CIATTIS INC /DE/, 424B3, 1997-10-20

CIATTIS INC /DE/
424B3, 1997-10-20
EATING PLACES

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PROSPECTUS

$1,750,000
PRINCIPAL AMOUNT
---------------------------------------------

CIATTI'S, INC.
ONE AND THREE YEAR SUBORDINATED FIXED-TERM NOTES

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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 $1,849,706 in principal amount was outstanding at August 31, 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 are currently being set at 11.00% for
One-Year Notes and 12.00% 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.

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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.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Underwriting
Price to Commissions and Proceeds to
Public Discount Company
- --------------------------------------------------------------------------------
Per Note 100% 0.0% 100% (1)
- --------------------------------------------------------------------------------
Total $1,750,000 0.0% $1,750,000 (1)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(1) Before deducting estimated offering expenses of $25,000.

The date of this Prospectus is October 17, 1997.

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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 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 document, which has been filed by the Company with the
Commission (File No. 0-16348), is incorporated by reference in this
Prospectus--the Company's Annual Report on Form 10-KSB for the fifty-two weeks
ended June 29, 1997. The Company's Annual Report for the fifty-two weeks ended
June 29, 1997 is being delivered to investors concurrently with 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 Scott P. McGuire, Ciatti's, Inc.,
5555 West 78th Street, Edina, Minnesota 55439-2702. Telephone requests may be
directed to (612) 941-0108, extension 205.

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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.

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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 seven full-service restaurants in Minnesota
and Wisconsin. Included in these full-service restaurants are six Italian
restaurants operating in Minnesota and Wisconsin under the name "Ciatti's
Italian Restaurant-Registered Trademark-" and one steakhouse restaurant
operating in Wisconsin under the name "Spurs Steakhouse & Saloon-Registered
Trademark-." On January 1, 1995, DFW Bagels, Inc. ("DFW"), 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 October 1, 1997, DFW has opened and is operating eight
bagel restaurants in the Dallas-Fort Worth, Texas area. All bagel restaurants
are operated under the name "Bruegger's Bagel Bakery-Registered Trademark-"
pursuant to the terms of the Development Agreement and related franchise
documents.

Ciatti's, Inc. and its wholly-owned subsidiary, DFW 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,
DFW Bagels, Inc. References to the Company's development and operation of its
bagel restaurants will generally mean DFW Bagels, Inc. In October, 1997, the
Company disclosed that its Board of Directors has decided to change the name of
the Company to Premier Restaurants Company, subject to shareholder approval at
the November 13, 1997 annual meeting of shareholders. In September 1997, the
Company sold three of its full-service restaurants and entered into an agreement
to sell a fourth full-service restaurant. See "Business-Restaurant
Demographics."

THE OFFERING

Securities Offered. . . . . . . . . . The Company is offering up to $1.75
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),
$1,849,706 of which was outstanding at
August 31, 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."

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Interest Rates and Payment. . . . . . . Interest rates are being initially set
at 11.00% for One-Year Notes and
12.00% 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.

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.

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"BRUEGGER'S" and "BRUEGGER'S BAGEL BAKERY" are trademarks of Bruegger's
Franchise Corporation. "CIATTI'S ITALIAN RESTAURANT" and "SPURS STEAKHOUSE &
SALOON" are registered trademarks of the Company.

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The Notes offered hereby are securities of Ciatti's, Inc. They are not
direct or indirect interests in DFW 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 30 for a more detailed disclaimer of Bruegger's Franchise Corporation's
involvement.

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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 fiscal year ended June
29, 1997 the Company incurred losses of approximately $1,363,000 and $2,569,000,
respectively. For the first quarter ended September 28, 1997, the Company
estimates that it will incur a loss from operations similar to that of the
fourth quarter of fiscal 1997, which will be partially offset by a gain as a
result of the sale of three of its restaurants. Although the Company believes
it can regain profitability through its expansion of Bruegger's Bagel Bakery
restaurants in the Dallas-Fort Worth area, the Company expects that it will
continue to incur losses until profitability is achieved. There can be no
assurance that the Company will be able to achieve profitability at its
Bruegger's Bagel Bakery 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 fiscal year ended June 29, 1997, the Company's full service
restaurants generated sales of $15.8 million while its bagel restaurants
generated sales of only $1.9 million. The Company currently operates eight
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 and Bakery Operations" and "Business -
Restaurant Development."

SALE OF CERTAIN OF ITS CIATTI'S ITALIAN RESTAURANTS

The Company has not opened any full-service restaurants in recent years and
has no plans to open any additional full-service restaurants in the future. In
September 1997, the Company sold three of its full-service restaurants and
entered into an agreement to sell a fourth restaurant. The restaurants that
were sold were located in Burnsville, Falcon Heights, and Woodbury, Minnesota,
while the restaurant that the Company has entered into an agreement to sell is
located in St. Cloud, Minnesota. The aggregate sales price of the three
restaurants that were sold in September 1997 was approximately $925,000, of
which $825,000 was paid in cash with the remaining $100,000 payable in monthly
installments over a five year period. The net book value of the equipment and
leasehold improvements as of June 29, 1997 at these three locations was
approximately $479,000.

