3. Restaurant Impairment and Restaurant Closures

Restaurant Impairment

        During 2011, the Company determined that three Company-owned restaurants were impaired. The Company recognized a non-cash pre-tax impairment charge of $4.3 million resulting from the continuing and projected future results of these restaurants, primarily through projected cash flows. We reviewed each restaurant's past and present operating performance combined with projected future results, primarily through projected undiscounted cash flows, which indicated possible impairment. The Company compared the carrying amount of each restaurant's assets to its fair value as estimated by management. The fair value of the long-lived assets was determined using a discounted cash flows projection model that uses several scenarios that estimate expected future cash flows. The discount factor was determined using external information regarding the risk-free rate of return, industry beta factors, and premium adjustments. These factors were combined with internal information such as the Company's average cost of debt and effective tax rate to determine a weighted average cost of capital which was applied to the undiscounted cash flows. The impairment charges represent the excess of each restaurant's carrying amount over its estimated fair value. During 2010, we determined that the long lived assets of four Company-owned restaurants were impaired, and the Company recognized a non-cash pre-tax impairment charge of $6.1 million resulting from the continuing and projected losses of these restaurants. There were no such impairments in 2009.

Restaurant Closures

        The Company did not close any restaurants in the fiscal year 2011. The Company closed three restaurants in the fiscal year 2010. Two closed locations were at the end of their lease term and management did not believe the other location would provide acceptable returns in the foreseeable future. There was no associated amount of goodwill to write off in connection with these closures. The Company incurred $856,000 in expenses related to these restaurant closures for fiscal year 2010.

        The Company closed four restaurants in the first quarter of 2009. This decision was the result of an initiative to identify restaurants that are in declining trade areas, performing below acceptable profitability levels and/or require significant capital expenditures. The locations closed in 2009 represented older restaurants whose leases were not extended or were in need of significant capital improvements that were not projected to provide acceptable returns in the foreseeable future. We evaluated the 2009 restaurant closures and determined there was no associated amount of goodwill to write-off in connection with these closures. The Company recognized additional charges of $562,000 during 2009 related to lease terminations and other closing related costs.