3. Stock-Based Compensation

2013-2016 LTIP

The Company’s 2013-2016 Destination XL Group, Inc. Long-Term Incentive Plan (the “2013-2016 LTIP”) was approved in the second quarter of fiscal 2013. 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 Chief Executive Officer, 70% for its senior executives and 50% for other participants in the plan, which the Company refers to as the “Projected Benefit Amount.” Each participant was granted 50% of the Projected Benefit Amount in shares of restricted stock, 25% in stock options and the remaining 25% in cash. All shares were granted from the Company’s 2006 Incentive Compensation Plan.

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% will vest at the end of fiscal 2015 and the remaining 40% will vest 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, excluding estimated forfeitures, the total potential value of all awards over this four-year period, as of October 31, 2015, would be approximately $19.4 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 at October 31, 2015, no expense for the performance-based awards has been recognized through the first nine months ended October 31, 2015.

2016 Long-Term Incentive Wrap-Around Plan

In the fourth quarter of fiscal 2014, the Compensation Committee of the Company’s Board of Directors approved the 2016 Long-Term Incentive Wrap-Around Plan (the “Wrap-Around Plan”). The Wrap-Around Plan is a supplemental performance-based incentive plan that is only effective if there is no vesting of the performance-based awards under the 2013-2016 LTIP and, as a result, all performance-based awards under that plan are forfeited. Under the Wrap-Around Plan, if the target level performance metrics for fiscal 2016 are met, participants will be eligible to receive a payout equal to 80% of the dollar value of the performance-based compensation they were eligible to receive under the 2013-2016 LTIP. If the target level performance metrics for fiscal 2016 under the Wrap-Around Plan are exceeded, the greatest payout that participants will be eligible to receive is 100% of the dollar value of the performance-based compensation they were eligible to receive under the 2013-2016 LTIP. Any award earned will be paid 50% in cash and 50% in shares of restricted stock.

The performance target under the Wrap-Around Plan consists of two metrics, Sales and EBITDA, with threshold (50%), target (80%) and maximum (100%) payout levels. Each metric is weighted as 50% of the total performance target. However, in order for there to be any payout under either metric, EBITDA for fiscal 2016 must be equal to or greater than the minimum threshold.

The Wrap-Around Plan also provides for an opportunity to receive additional shares of restricted stock if at least the threshold EBITDA target is achieved and the Company’s closing stock price is $6.75 or higher on the day earnings for fiscal 2016 are publicly released. If the Company’s stock price is $6.75, the payout in restricted shares will be increased by 20% and if the stock price is $7.25 or higher, the payout in restricted shares will be increased by 30%. The portion of the award payable in cash is not affected by the stock price. In any event, the most that can be achieved is the 100% payout level. All awards granted pursuant to the Wrap-Around Plan will not vest until the last day of the second quarter of fiscal 2017.

Assuming that the Company achieves the performance target at target levels under the Wrap-Around Plan, and further assuming that the Company’s stock price is greater than $7.25, at the time the Company’s earnings are publicly released, the compensation expense associated with this Wrap-Around Plan is estimated to be approximately $8.7 million. However, because the performance targets under the Wrap-Around Plan were not deemed probable at October 31, 2015, no compensation expense for the performance-based awards has been recognized through the end of the first nine months of fiscal 2015.

2006 Plan—Stock Option and Restricted Share Award Activity

Pursuant to the Company’s 2006 Incentive Compensation Plan, as amended (the “2006 Plan”), the Company has 7,250,000 shares authorized for issuance, of which 4,250,000 shares may be subject to the granting of awards other than stock options and stock appreciation rights.

The following tables summarize the stock option activity and restricted share activity under the 2006 Plan for the first nine months of fiscal 2015:

	Number of shares			Weighted-average exercise price per option		Weighted-average remaining contractual term	Aggregate intrinsic value
Stock Options
Outstanding options at beginning of year		2,747,802		$	4.97
Options granted		—			—
Options canceled		(60,287	)	$	5.04
Options exercised ⁽¹⁾		(22,136	)	$	4.59
Outstanding options at end of quarter		2,665,379		$	4.98	7.2 years	$	2,376,745
Options exercisable at end of quarter		588,692		$	4.74	5.6 years	$	719,276

(1)

The intrinsic value of options exercised was immaterial.

