to be publicly traded.

The Development Agreement may be reviewed in one year increments after the
initial term if Big D continues opening bagel restaurants at the rate of three
per year. After five years of renewals, however, Big D is obligated to open only
one bagel restaurant per year.

The Development Agreement gives Big D the exclusive right to operate bagel
restaurants in the Development Area. The Development Agreement provides,
however, that certain Bruegger's specialty products (specifically cheese spreads
and related products) may be distributed by a third party through supermarkets,
delicatessens, specialty food stores, convenience stores, and other wholesale
and retail food stores within the Development Area, but in such event Big D has
a right to act as distributor.

The Development Agreement provides that if Big D breaches any term of the
Development Agreement, Bruegger's has the right to terminate the Development
Agreement.

The Development Agreement provides that Big D and Bruegger's will enter
into a predetermined Franchise Agreement for each bagel restaurant opened by Big
D. The Franchise Agreement grants Big D the right to establish and operate the
particular bagel restaurant and to use the Bruegger's system and various
trademarks. The Franchise Agreement designates the locations approved pursuant
to the Development Agreement as the exclusive sites for the operation of the
bagel restaurants. Under the terms of the Franchise Agreement, Bruegger's agrees
to provide Big D with operation assistance, layout as well as manuals, training
and annual audits. The Franchise Agreement also states that Bruegger's may at
its discretion establish an Advertising Cooperative (the "Coop") for certain
geographic areas and that if Big D operates a bagel restaurant within such area
it must immediately become a member of the Coop. Big D's duties under the
Franchise Agreement include constructing bagel restaurants at its own expense
from pre-approved plans and sending new managers to

21
<PAGE>

Bruegger's training program. Big D also promises that its bagel restaurants will
strictly conform to Bruegger's methods, such as its core products, management of
the business, fixtures, furnishings, and maintenance, and that it will keep
confidential the Operations and Bagel Production Manuals provided it. In
consideration of the rights granted it, Big D is obligated to pay certain
franchise and other fees to Bruegger's.

Each Franchise Agreement has a term of twenty (20) years and may be renewed
in ten (10) year increments. If Big D chooses to renew, the terms of the
Franchise Agreement will change to whatever terms are being offered new
franchisees at the time of renewal.

Fiscal Year

The Company's fiscal year ends on the Sunday closest to June 30 of each
year. Therefore, the Company's fiscal years are either 52 or 53 week periods.

Seasonality

The Company's highest sales historically have occurred during the period
from July through December. The Company is currently unable to determine whether
the operation of its bagel restaurants will result in any change in its
seasonality.

Competition

The restaurant industry is intensely competitive and is affected by changes
in taste and eating habits of the public, local and national economic conditions
affecting spending habits, population and traffic patterns. Menu, price,
service, convenience, location, decor, and atmosphere are all important
competitive factors, with the relative importance of such factors varying among
different segments of the consuming public. By serving high-quality food and
beverages at reasonable prices in pleasant, casual surroundings, the Company
seeks to appeal to a wide range of customers.

Although the full-service Italian restaurant market segment is highly
fragmented, a few regional and national chains compete directly against the
Company in this market segment. Dardens' concept, The Olive Garden, is
represented in the Company's Minnesota and Wisconsin markets. The Company's
Italian and Steakhouse restaurants compete not only with other chain or locally
owned restaurants with similar menus, but also with other full-service
restaurants.

For its bagel restaurants, the Company's primary competitors are several
chain bagel operators offering menu items essentially similar to Bruegger's, all
vying for speedy market penetration. For example, Einstein Bagels and Bagel
Boulevard are represented in the Company's territory as well as a number of
local, owner-operated bagel shops which in several cases have developed a loyal
local clientele. In addition, any quick-service or home-replacement meal
restaurants are competing with the Company for breakfast or lunch customers.

Through the Bruegger's concept, the Company does, however, differentiate
itself from these competitors by providing its customers with bagels baked in
small batches on site throughout the day using fresh, not frozen, dough.
Additionally, by constructing and operating its own commissary to produce and
distribute fresh dough daily, the Company will vertically integrate its bagel
operations. This integration will allow the Company to provide its bagel
customers with a consistently high-quality product and to minimize
transportation and production costs.

Advertising and Promotion

The Company develops and executes annual advertising and promotional
programs customized to each of the markets in which the Company currently
operates. The Company has budgeted 4.0 percent of its projected fiscal 1997 full
service restaurant sales for advertising. Under the terms of the Company's
franchise agreement with Bruegger's, the Company is required to spend
approximately four percent of its sales from the bakeries for advertising and
promotion, including advertising and promotions due in connection with
Bruegger's efforts. Due to the small number of bagel restaurants currently
existing in the franchise area, the majority of the Company's efforts in this
respect are directed to local

22
<PAGE>

store marketing. Television or other wide coverage advertising will not be
economically justifiable until a larger number of bakeries exists in the
Company's territory.

Government Regulation

Various federal, state and local laws affect the Company's restaurant
business, including laws and regulations relating to health, sanitation,
alcoholic beverage control and safety standards and access for disabled persons.
To date, federal and state environmental regulations have not had a material
effect on the Company's operations. Varied and sometimes stringent requirements
of local government bodies with respect to zoning, building codes, land use and
environmental factors have, in the past, increased, and in the future can be
expected to increase, the cost and time required for developing new restaurants.
In some instances the Company may have to obtain zoning variances and land use
permits for its new restaurants. A significant portion of the Company's Italian
and steakhouse restaurant business is also derived from the sale of alcoholic
beverages. Any action by an alcoholic beverage control agency to suspend or
revoke a restaurant's liquor license would have an adverse effect on that
restaurant's business. The Company believes that it is operating in compliance
with all material laws and regulations covering its operations.

The Company is also subject to the Fair Labor Standards Act, which covers
such matters as minimum wages, overtime and other working conditions. A
significant portion of the Company's food service personnel are paid at rates
above, but related to, the minimum wage. Accordingly, additional increases in
state or federal minimum wage requirements or changes in applicable state law
with respect to minimum wages for "tipped" employees may have an adverse impact
on the Company.

Trademarks and Licenses

The Company has obtained a trademark of the stylized words and design for
"Ciatti's Italian Restaurant," which was renewed in March 1994. The Company also
obtained a trademark for the words and design of "Spurs Steakhouse & Saloon" in
June 1994. Generally, federal registration of a trademark gives the registrant
the exclusive use of the trademark in the United States in connection with the
goods or services associated with the trademark, subject to the common law
rights of any other person who began using the trademark prior to the date of
federal registration. The Company believes that its marks are important to its
business.

"Bruegger's" and "Bruegger's Bagel Bakery" are trademarks of Bruegger's
Corporation. Under the terms of the Development Agreement between Big D and
Bruegger's, Big D, as a franchisee of Bruegger's, has the right to use all
trademarks associated with the Bruegger's bagels franchise in connection with
the operation of bagel restaurants in the Dallas-Fort Worth area.

Employees

As of April 30, 1997, the Company employed approximately 915 persons,
including 10 corporate employees, 55 restaurant managers and assistant managers,
and 850 hourly restaurant employees. Hourly employees comprise approximately 93%
of the Company's total work force and most work on a part-time basis. Other than
corporate and restaurant management personnel, employees are paid on an hourly
basis. No employees are covered by collective bargaining agreements and no work
stoppages have occurred. The Company considers its employee relations to be
good.

