3.	Stock-Based Compensation

All share-based payments, including grants of employee stock options and restricted stock, are recognized as an expense in the statement of operations based on their fair values and vesting periods. The fair value of stock options is determined using the Black-Scholes valuation model and requires the input of subjective assumptions. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them (the “expected term”), the estimated volatility of the Company’s common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (“forfeitures”). The Company reviews its valuation assumptions at each grant date and, as a result, is likely to change its valuation assumptions used to value employee stock-based awards granted in future periods. The values derived from using the Black-Scholes model are recognized as an expense over the vesting period, net of estimated forfeitures. The estimation of stock-based awards that will ultimately vest requires significant judgment. Actual results, and future changes in estimates, may differ from the Company’s current estimates.

2006 Incentive Compensation Plan

At the Company’s Annual Meeting of Stockholders held on August 1, 2013, the stockholders approved an amendment to the 2006 Incentive Compensation Plan, as amended (the “2006 Plan”). This amendment increased the total number of shares of common stock authorized for issuance under the plan by 1,500,000 from 5,750,000 to 7,250,000 shares and as a sub-limit under the 2006 Plan, increased the maximum number of those shares that may be subject to the granting of awards other than stock options and stock appreciation rights by 500,000 shares.

During the second quarter of fiscal 2013, the 2013-2016 Destination XL Group, Inc. Long-Term Incentive Plan (the “2013-2016 LTIP”) was approved and put into place. Pursuant to the terms of the 2013-2016 LTIP, on the date of grant, each participant was granted an unearned and unvested award equal in value to four times his/her annual salary multiplied by the applicable long-term incentive program percentage, which is 100% for the Company’s executive officers, 70% for its senior executives and 50% for other participants in the plan, which we refer to as the “Projected Benefit Amount.” Each participant received 50% of the Projected Benefit Amount in shares of restricted stock, 25% in stock options and the remaining 25% in cash.

Of the total Projected Benefit Amount, 50% is subject to time-based vesting and 50% is subject to performance-based vesting. The time-vested portion of the award (half of the shares of restricted stock, options and cash) vests in three installments with 20% of the time-vested portion vesting at the end of fiscal 2014, 40% at the end of fiscal 2015 and the remaining 40% vesting at the end of fiscal 2016.

For the performance-based portion of the award to vest, the Company must achieve, during any rolling four fiscal quarter period that ends on or before the end of fiscal 2015, revenue of at least $550 million and an operating margin of not less than 8.0%. In the event that the Company achieves its target of $550 million in revenue with an operating margin of not less than 8.0% during any rolling fiscal four quarters prior to fiscal 2016, then the total Projected Benefit Amount vests in full.

If the targets for vesting of the performance-based portion of the award are not met by the end of fiscal 2015, then the performance-based target can still be met in fiscal 2016. In fiscal 2016, the Company must achieve revenue of at least $600 million and an operating margin of not less than 8.0% for participants to receive 100% vesting of the performance-based portion of the Projected Benefit Amount. If the Company does not meet the performance target at the end of fiscal 2016, but the Company is able to achieve revenue equal to or greater than $510 million at the end of fiscal 2016 and the operating margin is not less than 8.0%, then the participants will receive a pro-rata portion of the performance-based award based on minimum sales of $510 million (50% payout) and $600 million (100% payout).

Assuming the Company achieves the performance target and 100% of the Projected Benefit Amount vests, without forfeiture, the total potential value of all awards over this four-year period would be approximately $22.6 million. Approximately half of the compensation expense relates to the time-vested awards, which is being expensed over forty-four months, based on the respective vesting dates. As the performance targets were not deemed probable during the second quarter of fiscal 2013, no expense for the performance-based awards has been recognized as of August 3, 2013.

2006 Plan—Stock Option and Restricted Share Award Activity

The following tables summarize the stock option activity and restricted share activity under the 2006 Plan for the first six months of fiscal 2013:


Stock Options	Number of Shares			Weighted-average Exercise price per Option		Weighted-average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding options at beginning of year		376,374		$	4.31
Options granted		2,739,187			5.04
Options canceled		(3,987	)		4.19
Options exercised		—			—

Outstanding options at end of quarter		3,111,574		$	4.95		9.4 years	$	4,085,198
Options exercisable at end of quarter		305,510		$	4.50		5.7 years	$	585,381


Restricted Shares	Number of Shares			Weighted-average Grant-Date Fair Value ⁽¹⁾
Restricted shares outstanding at beginning of year		483,403		$	3.90
Restricted shares granted		2,229,364			5.08
Restricted shares vested		(310,088	)		3.74
Restricted shares canceled		—			—

Restricted shares outstanding at end of quarter		2,402,679		$	5.01

(1)	The fair value of a restricted share is equal to the Company’s closing stock price on the date of grant.

1992 Stock Incentive Plan (the “1992 Plan”)—Stock Option Activity

The following table summarizes stock option activity under the 1992 Plan for the first six months of fiscal 2013:


Stock Options	Number of Shares			Weighted-average Exercise price per Option		Weighted-average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at beginning of year		1,329,815		$	6.35
Options granted		—			—
Options canceled		(11,000	)		8.64
Options exercised ⁽¹⁾		(400,040	)		5.16

Outstanding at end of quarter		918,775		$	6.84		1.1 years	$	107,450
Options exercisable at end of quarter		918,775		$	6.84		1.1 years	$	107,450

(1)

During the first six months of fiscal 2013, options to purchase 400,040 shares of common stock, with an intrinsic value of approximately $183,000, were exercised. Includes options that were exercised through net share settlement. As a result, only 96,242 shares were issued with no corresponding option cost.

Share Availability Under the 2006 Plan

At August 3, 2013, the Company has 443,463 shares available for future grant under the 2006 Plan, of which all remains available under the sublimit for awards other than options and stock appreciation rights. No further grants can be made under the 1992 Plan.

Non-Employee Director Stock Purchase Plan

The Company granted 7,624 shares of common stock, with a fair value of approximately $37,000, to certain of its non-employee directors as compensation for the first six months of fiscal 2013.

Valuation Assumptions for Stock Options and Restricted Stock

In total, the Company granted stock options to purchase 2,739,187 and 51,286 shares of common stock for the first six months of fiscal 2013 and fiscal 2012, respectively. For the first six months of fiscal 2013, the Company granted 2,229,364 shares of restricted stock. The majority of the grants of both stock options and restricted stock for the first six months of fiscal 2013 is attributable to the Company’s 2013-2016 LTIP. There were no grants of restricted stock for the first six months of fiscal 2012.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average grant date fair-value of stock options granted during the first six months of fiscal 2013 was $2.07 per share.

The following assumptions were used for grants for the first six months of fiscal 2013 and fiscal 2012:


	August 3, 2013	July 28, 2012
Expected volatility	52.0%	55.0%
Risk-free interest rate	0.34-0.79%	0.31-0.67%
Expected life	3.0-4.1 yrs	3.0 -4.5 yrs
Dividend rate	-	-

Expected volatilities are based on historical volatilities of the Company’s common stock; the expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and historical exercise patterns; and the risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

For the first six months of fiscal 2013 and fiscal 2012, the Company recognized total stock-based compensation expense of $0.7 million and $0.5 million, respectively. The total compensation cost related to time-vested stock options and time-based restricted stock awards not yet recognized as of August 3, 2013 is approximately $7.1 million which will be expensed over a weighted average remaining life of 32 months. At August 3, 2013, the Company had $7.1 million of unrecognized compensation expense related to its performance-based stock options and restricted stock. As discussed above, the Company will begin recognizing compensation once achievement of the performance targets becomes probable.