Panera Bread 2004 Annual Report Download - page 42

Revenue Recognition
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 also recorded upon delivery.
The Company records a liability in the period in which a gift card is issued and proceeds are received. As gift cards are redeemed,
this liability is reduced and revenue is recognized as a sale.
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 $3.2 million, $3.3 million and $3.2
million for the years ended December 25, 2004, December 27, 2003, and December 28, 2002, respectively. Royalties are paid weekly
based on the percentage of sales specified in each ADA (from 4.0% to 5.0% of sales). Royalties are recognized as revenue when they
are earned. Royalties were $41.2 million, $32.9 million, and $24.7 million for the fiscal years ended December 25, 2004, December
27, 2003, and December 28, 2002, respectively.
Advertising Costs
Franchised bakery-cafes contribute to the Company 0.4% of their sales to a national advertising fund and 0.4% of their sales as a
marketing administration fee and are required to spend 2.0% of their 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.
The national advertising fund and marketing administration contributions received from franchised bakery-cafes are consolidated with
Company amounts in the Company’s financial 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 as well as its
own media costs are recorded as part of other operating expenses in the Company’s consolidated statements of operations.
The Company’s policy is to record advertising costs as expense in the period in which the cost is incurred. The total amounts
recorded as advertising expense were $9.2 million, $7.5 million, and $5.4 million for the years ended December 25, 2004, December
27, 2003, and December 28, 2002, respectively.
Pre-Opening Costs
All pre-opening costs directly associated with the opening of new bakery-cafe locations, which consists primarily of labor and
food costs incurred during in-store training and preparation for opening, exclusive of manager training costs which are included in
other operating expenses, are expensed when incurred. Direct costs to open bakery-cafes amounted to $2.6 million, $1.5 million and
$1.1 million in 2004, 2003, and 2002, respectively.
Rent Expense
The Company recognizes rent expense on a straight-line basis over the reasonably assured lease term as defined in SFAS 98,
“Accounting for Leases.” The lease term on most bakery-cafe leases is the initial non- cancelable lease term plus one renewal option
period, which generally equates to 15 years. The lease term on most fresh dough facility leases is the initial non-cancelable lease term
plus two to three renewal option periods, which generally ranges from 15 years to 20 years. In addition, certain of the Company’s
lease agreements provide for scheduled rent increases during the lease terms or for rental payments commencing at a date other than
the date of initial occupancy. The Company includes any rent escalations and construction period and other rent holidays in its
determination of straight-line rent expense.
The Company records landlord allowances for normal tenant improvements as deferred rent, which is included in accrued
expenses or deferred rent in the consolidated balance sheets based on their short-term or long-term nature. This deferred rent is
amortized over the reasonably assured lease term as a reduction of rent expense.
See Note 3 to the Consolidated Financial Statements for further information.
36