Description of Property

The Company's existing restaurants are located in leased facilities, all of
which the Company believes to be adequate. The Company owns substantially all of
the furniture, fixtures, and equipment in each of its restaurants. Leasehold
improvements paid for by the Company generally will become the property of the
landlord upon expiration or termination of a lease.

The Company's corporate offices are located in Edina, Minnesota, a
Minneapolis suburb. These premises include a test kitchen and a small warehouse
area. The lease currently runs through August 31, 1998, with the Company having
the option to renew the lease for an additional three year term at the then
current market rates. The Company believes this

23
<PAGE>

facility will be adequate to accommodate its administrative needs for the
foreseeable future and that it will be able to renew its existing lease upon
satisfactory terms or obtain comparable space on satisfactory terms.

The Company leases real estate and improvements for its restaurants. The
leases for its Italian restaurants generally provide for an initial term of ten
or twelve years although one restaurant had an initial term of twenty years.
These leases generally have a minimum of two five-year renewal options. Base
rent under the Company's leases varies depending, in part, upon leasehold
allowance funds provided by the lessor. Base rent at some locations also
escalates during the term of the lease. At a few restaurants, the Company also
is required to pay a percentage rate between 4% and 5.5% of sales in excess of
specified amounts. The Company pays all real estate taxes, insurance, utilities
and maintenance expenses for its leased properties.

The Company's leases for its bagel restaurants generally run for either
five or ten years, and have an option to renew for one or two additional five
year terms. The existing leases provide for a fixed rent for the primary term in
an amount that varies with the location.

Legal Proceedings

On October 1, 1996, the Company filed a Registration Statement with the
Securities and Exchange Commission for a Rights Offering to its existing
shareholders. In response to Ciatti's filing of the Registration Statement,
Bruegger's asserted that Bruegger's has certain rights of consent and of first
refusal regarding the sale of securities of Ciatti's. Bruegger's is the
franchisor and Big D, the Company's wholly-owned subsidiary, is the franchisee
under a Development Agreement in which Big D has the exclusive right to develop
Bruegger's bagel restaurants in the Dallas-Fort Worth, Texas area. Ciatti's and
Bruegger's were unable to agree upon resolution of the matter and, on November
8, 1996, Ciatti's and Big D filed a lawsuit in United States District Court for
the District of Minnesota against Bruegger's and its parent corporation, Quality
Dining, Inc. ("Quality Dining"). In April 1997 the parties held settlement
discussions and on May 20, 1997 entered into a Settlement Agreement dated as of
April 24, 1997. Under the terms of the Settlement Agreement , Bruegger's agreed
to extend the dates on which the Company was required to complete the opening of
certain bagel restaurants under the Development Agreement, and the Company and
Big D agreed to enter into certain indemnification and license arrangements with
Bruegger's. The parties also agreed that Bruegger's would have no right of first
refusal to purchase securities of Ciatti's so long as Ciatti's remained a
publicly held corporation and that Bruegger's would have no right of consent for
certain issuances of securities by Ciatti's, including any issuance of
securities by Ciatti's (i) if the issuance does not result in the acquisition of
over 40% of the voting power of any class of securities of Ciatti's after the
completion of the issuance by any shareholder (other than Phillip R. Danford of
L.E. "Dan" Danford, Jr.) who previously held less than 40% of the voting power
of such securites and (ii) such issuance does not result in Phillip R. Danford
and L.E. "Dan" Danford, Jr. collectively owning less than 10% of the voting
power of all classes of securities of Ciatti's.

In light of the lawsuit and its desire to have this matter resolved prior
to commencement of the rights offering, Ciatti's had previously announced that
it was postponing the record date and the commencement date of its rights
offering. The Company has not yet announced its plans for proceeding with the
Rights Offering.

CERTAIN TRANSACTIONS

24
<PAGE>

DESCRIPTION OF NOTES AND TERMS OF OFFERING

General

The Notes are general obligations of the Company. The Company will issue up
to a principal amount of $2,000,000 of Notes. The Notes may be issued in one or
more series having various maturities, interest rates, principal amounts,
prepayment provisions and other features as the Company may establish. This
Prospectus relates to Subordinated Fixed-Term notes having maturities of one or
three years after the date of issue. There is no limitation on the respective
amounts of each series of Notes which may be outstanding.

The Notes will be issued in registered form, without coupons, in any
multiple of $1,000. In the future, the Notes may be offered and issued in such
denominations as may be designated from time to time by the Company. The Company
currently intends to issue the Notes in certificated form; however, the Company
may elect to issue Notes in uncertificated from pursuant to Article 8 of the
Uniform Commercial Code.

The Notes are unsecured general obligations of the Company, subordinated to
all existing and future Senior Indebtedness. There is no sinking fund or other
provision for payment of the Notes at maturity. Notes which mature will be paid
from general funds of the Company or from the sale of new Notes. See
"Description of Notes and Terms of Offering - Subordination."

Interest

Initial interest rates are set at 9.00% for One Year Notes and 9.25% for
Three Year Notes. The initial interest rate payable on any unsold Notes will be
subject to change by the Company from time to time based on market conditions
and the Company's financial requirements, but no such change will affect the
interest rate on any Note purchased prior to the effective date of such change.
Interest payable on the Notes accrues from the date of issuance and is
calculated based on a 360-day year.

Interest on all the Notes will be paid semi-annually, on January 1 and July
1.

Prepayment by the Company

The Company reserves the right to prepay any Note, in whole or in part,
plus accrued interest to the prepayment date, without penalty or premium upon 15
days written notice. Any partial prepayment shall be in multiples of $1,000.

Interest Accrual Date

Interest on the Notes accrues from the date of purchase, which is deemed to
be the date the Company receives funds prior to 3:00 p.m. on a business day, or
the next business day if the Company receives such funds on a non-business day
or after 3:00 p.m. on a business day. For this purpose, the Company's business
day will be deemed to be Monday through Friday, except for national bank
holidays.

Interest Withholding

With respect to those investors who do not provide the Company with a fully
executed Internal Revenue Service Form W-8 or Form W-9, the Company will
withhold 31% of any interest paid. Otherwise, no interest will be withheld.

Subordination

The Notes are subordinated in right of payment to the prior payment in full
of all Senior Indebtedness. The Company and each Noteholder by accepting a Note
agrees to the subordination and authorizes the Company to give it effect. Senior
Indebtedness means all Indebtedness (as defined below) of the Company except (a)
indebtedness evidenced by the Notes and (b) indebtedness which is expressly made
equal in right of payment to the Notes. As of March 30, 1997, the

25
<PAGE>

Company's $992,293 of Senior Indebtedness includes (i) $224,111 of an 11.5% note
payable to a financial institution due in monthly installments through December
2000, (ii) $332,280 of 10.5% notes payable to a financial institution due in
monthly installments May 2001, (iii) $385,902 of amounts due under a capital
lease through January 2005 and (iv) $50,000 of a 10.5% promissory note to an
affiliate of the Company due in four installments through June 1998. See
"Certain Transactions." "Indebtedness" of the Company on any date includes (i)
all indebtedness for money borrowed by the Company, (ii) indebtedness of the
Company under leases which are capitalized under generally accepted accounting
principles ("GAAP") and (iii) indebtedness of the Company representing the
deferred and unpaid purchase price of any property or business (excluding trade
and service payables incurred in the ordinary course of business and
constituting current liabilities).

