Panera Bread 2005 Annual Report Download - page 47

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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 $7.0 million, $5.4 million, and $3.2 million for the fiscal years ended
December 27, 2005, December 25, 2004, and December 27, 2003, respectively, are recorded as part of the asset to which they relate
and are amortized over the asset’s useful life.
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 $2.8 million, $3.2 million and $3.3
million for the years ended December 27, 2005, December 25, 2004, and December 27, 2003, respectively. Royalties are paid weekly
based on the percentage of sales specified in each ADA (from 4% to 5% of sales). Royalties are recognized as revenue when they are
earned. Royalties were $51.5 million, $41.2 million, and $32.9 million for the fiscal years ended December 27, 2005, December 25,
2004, and December 27, 2003, respectively.
Advertising Costs
Franchise-operated 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. National advertising fund contributions can be increased up to a total of 2.6% of sales by the Company. The national
advertising fund and marketing administration contributions received from franchise-operated 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 $10.3 million, $7.7 million, and $5.8 million for the years ended December 27, 2005, December
25, 2004, and December 27, 2003, 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, but exclude manager training costs which are included in
other operating expenses, are expensed when incurred. Direct costs to open bakery-cafes amounted to $3.2 million, $2.6 million and
$1.5 million in 2005, 2004, and 2003, respectively.
Rent Expense
The Company recognizes rent expense on a straight-line basis over the reasonably assured lease term as defined in FAS 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. Therefore, rent expense for new locations is charged to expense beginning with the start of
the construction period.