Aarons 2013 Annual Report Download - page 56

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46
Franchise agreement fee revenue was $1.7 million, $2.4 million and $2.6 million; royalty revenue was $59.1 million, $56.5
million and $52.0 million; and finance fee revenue was $5.1 million, $4.9 million and $5.9 million for the years ended
December 31, 2013, 2012 and 2011, respectively. Deferred franchise and area development agreement fees, included in
accounts payable and accrued expenses in the accompanying consolidated balance sheets, were $3.4 million and $3.8 million at
December 31, 2013 and 2012, respectively.
Retail and Non-Retail Cost of Sales
Included in cost of sales is the net book value of merchandise sold, primarily using specific identification. It is not practicable to
allocate operating expenses between selling and lease operations.
Shipping and Handling Costs
The Company classifies shipping and handling costs as operating expenses in the accompanying consolidated statements of
earnings, and these costs totaled $78.6 million, $74.9 million and $68.1 million in 2013, 2012 and 2011, respectively.
Advertising
The Company expenses advertising costs as incurred. Advertising production costs are expensed when an advertisement
appears for the first time. Such advertising costs amounted to $43.0 million, $36.5 million and $38.9 million in 2013, 2012 and
2011, respectively. These advertising expenses are shown net of cooperative advertising considerations received from vendors,
substantially all of which represents reimbursement of specific, identifiable and incremental costs incurred in selling those
vendors’ products. The amount of cooperative advertising consideration netted against advertising expense was $25.0 million,
$31.1 million and $25.4 million in 2013, 2012 and 2011, respectively. The prepaid advertising asset was $2.4 million and $3.2
million at December 31, 2013 and 2012, respectively.
Stock-Based Compensation
The Company has stock-based employee compensation plans, which are more fully described in Note 10. The Company
estimates the fair value for the options granted on the grant date using a Black-Scholes option-pricing model and accounts for
stock-based compensation under the fair value recognition provisions codified in ASC Topic 718, Stock Compensation. The fair
value of each share of restricted stock awarded is equal to the market value of a share of the Company’s common stock on the
grant date.
Deferred Income Taxes
Deferred income taxes represent primarily temporary differences between the amounts of assets and liabilities for financial and
tax reporting purposes. The Company’s largest temporary differences arise principally from the use of accelerated depreciation
methods on lease merchandise for tax purposes.
Earnings per Share
Earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock
outstanding during the period. The computation of earnings per share assuming dilution includes the dilutive effect of stock
options, restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) as determined under the treasury stock method.
The following table shows the calculation of dilutive stock awards for the years ended December 31 (shares in thousands):
2013 2012 2011
Weighted average shares outstanding 75,747 75,820 78,101
Effect of dilutive securities:
Stock options 421 789 998
RSUs 206 210 237
RSAs 16 7 3
Weighted average shares outstanding assuming dilution 76,390 76,826 79,339
Approximately 53,000 stock-based awards were excluded from the computations of earnings per share assuming dilution in
2012 because the awards would have been anti-dilutive for the year presented. No stock options, RSUs or RSAs were anti-
dilutive during 2013 or 2011. In addition, under the terms of the Company’s performance-based RSUs, approximately 175,000
RSUs may be earned based on the achievement of revenue and pre-tax profit margin targets applicable to performance periods
beginning subsequent to December 31, 2013. Refer to Note 10 for additional information regarding the Company’s restricted
stock arrangements.