Upon the maturity of any Senior Indebtedness by lapse of time, acceleration
of otherwise, all such Senior Indebtedness must first be paid in full before any
payment is made by the Company on account of the Notes. The Company may not pay
any amounts in respect of the Notes, designate or set aside any amount for such
payment, or acquire any Notes for cash or property, other than capital stock of
the Company, (a) if the Company is then in default in the payment of any
obligation due with respect to Senior Indebtedness or (b) if a default on Senior
Indebtedness occurs and is continuing that permits holders of such Senior
Indebtedness to accelerate its maturity (other than a payment default) and the
Company receives a notice of the default. The Company may resume payments on the
Notes and may acquire them when the default is cured or waived.

Default

In the event of nonpayment when due of any payment due on any Note, and if
such default continues for a period of 30 days, then at the option of the holder
the Note, all amounts then owing under the Note shall become due and payable,
subject to the subordination provisions of the Note.

Place, Method and Time of Payment

Principal and interest upon the Notes will be payable at the principal
executive office of the Company, as it may be established from time to time, or
at such other place as the Company may designate for that purpose; provided,
however, that payments may be made at the option of the Company by check or
draft mailed to the person entitled thereto at his or her address appearing in
the register which the Company maintains for that purpose. Any payment of
principal or interest which is due on a non-business day will be payable by the
Company on the next business day immediately following such non-business day.

Exchanges

The Company, in its discretion, may offer or accept outstanding Notes in
exchange for other Notes under this Prospectus.

Transfer and Exchange

A holder may transfer or exchange Notes in accordance with this Prospectus.
The Company or other registrar under this Prospectus may require a holder, among
other things, to furnish appropriate endorsements and transfer documents, and to
pay any taxes and fees required by law or permitted by this Prospectus. The
Company is not required to transfer or exchange any Notes selected for
prepayment, beginning at the opening of business 15 days before the day notice
of prepayment is mailed by the Company. Also, the Company is not required to
transfer or exchange any Note for a period of 15 days before the maturity of the
Note.

Reports

The Company publishes annual reports containing audited financial
statements and quarterly reports containing unaudited financial information for
the first three quarters of each fiscal year. Copies of such reports will be
sent to any Noteholder upon oral or written request to the Company. The
requesting Noteholder shall identify itself as such in such request.

26
<PAGE>

Service Charges

The Company reserves the right to assess reasonable service charges for
services such as changing the registration of any Note when such change is
occasioned by a change in name of the holder or a transfer (whether by operation
of law or otherwise) of a Note by the holder to another person.

Variations in Terms and Conditions

The Company may elect to offer only certain of the series of Notes
described in this Prospectus, depending on the Company's financial requirements
and market conditions. The Company reserves the right from time to time to offer
securities different from the Notes and to vary the terms and conditions of the
offering depending upon various factors, including the state or locality where
the purchaser resides, the purchaser's tenure as an investor with the Company or
whether an investor is increasing or renewing his or her investment in the
Company's securities. In addition, the Company may vary certain terms and
conditions of the Notes for its employees.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following is a general discussion of certain federal income tax
consequences relating to the purchase, ownership, and disposal of the Notes. The
discussion is based upon the current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the Treasury regulations promulgated thereunder
and judicial or ruling authority, all of which are subject to change, which may
be retroactive. The discussion assumes that the Notes are held as capital assets
and does not purport to deal with federal income tax consequences applicable to
all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors to determine the federal, state,
local, and any other tax consequences of the purchase, ownership, and
disposition of the Notes.

Sale, Exchange or Retirement

Upon the sale, exchange or retirement of a Note, the holder will recognize
gain or loss in an amount equal to the difference between the amount realized on
the sale, exchange or retirement and the holder's adjusted tax basis in the
Note. The adjusted tax basis of a Note to a particular holder generally will
equal the holder's cost for the Note, increased by any accrued but unpaid
interest previously included by such Holder in income with respect to the Note
and decreased by principal payments previously received by such Holder with
respect to the Note. Any such gain or loss will be capital gain or loss, except
for gain representing accrued interest not previously included in income.

Reporting and Backup Withholding

The Company will report annually to the Internal Revenue Service and to
holders of record that are not excepted from the reporting requirements such
information as may be required by law with respect to interest on the Notes.
Under certain circumstances, a holder of a Note may be subject to "backup
withholding" at a 31% rate. Backup withholding may apply to a holder who is a
United States person if the holder, among other circumstances, fails to furnish
his Social Security number or other taxpayer identification number to the
Company. Backup withholding, however, does not apply to payments on a Note made
to certain exempt recipients, such as corporations and tax exempt organizations.

PLAN OF DISTRIBUTION

The Notes are being offered on a continuous basis. The Notes will be sold
directly by officers and other employees of the Company, without an underwriter
or selling agent.

From time to time, the Company may limit the volume of Notes sold. The
Company may vary the terms and conditions of the offering as otherwise described
under "Description of Notes - Variations in Terms and Conditions."

27
<PAGE>

Further, the Company may offer different securities at different times depending
on such factors as the Company's liquidity requirements, the interest rate
environment and other economic conditions.

The Company's employees participating in the sale of the Notes are not
required to be registered as brokers under the Exchange Act, based upon the safe
harbor provided by Rule 3a4-1 under the Exchange Act. Pursuant to Rule 3a4-1,
such employees will not be deemed to be brokers because they will not receive a
commission or other remuneration in connection with the sale of the Notes, and
are not and will not be associated persons of a broker or dealer. In addition,
the employees will restrict their participation in the sale of the Notes to the
following activities, as required under Rule 3a4-1(a)(4)(iii) of the Exchange
Act: (i) preparing and delivering written communications as generally approved
by an officer or director of the Company, without making any oral solicitations
of potential purchasers, (ii) responding to inquiries of a potential purchaser
in a communication initiated by the potential purchaser; provided, however, that
the content of such responses will be limited to information contained in this
Prospectus and any applicable Prospectus Supplement, and (iii) performing
administerial and clerical work involved in effecting any transaction.

LEGAL MATTERS

The validity of the Notes offered will be passed upon for the Company by
Lindquist & Vennum, P.L.L.P., 4200 IDS Center, Minneapolis, Minnesota 55402.

EXPERTS
The consolidated financial statements of the Company as of and for the
fifty-two weeks ended June 30, 1996, incorporated by reference into this
Prospectus, have been so incorporated in reliance upon the report of Grant
Thornton LLP, independent certified public accountants, given on the authority
of said firm as experts in auditing and accounting.

ADDITIONAL INFORMATION

Neither Bruegger's Franchise Corporation ("Bruegger's") nor any of its
parents, subsidiaries, affiliates, officers, directors, agents, employees,
accountants or attorneys are in any way participating in, approving or endorsing
this offering of securities by the Company, any of the offering or accounting
procedures used in the Prospectus, or any representations made in connection
with the offering. The grant by Bruegger's of any franchise or other rights to
Ciatti's or Big D is not intended as, and should not be interpreted as, an
express or implied approval, endorsement or adoption of any statement regarding
financial or other performance which may be contained in this Prospectus. Any
review by Bruegger's of this Prospectus or the information included in this
Prospectus has been conducted solely for the benefit of Bruegger's to determine
conformance with Bruegger's internal policies, and not to benefit or protect any
other person. No investor should interpret any such review by Bruegger's or the
use and display of any of Bruegger's logos, trademarks or service marks herein
as approval, endorsement, acceptance or adoption of any representation, warranty
or covenant contained in the materials reviewed. The enforcement or waiver of
any obligation of Ciatti's or Big D under any agreement between Ciatti's or Big
D and Bruegger's or any of Bruegger's affiliates is a matter of Bruegger's or
its affiliates' sole discretion. No investor should rely on any representation,
assumption or belief that Bruegger's or its affiliates will enforce or waive
particular obligations of Ciatti's or Big D under such agreements.

