Note I: Franchising of Aaron’s Sales and Lease Ownership Stores

The Company franchises Aaron’s Sales & Lease Ownership stores. As of December 31, 2011 and 2010, 943 and 946 franchises had been granted, respectively. Franchisees typically pay a non-refundable initial franchise fee from $15,000 to $50,000 depending upon market size and an ongoing royalty of either 5% or 6% of gross revenues. Franchise fees and area development fees are generated from the sale of rights to develop, own and operate Aaron’s Sales & Lease Ownership stores. These fees are recognized as income when substantially all of the Company’s obligations per location are satisfied, generally at the date of the store opening. Franchise fees and area development fees are received before the substantial completion of the Company’s obligations and deferred. Substantially all of the amounts reported as non-retail sales and non-retail cost of sales in the accompanying consolidated statements of earnings relate to the sale of lease merchandise to franchisees.

Franchise agreement fee revenue was $2.6 million, $3.0 million and $3.8 million and royalty revenue was $52.0 million, $47.9 million and $42.3 million for the years ended December 31, 2011, 2010 and 2009, respectively. Deferred franchise and area development agreement fees, included in customer deposits and advance payments in the accompanying consolidated balance sheets, were $4.7 million and $5.5 million at December 31, 2011 and 2010, respectively.

Franchised Aaron’s Sales & Lease Ownership store activity is summarized as follows:


(Unaudited)	2011			2010			2009
Franchised stores open at January 1,		664			597			504
Opened		55			62			84
Added through acquisition		—			10			—
Purchased from the Company		9			10			37
Purchased by the Company		(7	)		(12	)		(19	)
Closed, sold or merged		(8	)		(3	)		(9	)

Franchised stores open at December 31,		713			664			597

Company-operated Aaron’s Sales & Lease Ownership store activity is summarized as follows:


(Unaudited)	2011			2010			2009
Company-operated stores open at January 1,		1,146			1,082			1,037
Opened		57			86			85
Added through acquisition		8			14			19
Closed, sold or merged		(51	)		(36	)		(59	)

Company-operated stores open at December 31,		1,160			1,146			1,082

Company-operated HomeSmart store activity is summarized as follows:


(Unaudited)	2011		2010
Company-operated stores open at January 1,		3		—
Opened		24		3
Added through acquisition		44		—

Company-operated stores open at December 31,		71		3

In 2011, Sales and Lease Ownership segment acquired the lease contracts, merchandise and other related assets of 38 stores, including seven franchised stores, and merged certain acquired stores into existing stores, resulting in a net gain of eight stores. In 2010, the Company acquired the lease contracts, merchandise and other related assets of 30 stores, including 12 franchised stores, and merged certain acquired stores into existing stores, resulting in a net gain of 14 stores. In 2009, the Company acquired the lease contracts, merchandise and other related assets of 44 stores, including 19 franchised stores, and merged certain acquired stores into existing stores, resulting in a net gain of 29 stores.

In 2011, HomeSmart operations acquired the lease contracts, merchandise and other related assets of 47 stores and merged certain acquired stores into existing stores, resulting in a net gain of 44 stores.