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The restaurants sold are initially being operated as Ciatti's Italian
Restaurants, however, the new owners have the right to change the name at
anytime. The Company decided to sell these restaurants to focus on achieving
and maintaining profitability at its remaining full-service restaurants and to
generate cash to continue to expand the construction of its bagel bakeries in
the Dallas-Fort Worth area. During fiscal 1997, the three full-service
restaurants that were sold by the Company in September 1997 generated
approximately $5,025,000 of sales, net earnings of $53,000 and cash flows from
operations of $275,000. Accordingly, the Company will not have the benefit of
the cash flow of these restaurants in the future.

DEPENDENCE UPON BRUEGGER'S

The Development of the Dallas-Fort Worth area for bagel restaurants by DFW
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, DFW is required to comply with a number
of requirements with respect to construction and maintenance of bagel
restaurants. DFW 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 DFW and Bruegger's will enter into a pre-agreed-upon
franchise agreement for each bagel restaurant opened by DFW. The franchise
agreement grants DFW 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, DFW 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. In September 1997, Quality Dining, Inc.
entered into a share exchange agreement under which it will sell Bruegger's
Franchise Corporation back to its former owners. The Company believes the
transaction will be completed during October 1997. "See Proposed Sale of
Bruegger's Franchise Corporation by 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 DFW, the Company's wholly-owned subsidiary, is the franchisee
under a Development Agreement in which DFW 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 DFW 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 23, 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
DFW 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."

6
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DELISTING FROM NASDAQ SMALLCAP MARKET

On October 8, 1997, the Nasdaq notified the Company that it would not grant
the Company an exemption for the Company's inability to comply with the Nasdaq
SmallCap Market $1.0 million shareholders' equity requirement. Accordingly, the
Company's securities were delisted from the Nasdaq SmallCap Market as of the
close of business on October 8, 1997. Although the Company anticipates that its
common stock will trade on the Nasdaq "Bulletin Board" or in the local
over-the-counter market, there can be no assurance that such a market will
develop or be maintained.

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, DFW 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 DFW. If DFW were to default on
these leases, and the assets of DFW 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 $370,000 for the capital 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, the Company has
borrowed $400,000 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.

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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. In addition, on September 1, 1997, a federally mandated wage
increase became effective. In response to this wage increase the Company
implemented menu price increases at its full-service restaurants effective
October 1, 1997. These increases are expected to offset the cost of the wage
increases. See "Business - Government Regulation."

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.

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RELIANCE ON COMMISSARY OF THIRD PARTY

Currently, the Company obtains its shaped bagel dough, as well as other
food supplies from a commissary owned by Quality Dining, Inc. 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 subject to available financing. While the
current arrangement represents the most cost effective way of obtaining bagel
dough and other supplies, the closing of the commissary or the inability of the
Company to receive its supplies from the commissary, would have a severe and
immediate impact on the continuation of the Company's business in the
Dallas-Fort Worth area.

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, on
September 1, 1997, a federally mandated wage increase became effective. In
response to this wage increase the Company implemented menu price increases at
its full-service restaurants effective October 1, 1997. These increases are
expected to offset the cost of the wage increases. 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.

9
<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.

10
<PAGE>

RATIO OF EARNINGS TO FIXED CHARGES

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

FISCAL YEAR
----------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----

Ratio of earnings 4.90x 3.93x
to fixed charges
Deficiency of earnings $43,000 $1,430,000 $2,471,000
to fixed charges

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
$1,725,000 (net of offering expenses of $25,000). 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 DFW in Dallas-Fort Worth, Texas. Under the Development Agreement, DFW 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 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:

Expansion of Number of Bagel Restaurants
(including commissary) $1,110,000
Payment of short-term indebtedness 566,500
Working Capital 48,500
------------
Total $1,725,000
------------
------------

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.

11
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data for the fiscal years
ended June 27, 1993, July 3, 1994, July 2, 1995, June 30, 1996 and June 29, 1997
have been derived from audited financial statements of the Company for the
fiscal years then ended. 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 OPERATIONS
(in thousands, except share and per share data)

<TABLE>
<CAPTION>
FISCAL YEAR (1)
------------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----

<S> <C> <C> <C> <C> <C>
Sales
Full-service restaurants $22,359 $22,969 $18,935 $16,962 $15,811
Bagel restaurants - - - 627 1,927
--------------------------------------------------------------------
Total sales 22,359 22,969 18,935 17,589 17,738

Cost of food and beverage 6,760 6,848 5,781 5,191 5,371
--------------------------------------------------------------------
Gross profit 15,599 16,121 13,154 12,398 12,367