28
<PAGE>

No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained or incorporated by
reference in this Prospectus or a Prospectus Supplement, and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Company. The delivery of this Prospectus of a Prospectus
Supplement does not constitute an offer to sell or a solicitation of an offer to
buy any security other than the Notes offered hereby, nor does it constitute an
offer to sell or a solicitation of an offer to buy any of the Notes offered
hereby to any person in any jurisdiction in which it is unlawful to make such an
offer or solicitation. Neither the delivery of this Prospectus or a Prospectus
Supplement nor any sale made thereunder shall under any circumstances create any
implication that the information contained herein or therein is correct as of
any date subsequent to the date hereof.

---------------------------
TABLE OF CONTENTS
---------------------------

Page
----

Available Information................................................... 2
Incorporation of Certain Documents by
Reference.......................................................... 2
Prospectus Summary...................................................... 3
Risk Factors............................................................ 5
Ratio of Earnings to Fixed Charges...................................... 10
Use of Proceeds......................................................... 10
Selected Financial Data................................................. 11
Management's Discussion and Analysis of
Financial Condition and Results of
Operations......................................................... 12
Business................................................................ 17
Certain Transactions.................................................... 24
Description of Notes and Terms of Offering.............................. 25
Certain Federal Income Tax Consequences................................. 27
Plan of Distribution.................................................... 27
Legal Matters........................................................... 28
Experts................................................................. 28

$2,000,000
PRINCIPAL AMOUNT

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

CIATTI'S, INC.

-------------------------------
PROSPECTUS
May xx, 1997
-------------------------------

29
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14: Other Expenses of Issuance and Distribution
<TABLE>
<CAPTION>

<S> <C>
SEC registration fee $ 606
Legal fees 15,000
Accounting fees 10,000
Printing expenses 4,500
Blue Sky fees 1,000
Miscellaneous fees and expenses 1,894
------

Total $33,000
=======

</TABLE>
Item 15: Indemnification of Directors and Officers

The Company's Bylaws require indemnification of its directors and officers
to the fullest extent permitted by Minnesota law. The Bylaws provide that the
Company shall indemnify any person made or threatened to be made a party to any
threatened, pending or completed civil, criminal administrative, arbitration or
investigative proceeding, including a proceeding by or in the right of the
corporation, by reason of the former or present official capacity of the person,
provided the person seeking indemnification meets five criteria set forth in
Section 302A.521 of the Minnesota Business Corporation Act.

The Company's Bylaws also authorize the Board of Directors, to the extent
permitted by applicable law, to indemnify any person or entity not described in
the Bylaws pursuant to, and to the extent described in, an agreement between the
Company and such person, or as otherwise determined by the Board of Directors in
its discretion.

Section 302A.521 of the Minnesota Business Corporation Act provides that a
corporation shall indemnify any person who was or is made or is threatened to be
made a party to any proceeding by reason of the former or present official
capacity of such person against judgments, penalties, fines, including, without
limitation, excise taxes assessed against such person with respect to an
employee benefit plan, settlements, and reasonable expenses, including
attorneys' fees and disbursements, incurred by such person in connection with
the proceeding if, with respect to the acts or omissions of such person
complained of in the proceeding, such person (i) has not been indemnified by
another organization or employee benefit plan for the same expenses with respect
to the same acts or omissions; (ii) acted in good faith; (iii) received no
improper personal benefit and Section 302A.255 (regarding conflicts of
interest), if applicable, has been satisfied; (iv) in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful; and (v)
in the case of acts or omissions by person in their official capacity for the
corporation, reasonably believed that the conduct was in the best interests of
the corporation, or in the case of acts or omissions by persons in their
capacity for other organizations, reasonably believed that the conduct was not
opposed to the best interests of the corporation.

Item 16. Exhibits

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

4.1.1 Form of One-Year Promissory Note *
4.1.2 Form of Three-Year Promissory Note *
4.2 Form of Subscription Agreement *
5 Opinion and Consent of Lindquist & Vennum P.L.L.P., counsel to
the Company*

II-1
<PAGE>

10.1 Lease dated August 31, 1993, as amended September 1, 1993 between the
Company and 850 Limited Partnership, a Minnesota limited Partnership
(St. Paul restaurant)(11)
10.2 Lease dated September 26, 1984, as amended July 1, 1986 between the
Company and R&D Joint Venture (Madison restaurant)(1)
10.2.1 Agreement dated July 1, 1986 between Ciatti's of Wisconsin, Inc. and
C.J. Raymond (Madison Restaurant)(2)
10.2.2 Amendment to Lease (dated September 26, 1984 as amended July 1, 1986)
dated August 25, 1988 between Ciatti's of Wisconsin, Inc. and C.J.
Raymond (Madison restaurant)(2)
10.3 Lease dated July 24, 1987, between the Company and Eden Entertainment
Associates (Eden Prairie restaurant)(2)
10.4 Lease dated July 29, 1987, between the Company and Restaurant
Associates (Falcon Heights restaurant)(3)
10.5 Lease dated December 20, 1988, between the Company and Ryan
Construction Company of Minnesota, Inc. (Burnsville restaurant)(3)
10.6 Term loan and Credit Agreement between the Company and Norwest Bank
Minnesota, National Association dated July 30, 1992 (7)
10.6.1 Second Amendment to Term Loan and Credit Agreement dated December 27,
1993 (11)
10.6.2 Third Amendment to Term Loan and Credit Agreement dated June 1, 1994
(11)
10.7 Promissory Note dated May 10, 1995, from the Company to Norwest
Equipment Finance, Inc. with respect to Eden Prairie restaurant (13)
10.8 Lease dated July 11, 1989 between the Company and Larson-Doran
partnership (Maplewood restaurant)(4)

10.9 Lease dated July 26, 1990, between the Company and G.R. Herberger's,
Inc. (St. Cloud restaurant)(5)
10.10 Lease dated June 1990 between the Company and Phoenix Mutual Life
Insurance (Corporate office)(5)
10.10.1 Amendment No. 1 dated March 14, 1995 to June 1990 lease between the
Company and Phoenix Mutual Life Insurance (Corporate office)
10.11 Lease dated April 18, 1991, between the Company and J.L.P. Associates
II of Eden Prairie (LaCrosse restaurant)(6)
10.11.1 First Amendment dated June 18, 1991, to lease with respect to LaCrosse
restaurant (7)
10.12 Lease dated May 17, 1991, between the Company and Gabbert and Beck
Company (Edina restaurant)(6)
10.13 Lease dated July 3, 1991, between the Company and Wooddale Shopping
Center (Woodbury restaurant)(6)
10.14 Shareholder Development Agreement effective as of January 1, 1995,
between Big D Bagels, Inc. and Bruegger's Franchise Corporation. (12)
10.14.1 Settlement Agreement dated May 20, 1997 between Ciatti's, Inc., Big D
Bagels, Inc., Quality Dining, Inc. and Bruegger's Franchise
Corporation.
10.15 Restated Stock Option Plan, as amended (9)
10.16 1993 Stock Option Plan (10)
10.17 Promissory Note dated January 15, 1996, from the Company to Norwest
Equipment Finance, Inc. with respect to Big D Bagels, Inc. (14)
10.18 Promissory Note dated May 31, 1996, from the Company to Norwest
Equipment Finance, Inc. with respect to Big D Bagels, Inc. (14)
23.1 Consent of Grant Thornton LLP
23.2 Consent of Lindquist & Vennum P.L.L.P. (see Exhibit 5 above)
24 Powers of Attorney (included at Signature Page)

