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 November 1, 2014 (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⁾	3,799	⁽³⁾	$	7.50	29,999	⁽⁴⁾
Equity compensation plans not approved by stockholders ⁽²⁾	2,400	⁽⁵⁾	$	5.66	—
Total	6,199		$	6.79	29,999


⁽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 November 1, 2014, the 2009 ESPP had a stockholder-approved reserve of 65.0 million shares, of which 17.1 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⁾	All shares were granted in the first quarter of fiscal year 2013. 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 Income as follows (in thousands):



	Fiscal Year Ended November 1, 2014		Fiscal Year Ended October 26, 2013		Fiscal Year Ended October 27, 2012
Cost of revenues	$	14,963	$	14,519	$	15,433
Research and development	18,635		17,509		17,952
Sales and marketing	31,650		29,425		33,257
General and administrative	19,666		12,165		10,527
Total stock-based compensation	$	84,914	$	73,618	$	77,169

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



	Fiscal Year Ended November 1, 2014		Fiscal Year Ended October 26, 2013		Fiscal Year Ended October 27, 2012
Stock options	$	4,581	$	2,581	$	1,079
RSUs	62,906		50,522		56,791
Employee stock purchase plan (“ESPP”)	17,427		20,515		19,299
Total stock-based compensation	$	84,914	$	73,618	$	77,169

The following table presents unrecognized compensation expense, net of estimated forfeitures, of the Company’s equity compensation plans as of November 1, 2014, 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	$	3,986	1.35
RSUs	$	115,111	2.07
ESPP	$	13,834	1.06

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 the cash dividends paid by Brocade starting in the third quarter of fiscal year 2014. 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
	November 1, 2014	October 26, 2013		October 27, 2012
Expected dividend yield	0.0% - 1.5%	0.0	%	0.0	%
Risk-free interest rate	0.7 - 2.3%	0.6 - 1.7%		0.1 - 0.8%
Expected volatility	36.8 - 39.4%	39.9 - 44.9%		48.8 - 56.5%
Expected term (in years)	5.0	5.7		4.7

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 fiscal years ended November 1, 2014, October 26, 2013, and October 27, 2012, 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 as of 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 as of October 27, 2012	29,497		5.43				1.61	26,077
Granted	2,875		5.64		$	2.34
Exercised	(13,149	)	3.99					32,324
Forfeited or expired	(6,662	)	6.90
Outstanding as of October 26, 2013	12,561		6.19				2.37	24,784
Granted	1,770		9.03		$	3.16
Exercised	(9,767	)	5.19					24,240
Forfeited or expired	(1,250	)	8.60
Outstanding as of November 1, 2014	3,314		6.79				4.74	24,452
Vested and expected to vest as of November 1, 2014	6,012		$	6.77			4.71	$	23,832
Exercisable and vested as of:
November 1, 2014	3,088		$	6.31			3.76	$	13,656

Restricted Stock Units

Prior to the initial declaration of a quarterly cash dividend on May 22, 2014, the fair value of RSUs was measured based on the grant-date share price because Brocade did not historically pay cash dividends on its common stock. For awards granted on or subsequent to May 22, 2014, the fair value of RSUs is measured based on the grant-date share price, less the present value of expected dividends during the vesting period, discounted at a risk-free interest rate. A summary of the changes in RSUs outstanding under Brocade’s equity compensation plans during the fiscal years ended November 1, 2014, October 26, 2013, and October 27, 2012, respectively, is presented as follows:



	Shares (in thousands)		Weighted-Average Grant Date Fair Value
Nonvested as of October 29, 2011	23,481		$	3.85
Granted	11,166		4.97
Vested	(9,597	)	4.82
Forfeited	(3,054	)	5.92
Nonvested as of October 27, 2012	21,996		3.71
Granted	11,518		5.75
Vested	(7,401	)	5.69
Forfeited	(3,352	)	5.39
Nonvested as of October 26, 2013	22,761		3.85
Granted	11,582		9.69
Vested	(11,750	)	5.59
Forfeited	(3,594	)	6.01
Nonvested as of November 1, 2014	18,999		5.93
Vested and expected to vest as of November 1, 2014	17,388		$	5.93

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 November 1, 2014, October 26, 2013, and October 27, 2012, was $203.9 million, $178.8 million, and $116.6 million, respectively.

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 24-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
	November 1, 2014		October 26, 2013		October 27, 2012
Expected dividend yield	1.4	%	0.0	%	0.0	%
Risk-free interest rate	0.2	%	0.2	%	0.2	%
Expected volatility	30.1	%	39.5	%	52.5	%
Expected term (in years)	1.3		1.3		1.5