Restaurant operating expenses
Labor and benefits 7,590 7,383 6,266 6,145 6,304
Direct and occupancy 7,001 7,039 5,722 6,375 6,625
General and administrative 1,173 1,347 1,054 1,305 1,305
Impairment of assets write-down - - - 78 640
--------------------------------------------------------------------
Total restaurant and operating expenses 15,764 15,769 13,042 13,903 14,874
--------------------------------------------------------------------

Earnings (loss) from operations (165) 352 112 (1,505) (2,507)

Other income (expense), net (70) 92 88 (18) (69)
Income tax (expense) benefit (107) (134) (6) 160 7
--------------------------------------------------------------------
Net earnings (loss) ($342) $310 $194 ($1,363) ($2,569)
--------------------------------------------------------------------
--------------------------------------------------------------------

Net earnings (loss) per common and
common equivalent share ($0.42) $0.40 $0.25 ($1.85) ($3.46)
--------------------------------------------------------------------
--------------------------------------------------------------------

Weighted average number of common and
common equivalent shares outstanding 805,118 769,586 763,226 736,917 742,819
</TABLE>

CONSOLIDATED BALANCE SHEET DATA (AT END OF PERIOD)
(in thousands)

FISCAL YEAR (1)
--------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current assets $2,308 $2,763 $2,713 $2,184 $1,420
Current liabilities 2,219 2,201 1,969 2,569 3,292
Total assets 7,899 7,206 7,684 6,652 4,663
Long-term obligations, less
current maturities 1,491 655 1,179 908 765

</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 1993, 1995, 1996 and 1997
were fifty-two week years.

12
<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 27, 1993, July 3, 1994, July 2, 1995,
June 30, 1996 and June 29, 1997. Fiscal 1994 was a fifty-three week year while
fiscal 1993, 1995, 1996 and 1997 were fifty-two week years.

FISCAL YEAR
---------------------------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Sales
Full-service restaurants 100.0% 100.0% 100.0% 96.4% 89.1%
Bagel restaurants - - - 3.6% 10.9%
---------------------------------------------------------------------
Total sales 100.0% 100.0% 100.0% 100.0% 100.0%

Cost of food and beverage 30.2% 29.8% 30.5% 29.5% 30.3%
---------------------------------------------------------------------
Gross profit 69.8% 70.2% 69.5% 70.5% 69.7%

Restaurant operating expenses
Labor and benefits 33.9% 32.1% 33.1% 34.9% 35.5%
Direct and occupancy 31.3% 30.7% 30.2% 36.2% 37.3%
General and administrative 5.3% 5.9% 5.6% 7.5% 7.4%
Impairment of assets write-down - - - 0.4% 3.6%
---------------------------------------------------------------------
Total restaurant and operating expenses 70.5% 68.7% 68.9% 79.0% 83.8%
---------------------------------------------------------------------

Earnings (loss) from operations (0.7%) 1.5% 0.6% (8.5%) (14.1%)

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

Net earnings (loss) (1.5%) 1.3% 1.0% (7.7%) (14.5%)
---------------------------------------------------------------------
---------------------------------------------------------------------

</TABLE>

COMPARISON OF FIFTY-TWO WEEKS ENDED JUNE 29, 1997 TO FIFTY-TWO
WEEKS ENDED JUNE 30, 1996

SALES. Sales for fiscal 1997 increased $148,617, or .8%, to $17,737,804
from fiscal 1996 sales of $17,589,187. The increase in consolidated sales
during fiscal 1997 was due to an increase in sales at the Company's bagel
bakeries which was offset by a decline in sales at the Company's full-service
restaurants as described below.

13
<PAGE>

Full-service restaurant sales of $15,811,370 for fiscal 1997 decreased 6.8%
from sales of $16,962,135 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 full-service restaurant sales were down
$399,460, or 2.5%, when compared to the same period last year. The Company
believes an extensive advertising campaign entered into during the third quarter
of this year, which will extend through the first quarter of fiscal 1998, has
had and will continue to 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.

Bagel bakery sales of $1,926,434 for fiscal 1997 increased $1,299,382, or
207.2%, over bagel bakery sales of $627,052 for fiscal 1996. This increase in
sales was primarily a function of the Company having seven bagel restaurants
open as of June 29, 1997, while only having four bagel restaurants open as of
June 30, 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. The cost of food and beverage was 30.3% of
sales in fiscal 1997, an increase from the 29.5% of sales reported in fiscal
1996. The increase in the cost of food and beverage for fiscal 1997 was
primarily due to the Company's bagel bakery concept operating at higher cost
levels than its full-service restaurants. In addition, increases during the
first two quarters of this fiscal year in the costs of selected products at the
Company's full-service restaurants occurred 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 were 35.5% of sales in fiscal
1997, an increase from the 34.9% of sales reported in fiscal 1996. The increase
in labor and benefits costs as a percent of sales for fiscal 1997 was mainly due
to the Company's bagel bakery concept operating at higher cost levels than its
full-service restaurants. In addition, increases occurred in labor and benefit
costs as a percentage of sales at the Company's full-service restaurants during
the first and second quarters of the 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.