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

* Previously filed.
(1) Filed as an Exhibit to the Registration Statement on Form S-1, as amended
(Commission File No. 33-8965), effective on December 23, 1986, and
incorporated herein by this reference.
(2) Filed as an exhibit to the July 3, 1988 Form 10-KSB and incorporated hereby
by reference.
(3) Filed as an Exhibit to Post-Effective Amendment No. 1 to Form S-1
Registration Statement dated March 20, 1989 (No. 33-8965).
(4) Filed as an exhibit to the July 2, 1989 Form 10-KSB and incorporated hereby
by reference.
(5) Filed as an exhibit to the July 1, 1990 Form 10-KSB and incorporated hereby
by reference.
(6) Filed as an exhibit to the June 30, 1991 Form 10-KSB and incorporated
hereby by reference.

II-2
<PAGE>

(7) Filed as an exhibit to the June 28, 1992 Form 10-KSB and incorporated
hereby by reference.
(8) Filed as an exhibit to the June 27, 1993 Form 10-KSB and incorporated
hereby by reference.
(9) Filed as an exhibit to the Form S-8 Registration Statement, File Number 33-
28306 (April 24, 1989).
(10) Filed as an exhibit to the Form S-8 Registration Statement, File Number 33-
76974 (March 28, 1994).
(11) Filed as an exhibit to the July 3, 1994 Form 10-KSB and incorporated hereby
by reference.
(12) Filed as an exhibit to the January 1, 1995 Form 10-QSB and incorporated
hereby by reference.
(13) Filed as an exhibit to the July 2, 1995 Form 10-KSB and incorporated hereby
by reference.
(14) Filed as an exhibit to the June 30, 1996 Form 10-KSB and incorporated
hereby by reference.

Item 17. Undertakings

(a) The undersigned Registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(I) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;

(ii) to reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
Prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement; and

(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.

provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
Registration Statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the Registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the Notes offered herein, and the
offering of such Notes at that time shall be deemed to be the initial bona fide
offering thereof.

(3) To remove from registration by means of a post-effective amendment any
of the Notes being registered which remain unsold at the expiration of the
offering.

(b) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.

II-3
<PAGE>

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Edina, State of Minnesota, on the 22nd day of May, 1997.

CIATTI'S, INC.
(Registrant)

By /s/ Phillip R. Danford
----------------------
Phillip R. Danford
President and Director

POWER OF ATTORNEY

The undersigned hereby constitute and appoint Phillip R. Danford, our true
and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution for us and in our stead, in any and all capacities, to sign any
or all amendments to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person, hereby ratifying and confirming all that
said attorney-in-fact and agent or his substitute of substitutes may lawfully do
or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on May 22, 1997
in the capacities indicated.

Signature Title
--------- -----

/s/ L.E. "Dan" Danford, Jr. Director and Chairman of the Board
- ---------------------------
L.E. "Dan" Danford, Jr.

/s/ Phillip R. Danford President and Director
- ---------------------- (Principal Executive Officer; Principal
Phillip R. Danford Financial Officer)

/s/ Thomas A. Kelm Director
- ------------------
Thomas A. Kelm

/s/ Joseph W. Fesenmaier Controller
- ------------------------
Joseph W. Fesenmaier

II-5

<PAGE>

SETTLEMENT AGREEMENT

This Settlement Agreement ("Agreement") is made as of this 23rd day of
April, 1997 by and between Ciatti's, Inc. ("Ciatti's"), Big D Bagels, Inc. ("Big
D"), Quality Dining, Inc. ("Quality"), and Bruegger's Franchise Corporation
("Bruegger's").

WHEREAS, Big D and Bruegger's are parties to that certain Shareholder
Development Agreement entered into as of the 1st day of January, 1995 (the
"Shareholder Development Agreement") and to certain Bruegger's Fresh Bagel
Bakery Shareholder Franchise Agreements entered to thereunder (the "Franchise
Agreements"); and

WHEREAS, the parties have disagreed as to the meaning, construction,
application and scope of certain provisions of the Shareholder Development
Agreement and Franchise Agreements, including Section 9 of the Shareholder
Development Agreement and Section 14 of the Franchise Agreements (the "Disputed
Provisions"), and the circumstances under which the Disputed Provisions provide
Bruegger's with any rights, including rights of notice to, approval of, and/or
first refusal to, certain transactions; and

WHEREAS, to resolve that dispute, Ciatti's and Big D commenced a
declaratory judgment lawsuit captioned Ciatti's, Inc. and Big D Bagels, Inc. v.
Quality Dining, Inc. and Bruegger's Franchise Corporation, pending in the United
States District Court for the District of Minnesota, Third Division, Case No. 3-
96-1037, in which Ciatti's and Big D sought declaratory relief relating to the
Disputed Provisions; and

WHEREAS, Quality and Bruegger's have denied each of Ciatti's and Big D's
claims, asserted certain affirmative defenses, and counterclaimed for
declaratory relief; and
<PAGE>

WHEREAS, the parties desire to resolve their differences and avoid further
expense and uncertainty; and

WHEREAS, the parties have agreed to settle the issues in dispute between
them;

NOW, THEREFORE, in consideration of the promises and the mutual agreements,
covenants and provisions contained in this Agreement, the parties hereto agree
and declare as follows:

1. Bruegger's agrees that the following transactions are not and shall
not be subject to the provisions in Section 9 of the Shareholder Development
Agreement between Big D and Bruegger's, or to the provisions in Section 14 of
the Franchise Agreements entered into pursuant to the Shareholder Development
Agreement, requiring notice, consent, or first refusal to certain transactions:

a. any issuance of securities by Ciatti's (i) if the issuance does not
result in the acquisition of over 40% of the voting power of any class
of securities of Ciatti's after the completion of the issuance by any
shareholder (other than Phillip Danford or L. E. Danford, Jr.) who
previously held less than 40% of the voting power of such securities
and (ii) such issuance does not result in Phillip Danford and L. E.
Danford, Jr. collectively owning less than 10% of the voting power of
all classes of securities of Ciatti's.

b. any rights offering by Ciatti's substantially in accordance with the
Registration Statement filed on Form S-3 on October 1, 1996, as
amended by Amendment No. 1, filed October 29, 1996 (the "Registration
Statement"), or any future rights

<PAGE>

offering substantially in accordance with the Registration
Statement that complies with Section 1(a)(ii) above

c. any non-convertible non-voting debt of Ciatti's, Inc., including
bank debt.

d. any warrants to purchase common stock of Ciatti's, Inc. granted
to financial institutions or individuals in connection with any
restaurant financing packages in an amount up to 2,000 warrants
per restaurant, or such larger amount as bears the same
proportion to Ciatti's total shares then outstanding as 2,000
bears to 742,819, the number of shares presently outstanding.

e. any issuance of securities under Ciatti's incentive stock option
plan and any issuance of securities to Phillip Danford or L. E.
Danford, Jr.

f. any convertible debt by Ciatti's if, assuming all conversion
rights were fully exercised, the criteria specified in Section
1(a) would be satisfied.

