Panera Bread 2006 Annual Report Download - page 34

exercise of stock options and $1.2 million from the issuance of common stock under employee benefit plans. The
financing activities for the fiscal year ended December 25, 2004 primarily included $3.6 million from the exercise
of stock options and $1.1 million from the issuance of common stock under employee benefit plans.
We had a $10.0 million unsecured revolving line of credit that expired on December 19, 2006 and was not
renewed. As of December 26, 2006, we had a $0.1 million outstanding letter of credit in support of certain
operational activities.
Critical Accounting Policies & Estimates
Our discussion and analysis of our financial condition and results of operations are based upon the Consol-
idated Financial Statements and Notes to the Consolidated Financial Statements, which have been prepared in
accordance with generally accepted accounting principles in the United States. The preparation of these consol-
idated financial statements requires us to make estimates, judgments and assumptions, which we believe to be
reasonable, based on the information available. These estimates and assumptions affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. Variances in the
estimates or assumptions used could yield materially different accounting results. On an ongoing basis, we evaluate
the continued appropriateness of our accounting policies and resulting estimates to make adjustments we consider
appropriate under the facts and circumstances.
We have chosen accounting policies we believe are appropriate to report accurately and fairly our operating
results and financial position, and we apply those accounting policies in a consistent manner. We consider the
following policies on accounting for revenue recognition, goodwill, self-insurance, lease obligations, and stock-
based compensation to be the most critical in the preparation of our consolidated financial statements because they
involve the most difficult, subjective, or complex judgments about the effect of matters that are inherently uncertain.
Revenue Recognition
We recognize 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, a liability is recorded 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. Further, 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, or 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 we have 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% to 5%, as defined in the agreement. Royalties are recognized as revenue when they are
earned.
Valuation of Goodwill
We record goodwill related to the excess of the purchase price over the fair value of net assets acquired. At
December 26, 2006 and December 27, 2005, our goodwill balance was $57.2 million and $48.5 million, respec-
tively. Annually, and whenever an event or circumstance indicates it is more likely than not our goodwill has been
impaired, management assesses the carrying value of our recorded goodwill. We perform our impairment
assessment by comparing discounted cash flows from reporting units 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 identified indicating an impairment in the
value of our goodwill.
Self-Insurance
We are self-insured for a significant portion of our workers’ compensation, group health (beginning in 2005),
and general, auto, and property liability insurance for up to $0.5 million of individual claims, depending on the
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