The federally mandated minimum wage increases which became effective
October 1, 1996 did not have a significant impact on the Company's financial
results. On September 1, 1997, another minimum wage increase became effective.
In response to this wage increase, the Company implemented menu price increases
at its full-service restaurants effective October 1, 1997. These increases are
expected to offset the cost of the wage increases.

DIRECT AND OCCUPANCY. Direct and occupancy costs primarily include
individual restaurant advertising, promotion, supplies, utilities, occupancy and
depreciation expenses. These costs were 37.3% of sales in fiscal 1997, an
increase from the 36.2% reported last year. This increase was due to the
following three reasons. First, the Company increased its advertising and
promotion costs from 3.6% of sales during fiscal 1996 to 4.5% of sales in fiscal
1997. Second, lower sales levels at the full-service restaurants caused fixed
costs such as occupancy and depreciation to be spread over a smaller sales base,
thus increasing those respective percentages as compared to sales. Third, the
Company incurred significant costs related to the start-up of the bagel
bakeries. The Company expects preopening costs relating to the start-up of
bagel bakeries to remain at an average of $45,000 for each bakery, adjusted for
inflation. This amount includes a initial franchise fee of $20,000. The
Company is obligated by its Development Agreement with Bruegger's to spend a
minimum of 4% of sales on advertising and, following its current practice,
expects to spend between 4% and 5% of bakery sales in the near future. In
addition, the Company expects advertising and promotional expenses to
approximate 2.75% of full-service restaurant sales during fiscal 1998.

GENERAL AND ADMINISTRATIVE. General and administrative costs were 7.4% of
sales for fiscal 1997 and fiscal 1996. The Company incurred approximately
$208,000 of additional general and administrative costs related to operating
additional bagel bakeries in fiscal 1997. The Company also had increased
professional fees which were partially offset by the recovery of a note
receivable that had been fully reserved for.

14
<PAGE>

WRITE-DOWN OF IMPAIRED ASSETS. Due to events occurring during fiscal 1997,
the Company recognized an impairment loss of $640,286 for the long-lived assets
at its Madison, Wisconsin restaurant. During fiscal 1997, 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 half of
fiscal 1997 that did not produce the results management expected. Based on
these factors, 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.

During fiscal 1996, the Board of Directors resolved to close its
full-service restaurant located in Glendale, Wisconsin, effective September 8,
1996. Accordingly, the Company recorded a $77,691 charge during fiscal 1996 to
write-off the assets at this location.

OTHER INCOME (EXPENSE), NET. Other income (expense) increased to a net
expense of $69,140 in fiscal 1997 from a net expense of $17,601 in fiscal 1996.
The Company's interest expense increased to $105,460 in fiscal 1997 from $92,634
in fiscal 1996 as a result of higher debt in 1997 due primarily to the
construction of the Company's bagel bakeries. The Company's investment income
decreased to $18,097 in fiscal 1997 from $59,526 in fiscal 1996 primarily as a
result of fewer funds available for investment.

INCOME TAX BENEFIT. The income tax benefit for fiscal 1997 was $7,633 as
compared to $160,000 in fiscal 1996. The fiscal 1996 tax benefit recorded
reflects the amount of taxes recoverable from the carryback of losses; there was
no tax benefit recorded for the losses generated during 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 $7,025 of state and
franchise taxes paid during the year.

As of June 29, 1997, the Company has approximately $166,000 of alternative
minimum tax credit carryforwards and $2,733,000 in 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 full-service restaurant sales historically have
been the highest during the period from July through December. The Company's
bagel bakeries' highest sales have occurred during the period from September
through May.

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.

LIQUIDITY AND CAPITAL RESOURCES

At June 29, 1997, the Company had cash and cash equivalents on hand of
$454,157, which represents a decrease of $1,148,779 from the $1,602,936 in cash
and cash equivalents reported as of June 30, 1996. At June 29, 1997, the
Company had a deficit in working capital of $1,871,619 compared to a deficit in
working capital of $385,291 at June 30, 1996.

Net cash used in operating activities was $706,255 for fiscal 1997. During
fiscal 1997, the Company incurred a net loss of $2,568,778. This use of cash
was partially offset by non-cash depreciation and amortization expense of
$1,002,942 and a write-down of impaired assets of $640,286. In addition, the
Company received proceeds from an income tax receivable of $165,576.

15
<PAGE>

Net cash used in investing activities was $414,320 during fiscal 1997 which
is the net of $499,320, used primarily for purchases of equipment and leasehold
improvements for the Company's fifth bagel bakery, and $85,000 recovered on a
note receivable. The equipment and leasehold purchases for the Company's sixth
and seventh bagel bakeries were financed with loans from construction companies.