2. Ciatti's will print a reasonable disclaimer in substantially the
form attached hereto as Exhibit A in any Registration Statements and associated
Prospectuses relating to these equity offerings.

3. Bruegger's agrees that to the extent the Shareholder Development
Agreement or Franchise Agreements apply to the issuance or trading of any equity
securities of Ciatti's while Ciatti's remains a public company, Bruegger's has
no right of first refusal in such offering, and will exercise in good faith any
right to approve such transaction.

4. Ciatti's and Big D will sign an agreement in substantially the
form attached hereto as Exhibit B granting them permission to use Bruegger's
registered marks, and will use those marks only in a descriptive sense in the
Registration Statements and associated Prospectuses.

<PAGE>

5. Ciatti's and Big D agree to indemnify Bruegger's from liability
arising from the equity offerings described herein under terms in substantially
the form of Section 2 of the Indemnification Agreement, attached hereto as
Exhibit C. Ciatti's and Big D shall provide Bruegger's with a copy of any
opinion letter provided to Ciatti's and Big D or to any third party by Ciatti's
or Big D's securities counsel in connection with any offering described herein.
Bruegger's agrees that it will not be entitled to rely upon any opinion
expressed in any such opinion letter.

6. Ciatti's and Big D agree that it will constitute an event of
default under the Shareholder Development Agreement and related Franchise
Agreements warranting immediate termination of those agreements if Ciatti's or
Big D engages in a business competitive to Bruegger's, as defined in Section 11
of the Shareholder Development Agreement.

7. Big D designates Phil Danford as its Managing Officer who has, and
shall have throughout the term of the Shareholder Development Agreement and the
Franchise Agreements entered into thereunder, the authority to bind Big D in any
dealings with Bruegger's and its affiliates, and to direct any action necessary
to ensure compliance with the Shareholder Development Agreement and any other
agreements relating to the franchised bakeries operated thereunder. No change in
the Managing Officer may be made without the prior written consent of
Bruegger's, which consent shall not unreasonably be withheld. If Big D desires
to change its Managing Officer for any reason, Big D shall first notify
Bruegger's in writing of the proposed new Managing Officer and his or her
relevant qualifications. However, Big D shall have 60 days to propose a new
Managing Officer in the event the current Managing Officer resigns, dies, or
becomes disabled or incapacitated. In any event, Bruegger's shall have 30 days
after receipt of

<PAGE>

notice of the proposed Managing Officer to approve or disapprove the proposed
Managing Officer. If Bruegger's disapproves the proposed Managing Officer, Big D
shall have the right, exercised by sending a written demand for arbitration to
Bruegger's, to immediately submit the issue of the fitness of the proposed
Managing Officer for the position to arbitration, before such arbitrator as the
parties agree upon. If the parties can not agree upon an arbitrator within 10
days after the demand for arbitration is made, each party shall select an third
party arbitrator, and the arbitrators so selected shall select a third
arbitrator, and the panel so selected shall decide the issue by majority vote.
If the arbitrators so selected are unable to agree upon the third arbitrator
within ten days after their appointment, either party may petition the United
States District Court for the District of Minnesota to appoint the third
arbitrator. The decision of the arbitrator(s) shall be binding on both parties.
The arbitration shall take place in Minneapolis, and shall be conducted in
accordance with the then-current Commercial Arbitration Rules of the American
Arbitration Association. The cost of the arbitration shall be shared equally by
the parties. Failure to maintain an approved Managing Officer pursuant to the
terms of this Agreement shall constitute an event of default under the
Shareholder Development Agreement and the Franchise Agreements entered into
thereunder.

8. Bruegger's will provide reasonable assistance to Ciatti's/Big D in
obtaining financing for the leasehold, construction and equipment financing of
new bakeries. This assistance will not require Bruegger's to incur expense nor
to provide guarantees or other credit enhancements. It is contemplated that such
assistance would include, but not be limited to introducing Ciatti's/Big D to
any viable potential financing sources known to Bruegger's and making
appropriate representatives of Bruegger's available to answer questions and
attend
<PAGE>

meetings with prospective lenders or financing sources to Ciatti's/Big D. The
parties acknowledge and agree that Ciatti's/Big D shall also be entitled to
participate in any future credit programs that Bruegger's generally offers to
all of its other franchisees on the same terms and conditions as such programs
are offered to such other franchisees.

9. The deadline contained in Section 1.3 of the Shareholder
Development Agreement specifying the minimum cumulative number of Bakeries
required to be in operation by July 1, 1997 is extended to January 1, 1998, and
the deadline for opening new bakeries by July 1, 1998 is extended to October 1,
1998. All other deadlines in the Shareholder Development Agreement shall remain
in effect.

10. The lawsuit will be dismissed with prejudice, and the parties
shall instruct their respective counsel to file an appropriate stipulation
accomplishing that dismissal; provided, however, that nothing in the stipulation
of dismissal, this Agreement, or in the release contained in paragraph 11 below
shall be construed, with respect to future transactions or occurrences, to limit
or reduce Ciatti's or Big D's rights as they existed prior to this Agreement,
and prior to the Dismissal, under Section 9 of the Shareholder Development
Agreement, or Section 14 of the Franchise Agreements entered into thereunder, or
limit the right of either party to bring an action relating to the construction,
breach, operation, or enforcement of those agreements with respect to future
transactions or occurrences. This Agreement is not an admission by any party of
any liability, right or obligation other than those specifically set forth
herein. The provisions in Section 1 of this Agreement excepting certain
transactions from the notice, approval, and first refusal requirements of
Section 9 of the Shareholder Development Agreement and Section 14 of the related
Franchise Agreements are intended only to identify specific "safe harbor"
transactions

<PAGE>

that the parties agree will not be subject to those requirements if carried out
in accordance with Sections 2, 4, and 5 of this Agreement.

11. Ciatti's and Big D, and their respective officers, directors,
affiliates, successors and assigns, hereby release and discharge all claims or
causes of action they have against Quality Dining and/or Brueggers, their
respective officers, directors, affiliates, successors and assigns arising out
of the subject matter of the Complaint filed by Ciatti's and Big D. Quality and
Brueggers, and their respective officers, directors, affiliates, successors and
assigns, hereby release and discharge all claims or causes of action they have
against Ciatti's and Big D, and their respective officers, directors,
affiliates, successors and assigns, arising out of the subject matter of Quality
and Brueggers'counterclaim.

12. The parties will issue a joint press release in the form attached
hereto as Exhibit D.

CIATTI'S, INC. BIG D BAGELS, INC.

