3. Restaurant Impairment and Restaurant Closures

Restaurant Impairment

        There were no restaurant impairments during 2012. 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. Each restaurant's past and present operating performance were reviewed 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, the Company determined that the long lived assets of four Company-owned restaurants were impaired, and recognized a non-cash pre-tax impairment charge of $6.1 million resulting from the continuing and projected losses of these restaurants.

Restaurant Closures

        The Company closed three restaurants in the fiscal year 2012, no restaurants in fiscal year 2011, and three restaurants in 2010. In 2012 and 2010, one restaurant operating below acceptable profitability levels was closed in each fiscal year. In both 2012 and 2010, two restaurants were closed at the end of their respective lease terms.

        The Company evaluates restaurants that are sold or closed and allocates goodwill based on the relative fair value of the disposal restaurants to the Company's reporting unit. Since restaurant operations are typically valued based on cash flow from operations, the Company compares the historical cash flow from the closed restaurants to the cash flow from the reporting unit to determine the relative value. The Company allocates goodwill to disposed restaurants, if necessary. No goodwill was allocated to the restaurants closed in fiscal years 2012 or 2010 because those restaurants had projected negative cash flow and consequently did not have positive fair value.