Net cash used in financing activities was $28,204 for fiscal 1997. The net
cash used in financing activities is the net of proceeds of borrowings from the
Chairman of the Board of Directors of the Company of $100,000 and borrowings of
$73,000 from a note offering commenced in June 1997, less payments of $201,204
due under other debt financing.

DFW Bagels, Inc. ("DFW"), a wholly-owned subsidiary of Ciatti's, Inc., has
entered into an exclusive Development Agreement with Bruegger's Franchise
Corporation ("Bruegger's"). This agreement, as amended in April 1997, requires
DFW to build thirty bagel bakeries by July 1, 2001. During fiscal 1996, four
bagel restaurants were built, thus meeting the initial terms of this agreement.
During fiscal 1997, three additional bagel bakeries were opened. DFW is
required to open two additional bagel bakeries by January 1, 1998. As of
October 1, 1997, DFW opened one additional bagel bakery and has entered into
lease agreements for four additional bagel bakery sites. The Company intends to
open bagel bakeries at a faster rate than that obligated under the Development
Agreement, subject to available financing. The Company believes each new site
will require approximately $370,000 for capital expenditures, including the
initial franchise fee. The Company believes that the profitability of any
individual bagel bakery often depends to a high degree on the penetration of a
particular market by the bagel bakery operator. The Company believes that
individual bagel bakeries will generally become profitable only after the
Company has opened a number of bagel bakeries 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 bakeries needed for such penetration is
between twelve and twenty. If the Company is unable to achieve this level of
penetration, its ability to achieve profitability may be affected. In addition,
if the Company is unable to obtain adequate financing to open the bagel
bakeries, it could have a material adverse effect on the Company's consolidated
financial position or results of operations.

In June 1997, the Company commenced a note offering of $2,000,000 in one
and three year notes. Through October 1, 1997, the Company has sold
approximately $196,000 in one-year notes and approximately $30,000 in three-year
notes. The notes being offered by this Prospectus are a continuation of that
offering.

On August 8, 1997, the Company filed a Registration Statement with the
Securities and Exchange Commission ("SEC") for the sale of up to 3,000,000
units, each unit consisting of one share of Common Stock and a warrant to
purchase an additional share of common stock. The Registration Statement
indicates that the units will be sold at a price of $2.25 per unit, with the
warrant exercisable at a price of $5.00 until December 31, 2001. The offering
will be made directly by the Company. The offering is being done on a minimum -
maximum basis with a minimum of $2,000,000. The Registration Statement has not
yet become effective.

During the period June 1997 through August 1997 the Company has borrowed
$400,000 from its Chairman of the Board of Directors of the Company and may
borrow additional amounts.

In September 1997, the Company sold three of its full-service restaurants
and entered into an agreement to sell a fourth restaurant. The restaurants that
were sold were located in Burnsville, Falcon Heights, and Woodbury, Minnesota,
while the restaurant that the Company has entered into an agreement to sell is
located in St. Cloud, Minnesota. The aggregate sales price of the three
restaurants that were sold in September 1997 was approximately $925,000, of
which $825,000 was paid in cash with the remaining $100,000 payable in monthly
installments over a five year period. The net book value of the equipment and
leasehold improvements as of June 29, 1997 at these three locations was
approximately $479,000.

16
<PAGE>

The Company plans to finance its working capital and capital resource needs
with its current cash, future cash generated from operations, and proceeds from
its current and future debt and equity financing. The Company has explored
several alternatives for lease financing and equipment financing for its bagel
bakeries and believes that it will be able to obtain such financing when the
Bruegger's divestiture is completed, as described below. 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 bakeries 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 and the unit 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 assurance that the Company will be
successful.

In May 1996, Bruegger's was purchased by Quality Dining, Inc. On
May 12, 1997 Quality Dining, Inc. announced that its Board of Directors approved
a plan to divest its Bruegger's bagel-related business. On September 3, 1997,
Quality Dining, Inc. entered into a share exchange agreement under which it will
sell Bruegger's to its former owners in exchange for their securities of Quality
Dining, Inc. and certain other consideration. Consummation of the transactions
is subject to the prior satisfaction of certain conditions. The Company
believes the transactions will be consummated in October 1997. "See Proposed
Sale of Bruegger's Franchise Corporation by Quality Dining, Inc."

DELISTING FROM NASDAQ SMALLCAP MARKET

FORWARD LOOKING STATEMENTS

Statements included in this Prospectus that are not historical or current
facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially. The Company's ability to succeed in the future is dependent
upon the Company's ability to achieve and maintain profitability in its existing
restaurants and, together with its subsidiary, DFW Bagels, Inc., to open
additional Bruegger's Bagel Bakery restaurants and to operate those restaurants
in a profitable manner. The Company's ability to achieve these goals will be
affected by factors such as (i) the ability of the Company to generate funds
from operations, obtain adequate restaurant financing on favorable terms and
raise a significant amount of additional working capital, (ii) the strength of
the Bruegger's name, including in the areas in which the Company is the
franchisee, (iii) the ability of the Company to locate and negotiate favorable
leases for additional locations, (iv) the ability of the Company to hire, train
and retain skilled restaurant management and personnel, and (v) the competitive
environment within the restaurant industry.

