Kettle Restaurants, Inc.
Feb. 18, 1989

INQUIRY LETTER 1

VINSON & ELKINS

3300 FIRST CITY TOWER, 1001 FANNIN

HOUSTON, TEXAS 77002-6760

TELEPHONE(713) 651-2222

July 25, 1988

Securities Exchange Act of

Rule 14d-6(e)(1)(iii)

Mr. David A. Sirignano

Chief, Office of Tender Offers

Division of Corporation Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Dear Mr. Sirignano:

As a result of a recent telephone conversation with Mr. Richard Baltz of your Staff, I am writing this letter to describe a "Dutch auction" tender offer (the "Offer") proposed to be commenced pursuant to Section 14(d) of the Securities Exchange Act of 1934 by an employee stock ownership plan (the "Plan") of an issuer (the "Company") for outstanding common stock of the Company (the "Shares"), and to request that the Division of Corporation Finance confirm that, in the Staffs view, the features of the Offer described in this letter comply with Rule 14d-6(e)(1)(iii) under the Securities Exchange Act of 1934, or, alternatively, that the Division determine that it would not take enforcement action under such Rule if the Plan were to conduct the Offer as described in this letter.

BACKGROUND

The Company is privately held and has approximately 75 holders of record of the Shares, which are the only equity securities of the Company outstanding. Substantially all persons who are beneficial owners of Shares not held of record in their names are the members of the Plan who have Shares allocated to their accounts under the Plan. There is no public trading market for the Shares, and no market quotations are available. In connection with a public offering of debt securities, the Company agreed with its underwriters to voluntarily register its Shares under Section 12(g) of the Exchange Act and, as a result, the Company has been subject to the informational filing requirements of the Exchange Act for several years. Because the Company agreed to keep its Shares registered under Section 12(g) of the Exchange Act as long as its public debt was outstanding, the Offer will not affect the Companys informational filing requirements.

The Plan is a noncontributory, defined contribution profit sharing plan which can invest contributions in Shares. Under the terms of the Plan, contributions are made by the Company to the trust fund under the Plan in the form of cash or Shares. The Plan is a "qualified plan" under section 401(a) of the Internal Revenue Code of 1986 (the "Code") and is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The Plan provides for payment of the employees vested portion of the plan assets upon retirement, termination, disability or death. A bank serves as Trustee of the Plan and the Administrative Committee of the Plan is comprised of an officer/director, an officer and an employee of the Company. Prior to the commencement of the proposed Offer described below, the Plan would be converted to an employee stock ownership plan, within the meaning of section 4975(e)(7) of the Code.

Although the Plan generally provides that members of the Plan may direct the Trustee to tender, exchange or withdraw Shares allocated to a members account under the Plan in connection with tender offers or exchange offers, the Offer would be excluded from that group of tender or exchange offers pursuant to which members could so direct the Trustee, and it is anticipated that the Trustee would not tender in the Offer any of the Shares owned by the Plan.

The Proposed Offer

The Plan proposes to offer to purchase for cash up to a fixed number of outstanding Shares (which number has not yet been determined, but could be a significant percentage of outstanding securities, in the range of 30-35%). Shareholders will be invited to tender Shares at prices specified by such shareholders, up to a maximum of the most recent appraised fair market value per Share. ¹ The Plan will then select a single per Share purchase price (not in excess of such most recent appraised fair market value per Share) that will enable it to purchase such fixed number of Shares (or such lesser number of Shares as are properly tendered and not withdrawn at prices not in excess of such most recent appraised fair market value per Share). In the event of an oversubscription of the Offer, the Plan will purchase properly tendered Shares on a pro-rata basis (pro-rating across all tendering shareholders who have tendered at or below the single purchase price to be paid by the Plan). Shares tendered at prices in excess of the single purchase price and Shares not purchased because of proration will be returned to shareholders. It is anticipated that the Offer (the size of which is anticipated not to exceed approximately $5 million) will be financed by an exempt loan pursuant to section 4975(d) of the Code, which loan will be repaid principally from future cash contributions from the Company to the Plan.