- ---------------------------- -----------------------------------
By /s/ Barney U. Uhlig By /s/ Barney U. Uhlig
Its Vice President Its Vice President

QUALITY DINING, INC. BRUEGGER'S FRANCHISE CORPORATION

- ---------------------------- -----------------------------------
By /s/ John C. Firth By /s/ John C. Firth
Its Senior Vice President and Its Senior Vice President and
General Counsel General Counsel
<PAGE>

Exhibit A

Disclaimer with Respect to Bruegger's to be Added to Ciatti's, Inc. Prospectus

To be placed in the section entitled "Additional Information."

Neither Brueggers Franchise Corporation ("Brueggers") nor any of its
parents, subsidiaries, affiliates, officers, directors, agents, employees,
accountants or attorneys are in any way participating in, approving or endorsing
this offering of securities by the Company, any of the offering or accounting
procedures used in the Prospectus, or any representations made in connection
with the offering. The grant by Bruegger's of any franchise or other rights to
Ciatti's or Big D is not intended as, and should not be interpreted as, an
express or implied approval, endorsement or adoption of any statement regarding
financial or other performance which may be contained in this Prospectus. Any
review by Bruegger's of this Prospectus or the information included in this
Prospectus has been conducted solely for the benefit of Bruegger's to determine
conformance with Bruegger's internal policies, and not to benefit or protect any
other person. No investor should interpret any such review by Bruegger's or the
use and display of any of Bruegger's logos, trademarks or service marks herein
as approval, endorsement, acceptance or adoption of any representation, warranty
or covenant contained in the materials reviewed. The enforcement or waiver of
any obligation of Ciatti's or Big D under any agreement between Ciatti's or Big
D and Bruegger's or any of Bruegger's affiliates is a matter of the Bruegger's
or its affiliates' sole discretion. No investor should rely on any
representation, assumption or belief that Bruegger's or its affiliates will
enforce or waive particular obligations of Ciatti's or Big D under such
agreements.
<PAGE>

Exhibit B

LICENSE AGREEMENT

THIS AGREEMENT, entered into as of this day of May 1997 between Big D
Bagels, Inc., a Minnesota corporation (hereinafter referred to as "Big D"),
Ciatti's Inc., a Minnesota corporation (herein after referred to "Ciatti's"),
and Brueggers Franchise Corporation, a Delaware corporation (hereinafter
referred to as "Bruegger's). Ciatti's and Big D are herein referred to
collectively as "Licensees."

WITNESSETH:

WHEREAS, Bruegger's has rights in various names, characters, symbols,
designs and likenesses, including but not limited to the trademarks and/or
service marks listed in Schedule A of the Shareholder Development Agreement
dated as of January 1, 1995 between Bruegger's and Big D (hereinafter referred
to as "LICENSED MARK"), which LICENSED MARK has been used in commerce and
extensively advertised and promoted by various means. The LICENSED MARK is well
known and recognized by the general public, which high reputation and goodwill
has been and continues to be a unique benefit to Bruegger's and its franchisees;

WHEREAS, Ciatti's has filed registration statements with the United States
Securities and Exchange Commission with respect to the offering of its equity
securities and debt securities and such Registration Statements describe the
business of the Company and of Big D, including a description of the LICENSED
MARK; and

WHEREAS, Licensees recognize that benefits will be derived from utilizing
the LICENSED MARK and desires to utilize said LICENSED MARK in the manner
described above,

NOW, THEREFORE, in consideration of the mutual promises contained herein,
the parties agree as follows:

1. GRANT OF LICENSE
----------------

(a) Licensed Products - Upon the terms and conditions set forth in this
Agreement, Bruegger's grants to Licensees the right, license and privilege to
utilize the LICENSED MARK and in connection with such registration statements
and future offerings by Ciatti's filed with the Securities and Exchange
Commission (the "Registration Statements"). Use of the LICENSED MARK in the
Registration Statements and related Prospectuses shall be in a form approved by
Bruegger's as detailed on Schedule A to the Shareholder Development Agreement or
in such manner as Ciatti's, Big D and Bruegger's may otherwise agree. The
following language (or substantially similar language acceptable to Bruegger's )
must appear prominently above or below the first use of the LICENSED MARK, or in
a location near the LICENSED MARK acceptable to Bruegger's:
<PAGE>

The [trademark/service mark] ["LICENSED MARK"] is a [registered]
[trademark/service mark] of Bruegger's Franchise Corporation. Neither
Bruegger's Franchise Corporation nor any of its subsidiaries or
affiliates has endorsed or approved the Offering or is in any way
participating in it. Please see additional Information on page ____ for
a more detailed disclaimer of Bruegger's Franchise Corporation's
involvement.

(b) Term - The term of the license granted herein shall be effective on the
day of May 1997 and shall continue during the term of the Shareholder
Development Agreement between Big D and Bruegger's unless sooner terminated in
accordance with the provisions herein.

2. TERMS OF PAYMENT
----------------

(a) Fee - Licensees agree to pay to Bruegger's as royalty a sum equal to
one hundred dollars ($100) due and payable on the date of execution of this
Agreement.

3. GOODWILL, ETC.
--------------

Licensees recognize the great value of the goodwill associated with the
LICENSED MARK and acknowledge that the LICENSED MARK and all rights therein and
goodwill pertaining thereto belong exclusively to Bruegger's and that the
LICENSED MARK has a secondary meaning in the minds of the public.

Licensees agrees that they will not, attack the title or any rights of
Bruegger's in and to the LICENSED MARK or attack the validity of this license,
or do anything either by an act of omission or commission which might impair,
violate or infringe the LICENSED MARK and which will not claim adversely to
Bruegger's or anyone claiming through Bruegger's any right, title or interest in
or to said LICENSED MARK and will not misuse or harm or bring the LICENSED MARK
into public disrepute and that they have not and will not for their benefit,
directly or indirectly, register(ed) or apply(ied) for registration of the
LICENSED MARK or any mark which is, in Bruegger's reasonable opinion, the same
as or confusingly similar to the LICENSED MARK. Bruegger's agrees to assume the
defense of any third-party action challenging Licensees's right to use the
LICENSED MARK.

Licensees agree to cooperate fully and in good faith with Bruegger's for
the purpose of securing and preserving Bruegger's 's rights in and to the
LICENSED MARK.

Bruegger's, if it so desires, may commence or prosecute any claims or suits
in its own name or in the name of Licensees or join Licensees as a party
thereto. Should Bruegger's choose to bring an action in the name of Licensees or
join Licensees as a party thereto, Bruegger's agrees to bear the legal expenses
and costs incurred by Licensees's personal legal counsel. Licensees shall notify
Bruegger's in writing of any infringements or imitations by others of the
LICENSED MARK on documents similar to those covered by this Agreement which may
come
<PAGE>

to the Licensees's attention, and Bruegger's shall have the sole right to
determine whether or not any action shall be taken on account of any such
infringements of the LICENSED MARK. Licensees shall not institute any suit or
take any action on account of any such infringement or imitation without first
obtaining the written consent of Bruegger's to do so.

Licensees expressly recognize that the LICENSED MARK possesses special
unique and extraordinary character which makes difficult the assessment of
monetary damages which Bruegger's would sustain by unauthorized use. Licensees
expressly recognize and agree that an irreparable injury would be caused to
Bruegger's by unauthorized use and agrees that preliminary and permanent
injunctive and other equitable relief would be appropriate in the event of a
breach of this Agreement by Licensees, provided that such remedy shall not be
exclusive of legal remedies otherwise available.