17
<PAGE>

BUSINESS

GENERAL

Ciatti's, Inc. (the "Company") owns and operates seven full-service
restaurants in Minnesota and Wisconsin. At October 1, 1997, these full-service
restaurants included six Italian restaurants operating in Minnesota and
Wisconsin under the name "Ciatti's Italian Restaurant" and one steakhouse
restaurant operating in Wisconsin under the name "Spurs Steakhouse & Saloon."
During September 1997, the Company sold three Italian restaurants and has
entered into an agreement to sell a fourth restaurant in October 1997. DFW
Bagels, Inc. ("DFW"), a wholly-owned subsidiary of the Company, has entered into
an exclusive area Development Agreement with Bruegger's Franchise Corporation
("Bruegger's") to develop bagel bakeries in the Dallas-Fort Worth area. As of
October 1, 1997, DFW is operating eight bagel bakeries in the Dallas-Fort Worth
area.

RESTAURANT DEMOGRAPHICS

FULL-SERVICE RESTAURANTS

The Company currently operates five 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. 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:
APPROXIMATE
DATE OPENED LOCATION SQUARE FOOTAGE
- --------------------------------------------------------------------------

September, 1984 Saint Paul, Minnesota 8,600
February, 1985 Madison, Wisconsin 9,800
November, 1988 Eden Prairie, Minnesota 7,800
February, 1990 Maplewood, Minnesota 7,800
November, 1990 St. Cloud, Minnesota (1) 6,700
October, 1991 Edina, Minnesota 6,500
November, 1991 LaCrosse, Wisconsin 7,100
---------------------------------
(1) The Company has entered into an agreement to sell the St. Cloud
restaurant in October 1997.

The Saint Paul restaurant is located in an urban area. The Madison, Eden
Prairie, Maplewood and Edina 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. The LaCrosse,
Wisconsin restaurant is located in a community of approximately 50,000
residents, 90 miles southeast of the Minneapolis-Saint 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 any Italian or steakhouse restaurants in recent
years and has no plans to open any additional full-service restaurants in the
future. In September 1997, the Company sold three of its full service
restaurants and entered into an agreement to sell a fourth restaurant. The
restaurants that were sold were located in Burnsville, Falcon Heights, and
Woodbury, Minnesota, while the restaurant that the Company has entered into an
agreement to sell is located in St. Cloud, Minnesota. The aggregate sales price
of the three restaurants that were sold in September 1997 was approximately
$925,000, of which $825,000 was paid in cash with the remaining $100,000 payable
in monthly installments over a five year period. The net book value of the
leasehold improvements and equipment as of June 29, 1997 at these three
locations was approximately $479,000.

18
<PAGE>

The restaurants sold are initially being operated as Ciatti's Italian
Restaurants. The new owners have the right, however, to change the name at any
time. The Company decided to sell these restaurants to focus on achieving and
maintaining profitability at its remaining full-service restaurants and to
generate cash to continue to expand the construction of Bruegger's bagel
bakeries in the Dallas-Fort Worth area. During fiscal 1997, the three
full-service restaurants that were sold by the Company in September 1997
generated approximately $5,025,000 of sales, net earnings of $53,000 and cash
flows from operations of $275,000.

BAGEL BAKERIES

As of October 1, 1997, DFW operated eight bagel bakeries in the
Dallas-Forth Worth area and has signed leases for an additional four bakeries.
Generally, these bagel bakeries range in size from 2,100 to 3,000 square feet
and seat between 45 and 50 customers. Most bagel bakeries also offer a limited
area for outdoor patio dining. As a test, the Company opened a 520 square foot
bagel bakery as part of a service station/convenience store in Irving, Texas
during the last quarter of fiscal 1997. In the future, the Company plans to
open bagel bakeries ranging in size from 1,800 to 2,200 square feet.

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

APPROXIMATE
DATE OPENED LOCATION SQUARE FOOTAGE
- --------------------------------------------------------------------------

October, 1995 Plano (Lancer's Square) 3,000
December, 1995 Plano (Shepard Place) 2,250
February, 1996 Dallas (Preston Center) 2,500
June, 1996 Fort Worth (Bowie) 2,130
November, 1996 Dallas (Preston Campbell) 2,200
April, 1997 Irving (Valley Ranch) 520
June, 1997 Fort Worth (Fossil Creek) 2,100
August, 1997 University Park (Southern 2,300
Methodist University)

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 1997, food sales comprised approximately 77% and beverage sales
comprised approximately 23% of total full-service sales.

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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 midnight (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

The Company's Madison, Wisconsin Spurs Steakhouse & Saloon 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 appetizers. Prices at the steakhouse restaurant
range from $4.99 to $17.95 and the hours of operation are similar to those of
the Company's Italian restaurants.

