Stock-Based Compensation

Equity Compensation Plan Information

The following table summarizes information with respect to shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans as of October 27, 2012 (in thousands, except per share amounts):



Plan Category	A Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		B Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		C Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excludes Securities Reflected in Column A)
Equity compensation plans approved by stockholders ⁽¹⁾	23,561	⁽³⁾	$	5.52	76,048	⁽⁴⁾
Equity compensation plans not approved by stockholders ⁽²⁾	5,936	⁽⁵⁾	$	5.06	—
Total	29,497		$	5.43	76,048


(1)	Primarily consist of the 2009 ESPP, the 2009 and 1999 Director Plans and the 2009 and 1999 Stock Plans.


(2)	Consist solely of the 1999 NSO Plan described in Note 11, “Employee Compensation Plans,” of the Notes to Consolidated Financial Statements and Foundry’s 2000 NSO Plan, which was assumed in connection with our acquisition of Foundry.


(3)	Amount excludes purchase rights accrued under the 2009 ESPP. As of October 27, 2012, the 2009 ESPP had a stockholder-approved reserve of 65.0 million shares, of which 38.7 million shares were available for future issuance.


(4)	Amount consists of shares available for future issuance under the 2009 ESPP, the 2009 Director Plan and the 2009 Stock Plan.


(5)	Substantially all shares were granted prior to the fiscal year ended October 25, 2003. Information relating to equity compensation plans is set forth in Note 11, “Employee Compensation Plans,” of the Notes to Consolidated Financial Statements.

Stock-based compensation expense, net of estimated forfeitures, was included in the following line items on the Consolidated Statements of Operations as follows (in thousands):



	Fiscal Year Ended October 27, 2012		Fiscal Year Ended October 29, 2011		Fiscal Year Ended October 30, 2010
Cost of revenues	$	15,433	$	15,607	$	13,552
Research and development	17,952		18,959		27,795
Sales and marketing	33,257		36,068		45,232
General and administrative	10,527		12,442		15,046
Total stock-based compensation	$	77,169	$	83,076	$	101,625

The following table presents stock-based compensation expense, net of estimated forfeitures, by grant type (in thousands):



	Fiscal Year Ended October 27, 2012		Fiscal Year Ended October 29, 2011		Fiscal Year Ended October 30, 2010
Stock options, including variable options	$	1,079	$	3,483	$	12,383
Restricted stock awards and restricted stock units (“RSUs”)	56,791		55,750		55,580
Employee stock purchase plan (“ESPP”)	19,299		23,843		33,662
Total stock-based compensation	$	77,169	$	83,076	$	101,625

The following table presents unrecognized compensation expense, net of estimated forfeitures, of the Company’s equity compensation plans as of October 27, 2012, which is expected to be recognized over the following weighted-average periods, (in thousands, except for weighted-average period):



	Unrecognized Compensation Expense		Weighted- Average Period (in years)
Stock options	$	635	0.54
RSUs	$	95,152	2.01
ESPP	$	16,737	1.11

Stock Options

The fair value of each option granted during the respective period is estimated on the date of grant using the Black-Scholes valuation model and the assumptions noted in the following table. The dividend yield reflects that Brocade has not paid any cash dividends since inception and does not anticipate paying cash dividends in the foreseeable future. The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The expected volatility is based on an equal weighted-average of implied volatilities from traded options of the Company’s common stock and historical volatility of the Company’s common stock. The expected term is based on historical exercise behavior.



