Panera Bread 2007 Annual Report Download - page 63

Deferred Financing Costs
Debt issuance costs incurred in connection with the issuance of long-term debt are capitalized and amortized to
interest expense based on the related debt agreement using the straight-line method, which approximates the
effective interest method. The unamortized amounts are included in deposits and other assets in the accompanying
Consolidated Balance Sheets.
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 generally $35,000 per bakery-cafe to be developed under the Area
Development Agreement (“ADA”). Of this fee, $5,000 is generally 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 remainder of the fee 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 $2.6 million, $2.8 million and
$2.8 million for the fiscal years ended December 25, 2007, December 26, 2006, and December 27, 2005,
respectively. Royalties are generally paid weekly based on the percentage of sales specified in each ADA (generally
4 percent to 5 percent of sales). Royalties are recognized as revenue when they are earned. Royalties were
$64.6 million, $58.7 million, and $51.5 million for the fiscal years ended December 25, 2007, December 26, 2006,
and December 27, 2005, respectively.
Advertising Costs
National advertising fund and marketing administration contributions received from franchise-operated
bakery-cafes are consolidated with those from the Company in the Company’s accompanying consolidated
financial statements. Liabilities for unexpended funds received from franchisees are included in accrued expenses
in the accompanying 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
accompanying 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
$11.6 million, $11.3 million, and $10.3 million for the fiscal years ended December 25, 2007, December 26, 2006,
and December 27, 2005, 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, 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 in the accompanying
Consolidated Statements of Operations, are expensed when incurred.
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 one to
two renewal option periods, which generally equates to 20 years. In addition, certain of the Company’s lease
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PANERA BREAD COMPANY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)