BAGEL BAKERIES

The Company's bagel bakeries specialize in 12 varieties of freshly baked
bagels and branded cream cheeses, as well as 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
bakery offers deli-style bagel sandwiches, freshly-made soups, and other food
and beverage items. The bagel bakeries 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 layout of the Company's bagel bakeries are based on
plans and guidelines issued by Bruegger's. Bruegger's updated its plans and
designs for all bagel bakeries in 1995 and all of the Company's existing bagel
bakeries 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 AND BAKERY 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.

The Company's President supervises the operations of all restaurants with
the assistance of a Director of Operations for the bagel bakeries.
Additionally, a Vice President for Administration, a Corporate Controller 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.

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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.

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 and bakery 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

The Company has entered into an exclusive Development Agreement with
Bruegger's. Bruegger's was acquired in May 1996 by Quality Dining, Inc. As of
May 11, 1997, Bruegger's, directly or through franchises, operated in 52
metropolitan markets in 32 states. In September 1997, Quality Dining, Inc.
entered into a share exchange agreement under which it will sell Bruegger's
Franchise Corporation back to its former owners. The Company believes the
transaction will be completed during October 1997. See "Proposed Sale of
Bruegger's Franchise Corporation by 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 June 30, 1997, there were 475 bagel
bakeries open for business, owned and operated by either Bruegger's or by
franchisees. 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 bakeries. 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
agreement, the Company is required to build thirty bagel bakeries 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. As of October 1, 1997, six bagel bakeries
have been opened in the north-central portion of the Dallas area, and two were
opened in the Fort Worth area.

The ability of the Company to open additional bagel bakeries 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 opening a new bagel bakery is approximately $370,000. The cost
of leasehold improvements for the existing bakeries has averaged $175,000 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
averaged $150,000 for each bakery. Other pre-opening expenses, including design
services, smallwares, training, and initial inventory is $45,000 for each
bakery, including the initial franchise fee.

<PAGE>

RELATIONSHIP WITH BRUEGGER'S AND QUALITY DINING, INC.

The development by DFW of bagel bakeries is based upon franchise documents
entered into between DFW and Bruegger's. The principal documents are a
Development Agreement dated as of January 1, 1995 and amended on April 23, 1997
and franchise agreements pertaining to each existing bagel bakery. In September
1997, Quality Dining, Inc. entered into a share exchange agreement under which
it will sell Bruegger's Franchise Corporation back to its former owners. The
Company believes the transaction will be completed during October 1997. See
"Proposed Sale of Bruegger's Franchise Corporation by Quality Dining, Inc."

The Development Agreement, as amended, gives DFW the right to construct,
own and operate bagel bakeries 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 DFW the
exclusive right and obligation to develop thirty bagel bakeries within the
Development Area by July 1, 2001 on the following schedule:

Minimum number
of bagel bakeries
DFW must have in
Deadline operation by deadline
-------------------------------------------------------------
July 1, 1996 4
January 1, 1998 9
October 1, 1998 14
July 1, 1999 19
July 1, 2000 24
July 1, 2001 30

DFW is to choose the sites for the bagel bakeries 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 DFW 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 DFW 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 renewed in one year increments after the
initial term if DFW continues opening bagel bakeries at the rate of three per
year. After five years of renewals, however, DFW is obligated to open only one
bagel bakery per year.

The Development Agreement gives DFW the exclusive right to operate bagel
bakeries 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 DFW has a
right to act as distributor.

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

The Development Agreement provides that DFW and Bruegger's will enter into
a predetermined franchise agreement for each bagel bakery opened by DFW. Each
franchise agreement grants DFW the right to establish and operate the particular
bagel bakery 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
bakeries. Under the terms of the franchise agreement, Bruegger's agrees to
provide DFW 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 DFW operates a bagel bakery within such area it
must immediately become a member of the Coop. DFW's duties under the franchise
agreement include constructing bagel bakeries at its own expense from
pre-approved plans and sending new managers to Bruegger's training program.

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DFW also agrees that its bagel bakeries 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, DFW is obligated to pay certain franchise and other fees to
Bruegger's. Each franchise agreement has a term of twenty years and may be
renewed in ten year increments. If DFW chooses to renew, the terms of the
franchise agreement will change to whatever terms are being offered new
franchisees at the time of renewal.

As a result of a dispute between the Company and Bruegger's with respect to
whether Bruegger's had the right to consent to issuances of securities by
Ciatti's and a right of first refusal to purchase securities of Ciatti's, the
Company commenced litigation against Quality Dining and Bruegger's in November
1996 in United States District Court for the District of Minnesota. Quality
Dining and Bruegger's counterclaimed and the parties conducted discovery. In
April 1997, in connection with the settlement of the lawsuit, Ciatti's and
Bruegger's entered into a Settlement Agreement. 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 bakeries under the
Development Agreement, and under certain circumstances the Company needs the
consent of Bruegger's to issue securities and under certain circumstances
Bruegger's has a right of first refusal with respect to the Company's
securities.