	Fiscal Year Ended
Stock Options	October 27, 2012		October 29, 2011		October 30, 2010
Expected dividend yield	0.0	%	0.0	%	0.0	%
Risk-free interest rate	0.1 - 0.8%		0.1 - 0.6%		0.3 - 2.0%
Expected volatility	48.8 - 56.5%		50.3 - 61.9%		49.3 - 53.3%
Expected term (in years)	4.0		4.0		4.0

Compensation expense computed under the fair value method for stock options issued is being amortized under a graded vesting method over the options’ vesting period. A summary of stock option activity under the equity compensation plans for the years ended October 27, 2012, October 29, 2011 and October 30, 2010 is presented as follows:



	Shares (in thousands)		Weighted-Average Exercise Price		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at October 31, 2009	89,647		$	5.04			3.17	$	380,991
Granted	1,920		6.76		$	2.89
Exercised	(14,210	)	2.95					51,700
Forfeited or expired	(5,691	)	13.68
Outstanding at October 30, 2010	71,666		4.82				2.58	146,199
Granted	243		5.47		$	2.23
Exercised	(16,814	)	3.48					46,047
Forfeited or expired	(4,330	)	9.03
Outstanding at October 29, 2011	50,765		4.91				1.98	35,494
Granted	160		5.55		$	2.39
Exercised	(16,993	)	3.39					36,498
Forfeited or expired	(4,435	)	7.34
Outstanding at October 27, 2012	29,497		5.43				1.61	26,077
Vested and expected to vest at October 27, 2012	29,518		$	5.42			1.60	$	26,076
Exercisable and vested at:
October 27, 2012	28,591		$	5.40			1.51	$	25,985

From May 1999 through July 2003, the Company granted 98.8 million options subject to variable accounting as the measurement date of the options granted was not certain. As of October 27, 2012, 0.1 million options with a weighted-average exercise price of $4.85 and a weighted-average contractual life of 0.41 years remain outstanding and continue to be accounted for under variable accounting.

Employee Stock Purchase Plan

Under Brocade’s employee stock purchase plans, including the 2009 ESPP and the 1999 Employee Stock Purchase Plan (together, the “Brocade ESPP”), eligible employees can participate and purchase shares semi-annually at the lower of 85% of the fair market value of the Company’s common stock on (i) the first trading day of the offering period, or (ii) the last day of each six-month purchase period. The Brocade ESPP permits eligible employees to purchase common stock through payroll deductions for up to 15% of qualified compensation. The Company accounts for the Brocade ESPP as a compensatory plan and compensation expense is being amortized under a graded vesting method over the twenty-four month offering period. In addition, the Company accounts for changes in percentage contribution elected by employees, as well as decreases in the Company’s common stock price on the last day of each six-month purchase period as compared to the common stock price on the first trading day of the offering period, by applying modification accounting which results in an increase in compensation expense during the period of modification.

The fair value of the option component of Brocade ESPP shares was estimated using the Black-Scholes option pricing model using the following weighted-average assumptions:



	Fiscal Year Ended
Employee Stock Purchase Plan	October 27, 2012		October 29, 2011		October 30, 2010
Expected dividend yield	0.0	%	0.0	%	0.0	%
Risk-free interest rate	0.2	%	0.6	%	0.6	%
Expected volatility	52.5	%	65.5	%	67.8	%
Expected term (in years)	1.5		1.1		1.5

Restricted Stock Units

A summary of the changes in restricted stock units outstanding under Brocade’s equity compensation plans during the years ended October 27, 2012, October 29, 2011 and October 30, 2010 is presented as follows:



	Shares (in thousands)		Weighted-Average Grant Date Fair Value
Nonvested at October 31, 2009	32,693		$	4.37
Granted	10,801		5.84
Vested	(12,753	)	5.26
Forfeited	(2,570	)	6.74
Nonvested at October 30, 2010	28,171		4.32
Granted	12,754		5.68
Vested	(13,434	)	5.82
Forfeited	(4,010	)	6.37
Nonvested at October 29, 2011	23,481		3.85
Granted	11,166		4.97
Vested	(9,597	)	4.82
Forfeited	(3,054	)	5.92
Nonvested at October 27, 2012	21,996		3.71
Vested and expected to vest at October 27, 2012	20,277		$	3.71

Typically, vesting of restricted stock units occurs over one to four years and is subject to the employee’s continuing service to Brocade.

The aggregate intrinsic value of restricted stock units outstanding at October 27, 2012, October 29, 2011 and October 30, 2010 was $106.1 million, $105.9 million and $178.9 million, respectively.