Panera Bread 2003 Annual Report Download - page 40

PANERA BREAD COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
Income Taxes
The provision for income taxes is determined in accordance with the provisions of SFAS No. 109,
""Accounting for Income Taxes.'' Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to diÅerences between the Ñnancial statement carrying amounts of
existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured
using enacted income tax rates expected to apply to taxable income in the years in which those temporary
diÅerences are expected to be recovered or settled. Any eÅect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the enactment date.
The Company has recorded a valuation allowance to reduce its deferred tax assets, due principally to
capital loss carryforwards on the sale of the Au Bon Pain Division and charitable contribution carryforwards
that it may not be able to utilize prior to their expiration. The Company's recorded net deferred tax assets are
limited by the underlying tax beneÑts that it expects to ultimately realize.
Capitalization of Certain Development Costs
The Company capitalizes certain internal costs associated with the development, design, and construction
of new bakery-cafe locations and fresh dough facilities. Capitalized costs of $1.9 million, $1.4 million, and
$1.1 million for the Ñscal years ended December 27, 2003, December 28, 2002, and December 29, 2001,
respectively, are recorded as part of the asset to which they relate and are amortized over the asset's useful life.
Franchise Royalties and Fees and Revenue Recognition
Franchise fees are the result of the sale 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 the 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 opening of the bakery-cafe. Franchise fees were $3.3 million,
$3.2 million and $2.7 million for the years ended December 27, 2003, December 28, 2002, and December 29,
2001, respectively. Royalties are paid weekly based on the percentage of sales speciÑed in each ADA (from
4.0% to 5.0% of sales). Royalties are recognized as revenue when they are earned. Royalties were
$32.9 million, $24.7 million, and $16.8 million for the years ended December 27, 2003, December 28, 2002,
and December 29, 2001, respectively.
The Company records revenue from bakery-cafe sales upon delivery of the related food and other
products to the customer. Revenue from fresh dough sales to franchisees is recorded upon delivery.
Advertising Costs
Franchised bakery-cafes contribute to the Company 0.4% of sales to a national advertising fund and 0.4%
of sales as a marketing administration fee and are required to spend 2.0% of sales in their local markets on
advertising. The Company contributes similar amounts from Company-owned bakery-cafes towards the
national advertising fund and marketing administration fee. The national advertising fund and marketing
administration fee contributions received from franchised bakery-cafes are consolidated with Company
amounts in the Company's Ñnancial statements. Liabilities for unexpended funds are included in accrued
expenses in the consolidated balance sheets. The Company's contributions to the national advertising fund and
marketing administration fee as well as its own media costs are recorded as part of other operating expenses in
the consolidated statements of operations.
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