PROPOSED SALE OF BRUEGGER'S FRANCHISE CORPORATION BY QUALITY DINING, INC.

In September 1997, Quality Dining, Inc. entered into a share exchange
agreement under which it agreed to sell Bruegger's Franchise Corporation back to
its former owners. Although the Company is unable to determine the effect of
the sale upon it, the Company believes completion of this transaction will
remove some of the uncertainty surrounding the status of Bruegger's in the bagel
market place and may facilitate the Company's ability to expand and achieve
profitability in the Dallas-Fort Worth market. The Company expects this
transaction to close at the end of October 1997. A number of the other
franchisees of Bruegger's have sued Quality Dining, Inc., however, seeking to
prevent the sale of Bruegger's by Quality Dining, Inc. to its former owners.
The Company does not know what the effect, if any, these lawsuits will have on
the proposed sale of Bruegger's by Quality Dining, Inc., or what impact, if any,
these lawsuits will have on the Company.

RELIANCE ON COMMISSARY OF THIRD PARTY

Currently, the Company obtains its shaped bagel dough, as well as other
food supplies from a commissary owned by Quality Dining, Inc. 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 bakeries, which the Company
expects to occur in fiscal 1998, subject to available financing. While the
current arrangement represents the most cost effective way of obtaining bagel
dough and other supplies, the closing of the commissary or the inability of the
Company to receive its supplies from the commissary, would have a severe and
immediate impact on the continuation of the Company's business in the
Dallas-Fort Worth area.

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 full-service restaurant sales historically have been the
highest during the period from July through December. The Company's bagel
bakeries' highest sales have occurred during the period from September through
May.

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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 bakeries, 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 Development Area as well as are 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 2.75% of its projected fiscal 1998
full-service restaurant sales for advertising. Under the terms of the franchise
agreements with Bruegger's, the Company is required to spend approximately 4% 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 bakeries currently existing in the franchise area, the majority
of the Company's efforts in this respect are directed to local store marketing
and direct mail. As part of its efforts to increase sales of its bagel
bakeries, the Company intends to spend between 4% and 5% of bagel bakery sales
for advertising in the near future. Television, radio or other wide coverage
advertising could 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
or bakeries. In some instances the Company may have to obtain zoning variances
and land use permits for its new restaurants or bakeries. 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.

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<PAGE>

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. Although the Company implemented a
menu-price increase at its full-service restaurants effective October 1, 1997 to
offset the September 1, 1997 minimum wage increase, 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
Franchise Corporation. Under the terms of the Development Agreement, DFW has
the right to use all trademarks associated with the Bruegger's bagels franchise
in connection with the operation of bagel bakeries in the Dallas-Fort Worth
area.

EMPLOYEES

As of October 1, 1997, the Company employed approximately 854 persons,
including 7 corporate employees, 52 restaurant and bakery managers and assistant
managers, and 795 hourly restaurant and bakery 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 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 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 bakeries 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.

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LEGAL PROCEEDINGS

The Company is not subject to any pending legal proceedings.

CERTAIN TRANSACTIONS

In order to finance certain working capital requirements, during the period
of June 1997 through August 1997, the Company has borrowed $400,000 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. The Company believes that the terms of the
transactions with Mr. Danford were no less favorable to the Company than had
they been obtained from an unaffiliated third party for similar transactions.
All future material affiliated transactions and loans will be made or entered
into on terms that are no less favorable to the Company than those that can be
obtained from unaffiliated parties. In addition, all future material affiliated
transactions and loans will be approved by a majority of the Company's
independent directors who do not have an interest in the transactions.

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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 $1,750,000 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 form 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 11.00% for One-Year Notes and 12.00% 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 August 31, 1997,
the Company's $1,849,706 of Senior Indebtedness includes (i) $203,690 of an
11.5% note payable to a financial institution due

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in monthly installments through December 2000, (ii) $306,581 of 10.5% notes
payable to a financial institution due in monthly installments May 2001, (iii)
$372,935 of amounts due under a capital lease through January 2005, (iv)
$400,000 of a 10.5% promissory note to an affiliate of the Company due in four
installments through June 1998 and (v) $566,500 in prime plus 3% notes payable
to a construction company due in 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.

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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." 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.

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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 29, 1997, 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 DFW 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 DFW under any agreement between Ciatti's or DFW
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 DFW under such agreements.

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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.

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TABLE OF CONTENTS

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Page
----
Available Information. . . . . . . . . . . . . . . . . . . . . . . . . 2
Incorporation of Certain Documents by
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Ratio of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . . 11
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . 26
Description of Notes and Terms of Offering . . . . . . . . . . . . . . 27
Certain Federal Income Tax Consequences. . . . . . . . . . . . . . . . 29
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . 29
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

$1,750,000
PRINCIPAL AMOUNT

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CIATTI'S, INC.

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PROSPECTUS
OCTOBER 17, 1997

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