Rue 21 2011 Annual Report Download - page 39

against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not
be realized. Changes in the level and composition of earnings, tax laws or the deferred tax valuation allowance, as
well as the results of tax audits may materially impact our effective tax rate.
We recognize income tax liabilities related to unrecognized tax benefits in accordance with the FASB’s
authoritative guidance related to uncertain tax positions and adjust these liabilities when our judgment changes as
the result of the evaluation of new information. We classify interest and penalties as an element of tax expense.
The calculation of the deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from
an uncertain position and to establish a valuation allowance require management to make estimates and
assumptions. We believe that our assumptions and estimates are reasonable, although actual results may have a
positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances, or
net income.
Stock-Based Compensation
We account for stock-based compensation in accordance with the FASB’s authoritative guidance for stock-
based compensation. Under this guidance, stock-based compensation cost is estimated at the grant date based on the
award’s fair value as calculated by the Black-Scholes option-pricing model and is recognized as expense over the
requisite service period. The Black-Scholes model requires various highly judgmental assumptions including
volatility, expected option life, risk free interest rate and dividend yield. The expected volatility reflects the
application of SAB Topic 14’s interpretive guidance and, accordingly, incorporates historical volatility of similar
entities whose share prices are publicly available. The expected option life reflects the application of the simplified
method set out in SAB Topic 14. The simplified method defines the life as the average of the contractual term of the
options and the weighted-average vesting period for all option tranches. The risk-free interest rate is based on 7-year
U.S. Treasury instruments whose maturities are similar to those of the expected term of the award being valued. The
expected dividend yield was based on our expectation of not paying dividends on our common stock for the
foreseeable future.
If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation
expense may differ materially in the future from that recorded in the current period. In addition, we are required to
estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. We estimate the
forfeiture rate based on historical experience. Further, to the extent our actual forfeiture rate is different from our
estimate; stock-based compensation expense is adjusted accordingly.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our principal market risk relates to interest rate sensitivity, which is the risk that future changes in interest rates
will reduce our net income or net assets. Our senior secured credit facility accrues interest at the Bank of America
N.A. base rate, defined at our option as the prime rate or the Eurodollar rate plus applicable margin, which ranges
from 1.25% to 3.00% set quarterly dependent upon average net availability under our senior secured credit facility
during the previous quarter. Because our senior secured credit facility bears interest at a variable rate, we will be
exposed to market risks relating to changes in interest rates, if we have a meaningful outstanding balance. As of
January 28, 2012, we had no outstanding borrowings under our senior secured credit facility, nor did we have any
borrowings during fiscal year 2011. We had outstanding balances under our senior secured credit facility during
fiscal year 2009 prior to our initial public offering, but we do not believe we are significantly exposed to changes in
interest rate risk. We currently do not engage in any interest rate hedging activity and currently have no intention to
do so in the foreseeable future.
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