Panera Bread 2006 Annual Report Download - page 48

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, $2.8 million and $3.2 million for the years ended
December 26, 2006, December 27, 2005, and December 25, 2004, 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 $58.7 million, $51.5 million, and $41.2 million for the fiscal years ended
December 26, 2006, December 27, 2005, and December 25, 2004, respectively.
Advertising Costs
Franchise-operated bakery-cafes contribute to the Company 0.7% 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 $11.3 million, $10.3 million, and $7.7 million for the years
ended December 26, 2006, December 27, 2005, and December 25, 2004, respectively.
Pre-Opening Costs
All pre-opening costs directly associated with the opening of new bakery-cafe locations, which consists
primarily of pre-opening rent expense, and 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 $6.2 million, $5.1 million and $4.3 million in 2006, 2005,
and 2004, respectively.
Rent Expense
The Company recognizes rent expense on a straight-line basis over the reasonably assured lease term as
defined in SFAS No. 98, “Accounting for Leases.” The reasonably assured 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
reasonably assured 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
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PANERA BREAD COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)