The Plan desires to conduct the Offer as a Dutch auction tender offer because of the requirements of Section 408(e) of ERISA and sections 401(a)(28)(c) and 4975 of the Code that the Plan purchase Shares at a price which is not in excess of the fair market value of such Shares at the time of purchase. There are no market quotations for the Shares, and thus there is generally no method to precisely determine their fair market value. However, the Dutch auction process provides an ideal mechanism for determining the fair market value of the Shares purchased by the Plan in the absence of market quotations. Fair market value has frequently been defined as the price at which stock will change hands between a willing seller, under no compunction to sell, and a willing buyer, under no compunction to buy, both being informed of all the material facts pertaining to the corporation which would have an influence on the value. In a Dutch auction tender offer made for the Shares of the Company (which is subject to the informational filing requirements of the Exchange Act), the purchase price paid by the Plan will be, by definition, the fair market value. As a result, the Plan can be reasonably confident that it will have purchased Shares at a price not greater than the fair market value of the Shares.

Request

We believe that the proposed Offer does not implicate any of the normal policy concerns with respect to Dutch auction tender offers by non-issuers, and that the desirability of using a Dutch auction tender offer by an employee stock ownership plan in the absence of a public market, the unusual situation of a tender offer for the voluntarily registered, non-traded equity securities of a Company with approximately 75 holders of record, the relatively small size of the proposed transaction, and the protection of shareholders already provided by Sections 10(b) and 14(e) of the Exchange Act, argue for the permissibility of the proposed Offer.

I would appreciate your confirming that, in the Staffs view, the features of the Offer described in this letter comply with Rule 14d-6(e)(1)(iii) or, alternatively, that the Division of Corporation Finance would not recommend that the Commission take enforcement action under such Rule if the Plan were to conduct the Offer as described in this letter.

If you have any questions or comments concerning this letter, please call me at (713) 750-1118. I would appreciate having the opportunity to discuss this request orally with the Staff prior to receipt of a written response.

Very truly yours,

Jeffery A. Smisek

INQUIRY LETTER 2

VINSON & ELKINS

3300 FIRST CITY TOWER, 1001 FANNIN

HOUSTON, TEXAS 77002-6760

TELEPHONE(713) 651-2222

August 25, 1988

Mr. Richard Baltz

Office of Tender Offers

Division of Corporation Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Dear Mr. Baltz:

This letter is in response to your telephone call to me last week concerning the letter I wrote to Mr. David Sirignano dated July 25, 1988 relating to a proposed Dutch Auction tender offer proposed to be commenced by an employee stock ownership plan. Capitalized terms used but not defined herein have the meanings set forth in my earlier letter.

In response to your question as to whether I was aware of any other tender offer commenced solely by an employee stock ownership plan, I have only been able to locate reference to a possible tender offer by an employee stock ownership plan of Lowes Companies, Inc. mentioned in a no-action request dealing with other matters (Lowes Companies, Inc. letter dated October 25, 1979). I do not know if the proposed offer was actually commenced.

In response to your request for a copy of the Plan, enclosed please find the copy you requested. Please note that, as mentioned in my letter of July 25, 1988, prior to the commencement of the proposed Offer described therein, the Plan would be converted to an employee stock ownership plan, within the meaning of section 4975 (e)(7) of the Code.

Regarding your question of pass through of voting rights and tender rights under the Plan, please see Section 13.11 of the Plan as added to the Plan pursuant to the Fifth Amendment to the Plan enclosed herewith. As we discussed by telephone, it is intended that the Plan be amended such that the Offer would be excluded from that group of tender or exchange offers pursuant to which members could direct the Trustee to tender, exchange or withdraw Shares allocated to a members account under the Plan.

With respect to your question as to whether the Trustee would itself make the decision to commence the Offer or whether the Administrative Committee of the Plan would direct the Trustee to commence the Offer, it is my understanding that the Company has not yet discussed this issue with the Trustee. However, irrespective of whether the Trustee formally makes the decision to commence the Offer or whether the Trustee acts upon the direction of the Administrative Committee, the fiduciary making such investment decision will be subject to the statutory standard of conduct by which a fiduciarys action will be measured under Section 404(a)(1) of ERISA. In general, such standard requires a fiduciary to discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries and

(A) for the exclusive purpose of:

(i) providing benefits to participants and their beneficiaries; and

(ii) defraying reasonable expenses of administering the plan;

(B) with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims;

(C) by diversifying the investments of the plan so as to minimize the risk of large losses, unless under the circumstance it is clearly prudent not to do so; and

(D) in accordance with the documents and instruments governing the plan insofar as such documents and instruments are consistent with the provisions of ERISA.