	Restricted shares			Deferred shares ⁽¹⁾		Fully-vested shares ⁽²⁾			Total number of shares			Weighted-average grant-date fair value ⁽³⁾
Shares
Outstanding non-vested shares at beginning of year		1,685,290			11,238		—			1,696,528		$	5.09
Shares granted		10,000			15,790		46,536			72,326		$	4.89
Shares vested/issued		(32,223	)		—		(46,536	)		(78,759	)	$	5.00
Shares canceled		—			—		—			—			—
Outstanding non-vested shares at end of quarter		1,663,067			27,028		—			1,690,095		$	5.08

(1)

During the first nine months of fiscal 2015, the Company granted 15,790 shares of deferred stock, with a fair value of approximately $78,209 to certain directors as compensation in lieu of cash, in accordance with their irrevocable elections. The shares of deferred stock will vest three years from the date of grant or at separation of service, based on the irrevocable election of each director.

(2)

During the first nine months of fiscal 2015, the Company granted 46,536 shares of stock, with a fair value of approximately $230,143 to certain directors as compensation in lieu of cash, in accordance with their irrevocable elections. Beginning in fiscal 2015, directors are required to elect 50% of their quarterly retainer in equity. All shares paid to directors to satisfy this election are issued from the Company’s 2006 Stock Incentive Plan. Any shares in excess of the minimum required election will be issued from the Company’s Non-Employee Director Stock Purchase Plan.

(3)

The fair value of a restricted share, deferred share and fully-vested 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 nine months of fiscal 2015:

	Number of shares			Weighted-average exercise price per option		Weighted-average remaining contractual term	Aggregate intrinsic value ⁽¹⁾
Stock Options
Outstanding options at beginning of year		217,500		$	7.01
Options granted
Options expired		(201,500	)	$	7.00
Options canceled		(1,000	)	$	7.38
Options exercised		—			—
Outstanding options at end of quarter		15,000		$	7.18	0.2 years		—
Options exercisable at end of quarter		15,000		$	7.18	0.2 years		—

(1)

The intrinsic value of the options outstanding at October 31, 2015 was immaterial.

Share Availability Under the 2006 Plan

At October 31, 2015, the Company had 1,110,608 shares available for future grant under the 2006 Plan, of which 942,960 remain 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 18,639 shares of common stock, with a fair value of approximately $93,228, to certain of its non-employee directors as compensation in lieu of cash in the first nine months of fiscal 2015.

Valuation Assumptions for Stock Options and Restricted Stock

For the first nine months of fiscal 2015, the Company granted 15,790 shares of deferred stock and 10,000 shares of restricted stock. For the first nine months of fiscal 2014, the Company granted 97,950 shares of restricted stock, 8,345 shares of deferred stock and stock options to purchase 141,684 shares of common stock.

The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. For the first nine months of fiscal 2015, there were no grants of stock options. The following assumptions were used for grants for the first nine months of fiscal 2014:

	November 1, 2014
Expected volatility		46.0	%
Risk-free interest rate	0.79%-0.93%
Expected life	3.1 - 3.5 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 nine months of fiscal 2015 and fiscal 2014, the Company recognized total stock-based compensation expense of $1.6 million and $2.2 million, respectively. The total compensation cost related to time-vested stock options and time-based restricted stock awards not yet recognized as of October 31, 2015 is approximately $1.3 million, net of estimated forfeitures, which will be expensed over a weighted average remaining life of 12.8 months. At October 31, 2015, the Company had $7.1 million of unrecognized compensation expense, net of estimated forfeitures, related to its performance-based stock options and restricted stock. As discussed above, the Company will begin recognizing compensation if, and when, achievement of the performance targets under the 2013-2016 LTIP or Wrap-Around Plan becomes probable.