4. INDEMNIFICATION AND INSURANCE
-----------------------------

Licensees hereby agree to indemnify Bruegger's, its affiliates and their
directors, officers, agents and employees and to hold each of them harmless in
all respects including attorneys' fees from and against any claims, demands,
suits, or causes of actions and resulting settlements, awards or judgements
arising out of any act or alleged activity of Licensees in connection with this
license.

5. RIGHT OF TERMINATION
--------------------

Without prejudice to any other rights that Bruegger's may have, Bruegger's
shall have the right to terminate this Agreement upon five (5) days' written
notice sent by registered or certified mail:

(a) If Licensees shall be unable to pay their liabilities when due or shall
become subject to any bankruptcy, insolvency or receivership proceeding of any
nature or if their business is placed in the hands of a receiver or trustee.

(b) If Licensees assign this Agreement or any of their rights hereunder
without Bruegger's prior written consent.

(c) If Licensees shall fail to perform any of their obligations hereunder,
including without limitation, use of the LICENSED MARK in the manner provided on
Schedule A to the Shareholder Development Agreement.
<PAGE>

6. EFFECT OF TERMINATION
---------------------

(a) Cessation of Rights - Upon the expiration or termination of this
License, all rights granted to Licensees hereunder shall cease and Licensees
will refrain from further use of the LICENSED MARK or anything reasonably deemed
by Bruegger's to be confusingly similar to the LICENSED MARK, except as
expressly permitted under other licenses of agreements between the parties
hereto. In the event of disagreement as to whether a mark is confusingly
similar, Bruegger's decision shall control.

(b) Bruegger's Remedies - Licensees acknowledge that their use of the
LICENSED MARK on the Prospectus in a manner other than as provided herein will
result in immediate and irreparable damage to Bruegger's and to the rights of
any subsequent Licensees. Licensees acknowledge and admits that there is not
adequate remedy at law for such misuse, and Licensees agree that in the event of
such misuse Bruegger's shall be entitled to equitable relief by way of temporary
and permanent injunctions and such other further relief as any court with
jurisdiction may deem just and proper. Resort to any remedies referred to herein
shall not be construed as a waiver of any other rights and remedies to which
Bruegger's is entitled under this Agreement or otherwise.

7. NOTICES
-------

All notices, requests, approvals, disapprovals, consents and statements to
be given and all payments to be made hereunder shall be given or made at the
respective addresses of Bruegger's and Licensees set forth below unless
notification of a change of address is given in writing. Such notices, requests,
approvals, disapprovals and consents shall be deemed to have been duly given if
delivered personally or sent by certified mail, return receipt requested, with
postage prepaid or sent by prepaid telegram.

As to Bruegger's: Bruegger's Franchise Corporation
4220 Edison Lakes Parkway
Mishawaka, Indiana 46545
ATTENTION: General Counsel

As to Licensees: Ciatti, Inc
Big D Bagels, Inc.
5555 West 78th Street
Edina, MN 55435

<PAGE>

8. NO JOINT VENTURE
----------------

Nothing herein contained shall be construed to place Bruegger's and
Licensees in the relationship of partners or join venturers and neither shall
have any power to obligate or bind the other in any manner whatsoever.

9. NO ASSIGNMENT
-------------

This Agreement and any rights granted herein shall not be assigned,
mortgaged or otherwise encumbered by Licensees without written consent of
Bruegger's. No transfer by operation of law shall be effective against
Bruegger's.

10. NO WAIVER: MODIFICATION: SEVERABILITY
-------------------------------------

None of the terms of this Agreement can be waived or modified except
expressly in writing signed by both parties. The failure of either party to
insist on compliance with any provision hereof shall not constitute a waiver or
modification of such provision or any other provision. If any provision hereof
is held to be invalid or unenforceable by any court of competent jurisdiction or
any other authority vested with jurisdiction, such holdings shall not affect the
validity or enforceability of any other provision hereto.

11. WHOLE AGREEMENT: CONSTRUCTION
-----------------------------

Upon execution, this Agreement includes the entire understanding between
the parties, and there are no representations, promises, warranties, covenants
or undertakings other than those contained herein. This Agreement shall be
construed in accordance with the laws of the State of Minnesota.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.

Ciatti's, Inc. Bruegger's Franchise Corporation

By: By:
----------------------------- -------------------------------

Attest: Attest:
------------------------- ---------------------------

Big D Bagels, Inc.

By:
-----------------------------

Attest:
-------------------------

<PAGE>

Exhibit C

Indemnification Agreement

Ciatti's and Big D jointly and severally agree to protect, indemnify,
hold harmless and defend Bruegger's from and against any and all losses, claims,
damages, liability or expenses arising directly or indirectly out of or related
in any way to any public offering of securities made by Ciatti's, including,
without limitation, any violation or claimed violation of federal, state or
other securities laws, rules or regulations, Securities and Exchange Commission
liability, shareholder derivative or other shareholder claims. Upon notice from
Bruegger's to Big D of any claim hereunder, Ciatti's and Big D shall immediately
undertake at their sole cost and expense, including attorney's fees and costs,
Bruegger's defense of such claim with legal counsel mutually agreeable to
Bruegger's, Ciatti's and Big D. Such mutually agreeable legal counsel shall be
separate and independent of Ciatti's counsel if Bruegger's reasonably determines
that its interests may conflict. If no conflict of interest exists, and
Bruegger's wishes to retain independent counsel of its own choosing, then
Bruegger's shall be responsible for any such independent counsel fees. Any and
all material decisions with respect to the management of Bruegger's defense
hereunder shall occur only with Bruegger's prior consent and direction, which
will not be unreasonably withheld or delayed. Ciatti's shall have sole authority
to settle any claim under any terms acceptable to Ciatti's so long as no adverse
judgment is entered against Bruegger's pursuant to the settlement and Bruegger's
receives a complete release as part of such settlement.
<PAGE>

Exhibit D

CIATTI'S, INC. AND BRUEGGER'S AGREE TO SETTLEMENT OF LAWSUIT

Ciatti's, Inc. and its subsidiary Big D Bagels, Inc. and Quality
Dining, Inc. and its subsidiary Bruegger's Franchise Corporation announced today
that they have entered into a Settlement Agreement resolving the pending
litigation between the companies. In connection with the execution of the
Settlement Agreement, the parties have agreed to dismiss the lawsuit and all
respective counterclaims. The companies have also agreed on certain matters
relating to Ciatti's offerings of securities to the public in the future.

Ciatti's owns and operates ten full-service restaurants in Minnesota
and Wisconsin. Big D Bagels currently operates six Bruegger's Bagel Bakery
restaurants in the Dallas - Fort Worth area under franchise agreements with
Bruegger's. Bid D Bagels, Inc. has signed leases for an additional six
Bruegger's Bagel Bakery restaurants that its expects to open by December 31,
1997.

<PAGE>
Exhibit 23.1

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated August 14, 1996 accompanying the
consolidated financial statements of Ciatti's, Inc. included in the Annual
Report on Form 10-KSB for the fifty-two weeks ended June 30, 1996 which is
incorporated by reference in the Registration Statement and Prospectus. We
consent to the incorporation by reference in the Registration Statement and
Prospectus of our report and to the use of our name as it appears under the
caption "Experts."

/s/ Grant Thornton LLP
----------------------
GRANT THORNTON LLP

Minneapolis, Minnesota
May 22, 1997