In the case of an eligible individual account plan (such as the plan), the diversification requirement of paragraph (C) and the prudence requirement (only to the extent that it requires diversification) of paragraph (B) above is not violated by acquisition or holding of qualifying employer real property or qualifying employer securities (such as the Common Stock of the Company).

In the case of employee stock ownership plan exempt loan transactions such as those contemplated by the proposed Offer, such standard is "heightened" pursuant to applicable regulations issued jointly by the Internal Revenue Service and the Department of Labor on August 30, 1977, in that the Internal Revenue Service will subject exempt loan transactions to special scrutiny to insure that they are primarily for the benefit of participants and their beneficiaries. The Internal Revenue Service has stated that although the transactions need not be arranged and approved by an independent fiduciary, fiduciaries are cautioned to exercise scrupulously their discretion in approving such transactions. 29 C.F.R. §2550.408b-3(b)(2); Treas, Reg. §54.4975-7(b)(2)(ii).

Generally speaking, a fiduciary of a plan which is subject to ERISA is responsible for only the duties allocated to such fiduciary. However, a fiduciary (such as the Trustee) has certain responsibilities with respect to the conduct of a co-fiduciary (such as the Administrative Committee) in the sense that a fiduciary may be liable for breach of fiduciary duty committed by his co-fiduciary if he participates in or undertakes to conceal a breach by his co-fiduciary, if he has enabled a co-fiduciary to commit a breach by his own failure to comply with his own responsibilities or if he has knowledge of a breach by his co-fiduciary and fails to make reasonable efforts to remedy the breach. Finally, Section 403 of ERISA requires that the trustee of a plan have exclusive authority and discretion to manage and control the assets of the plan unless the plan expressly provides that the trustee is subject to the direction of a named fiduciary who is not a trustee. Under such circumstances, however, the trustee is not completely relieved from all fiduciary responsibility with respect to directions issued by such fiduciary, but will continue to have the responsibility of monitoring such directions to determine if they are "proper" directions which are made in accordance with the terms of the plan and which are not contrary to the provisions of ERISA (including the fiduciary responsibility provisions of ERISA described above).

Regarding your question as to whether the independent appraisal procedure which the Company and the Plan have used in the past in connection with purchases and sales of relatively small amounts of Shares is in compliance with applicable Department of Labor requirements, until the Tax Reform Act of 1976, there was no requirement that the fiduciaries of an employee stock ownership plan retain the services of an independent appraiser for purposes of valuing employer securities to be purchased by that plan or for the purpose of valuing such securities with respect to ongoing transactions (e.g., distributions to participants, repurchases from participants, etc.) arising in the ordinary course of the operation of the Plan. However, applicable regulations issued by the Internal Revenue Service strongly recommended that the fiduciaries of an employee stock ownership plan retain the services of an independent appraiser for such purposes. Treas. Reg. §54.4975-11(d)(5).

As a result of legislation enacted as a part of the Tax Reform Act of 1986, as amended, section 401(a)(28)(C) of the Internal Revenue Code of 1986 now requires that employee stock ownership plans which invest in employer securities that are not readily tradeable on an established securities market must be made by an independent appraiser and incorporates by reference the definition of "independent appraiser" as described in the provisions under the regulations issued pursuant to section 170(a)(1) of the Code (which section relates to deductions for charitable contributions). Accordingly, the fiduciaries of an employee stock ownership plan will be required to secure the services of such an independent appraiser and, to satisfy statutory requirements, the independent appraiser must meet the specifications described in the regulations issued pursuant to section 170(a)(1). In proposed regulations issued on May 17, 1988 (relating to the definition of "adequate consideration" for purposes of ERISAS fiduciary standards and the special rules regarding stock transactions between plans and related parties), the Department of Labor took the position that a fiduciary will not be viewed as having acted in good faith with respect to a securities evaluation determination unless the fiduciary making the evaluation either is independent of all parties to the transaction (other than the Plan) or relies on the report of an appraiser who is independent of all parties to the Plan. For purposes of determining whether an appraiser is "independent", the Department of Labor set forth a "relevant facts and circumstances test" and identified certain relationships which would result in an appraiser not being considered to be independent.

