Panera Bread 2003 Annual Report Download - page 26

Net Income
Net income for the Ñfty-two weeks ended December 28, 2002 increased $8.6 million or 65.2% to
$21.8 million or $0.73 per diluted share compared to net income of $13.2 million or $0.46 per diluted share for
the Ñfty-two weeks ended December 29, 2001. The increase in net income in 2002 was primarily due to an
increase in bakery-cafe sales, franchise royalties and fees, fresh dough facility sales to franchisees as well as
the leveraging of general and administrative and depreciation and amortization expenses.
Critical Accounting Policies & Estimates
The Consolidated Financial Statements and Notes to the Consolidated Financial Statements contain
information that is pertinent to management's discussion and analysis. The preparation of Ñnancial statements
in conformity with accounting principles generally accepted in the United States requires management to
make estimates and assumptions that aÅect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities. The Company believes the following critical accounting policies involve
additional management judgment due to the sensitivity of the methods, assumptions, and estimates necessary
in determining the related asset and liability amounts.
The Company recognizes revenue upon delivery of product or performance of services as follows. Bakery-
cafe sales are recorded upon delivery of food and other products to a customer. In addition, fresh dough sales
to franchisees are recorded upon delivery of fresh dough to franchisees. Also, franchise fees are the result of
sales of area development rights and the sale of individual franchise locations to third parties. The initial
franchise fee is $35,000 per bakery-cafe to be developed under the Area Development Agreement (ADA). Of
this fee, $5,000 is paid at the time of signing of the ADA and is recognized as revenue when it is received as it
is non-refundable and the Company has to perform no other service to earn this fee. The remaining $30,000 is
paid at the time an individual franchise agreement is signed and is recognized as revenue upon the
commencement of franchise operations of the bakery-cafes. Royalties are paid weekly based on a percentage
of sales, ranging from 4.0% to 5.0%, as deÑned in the agreement. Royalties are recognized as revenue when
they are earned.
The Company has recorded a valuation allowance to reduce its deferred tax asset arising from capital loss
carryforwards on the sale of the Au Bon Pain Division and charitable contribution carryforwards which it may
not be able to utilize prior to their expiration. The Company's recorded net deferred tax asset is limited by the
underlying tax beneÑt that it expects to ultimately realize. An adjustment to income could be required if the
Company were to determine that it could realize tax beneÑts in amounts greater or less than the amounts
previously recorded.
Intangible assets consist of goodwill arising from the excess of cost over the fair value of net assets
acquired. Annually, and whenever an event or circumstance indicates it is more likely than not the Company's
goodwill has been impaired, management assesses the carrying value of its recorded goodwill. The Company
performs its impairment assessment by comparing discounted cash Öows from acquired businesses with the
carrying value of the underlying net assets inclusive of goodwill. In performing this analysis, management
considers such factors as current results, trends, future prospects and other economic factors. No event has
been identiÑed indicating an impairment in the value of the Company's intangible assets.
We are self-insured for a signiÑcant portion of our workers' compensation and general, auto, and property
liability insurance. We utilize third party actuarial experts' estimates of expected losses based on statistical
analyses of historical industry data as well as our own estimates based on our actual historical data to
determine required insurance reserves. These assumptions are closely reviewed, monitored, and adjusted when
warranted by changing circumstances. Actual experience related to number of claims and cost per claim could
be more or less favorable than estimated resulting in expense reduction or increase.
Other Commitments
The Company is obligated under non-cancelable operating leases for its administrative oÇces, fresh
dough facilities, and bakery-cafes. Lease terms are generally for ten years with renewal options at most
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