If you have any further questions or comments, please do not hesitate to call me at (713) 750-1116. Your early response would be greatly appreciated.

Sincerely,

Jeffery A. Suisek

Enclosure

cc: William G. Lee Firm

Carol H. Jewett Firm

INQUIRY LETTER 3

VINSON & ELKINS

3300 FIRST CITY TOWER, 1001 FANNIN

HOUSTON, TEXAS 77002-6760

TELEPHONE(713) 651-2222

September 13, 1988

Mr. Richard Baltz

Office of Tender Offers

Division of Corporation Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Re: Kettle Restaurants, Inc.

Employee Stock Ownership Plan

Dear Mr. Baltz:

This letter is in response to our recent telephone conversation concerning the letters I wrote to Mr. David Sirignano dated July 25, 1988 and to you dated August 25, 1988, relating to a proposed Dutch Auction tender offer proposed to be commenced by an employee stock ownership plan. The "Company" referred to in those letters is Kettle Restaurants, Inc., a Texas corporation, and the "Plan" referred to in such letters is the Kettle Restaurants, Inc. Employees Stock Ownership Plan.

I understand that, with the above information, your office will be able to respond to the request for a no-action letter contained in such letters.

I also request, pursuant to Reg. 200.81(b), that such letters, this letter and your offices response be accorded confidential treatment for 120 days from the date of such response, in order to allow the Plan and the Company sufficient time to finance and document the proposed offer prior to public disclosure of such response.

If you have any further questions, please do not hesitate to call me at (713) 750-1118.

Sincerely

Jeffery A. Smisek

Enclosure

cc: Ms. Katharine Crain

Mr. Doyle Smith

Kettle Restaurants, Inc.

Mr. William G. Lee Firm

INQUIRY LETTER 4

VINSON & ELKINS

3300 FIRST CITY TOWER, 1001 FANNIN

HOUSTON, TEXAS 77002-6760

TELEPHONE(713) 651-2222

September 19, 1988

Mr. Richard Baltz

Office of Tender Offers

Division of Corporation Finance

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Dear Mr. Baltz:

This letter is in response to your telephone call to me today relating to the proposed Dutch Auction tender offer proposed to be commenced by the Kettle Restaurants, Inc. Employees Stock Ownership Plan. This letter will confirm that Kettle Restaurants, Inc., under the terms of its indenture relating to its outstanding Subordinated Debentures, may not currently purchase the Shares which are proposed to be purchased by the Employees Stock Ownership Plan pursuant to the proposed Dutch Auction tender offer.

If you have any further questions, please give me a call at (713) 750-1118.

Sincerely,

Jeffery A. Smisek

cc: Ms. Katharine Crain Kettle

Mr. Doyle Smith Kettle

William G. Lee Firm

STAFF REPLY LETTER

OCT 21 1988

RESPONSE OF THE OFFICE OF TENDER OFFERS

DIVISION OF CORPORATION FINANCE

Re: Kettle Restaurants, Inc.

Employee Stock Ownership Plan ("Plan")

Kettle Restaurants, Inc. ("Company")

Incoming letters dated July 25, August 25, September 13 and September 19, 1988

Traditionally, the Division has not permitted dutch auction tender offers by third party bidders. However, on the basis of the facts presented, the Division will not recommend any enforcement action if the Plan were to conduct a dutch auction tender offer. Specifically, the Division notes your representations that (i) the Company would make such an offer if it were not prohibited from doing so under the terms of the indenture relating to its debentures, (ii) the Company only has approximately 75 holders of record of its common stock and (iii) the Plan desires to purchase the shares at a price which is not in excess of the fair market value, but such value cannot be established by a trading market.

Because this position is based upon the representations made to the staff in your letters, it should be noted that any different facts or conditions might require a different conclusion. Further, this letter only expresses the Divisions position on enforcement action and does not purport to express any legal conclusion on the questions presented.

Your request for confidential treatment pursuant to Rule 81(b) is granted for 90 days beyond the time specified in Rule 81(a), unless the tender offer is commenced at an earlier date.

Sincerely,

David A. Sirignano, Chief

Office of Tender Offers

SEC_CODE_REF_0090001192884