UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934

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Brocade Communications Systems, Inc.

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Brocade Communications Systems, Inc.

1745 Technology Drive, San Jose, CA 95110

www.brocade.com

 

To the Stockholders of Brocade Communications Systems, Inc.:

 

You are cordially invited to attend the 2008 Annual Meeting of Stockholders of Brocade Communications Systems, Inc. The Annual Meeting will be held on Thursday, April 10, 2008, at 2:00 p.m. Pacific Time, at our corporate offices located at 1745 Technology Drive, San Jose, California 95110. At the Annual Meeting, we will ask you to elect 3 directors, amend the 1999 Director Option Plan and ratify the appointment of KPMG LLP as our independent auditors for the fiscal year ending October 25, 2008.

 

We are also pleased to take advantage of the new Securities and Exchange Commission rules allowing issuers to furnish proxy materials over the Internet. Please read the proxy statement for more information on this alternative, which we believe will allow us to provide our stockholders with the information they need while lowering the costs of delivery and reducing the environmental impact of our annual meeting.

 

Stockholders of record as of February 14, 2008 may vote at the Annual Meeting.

 

Your vote is important. Whether or not you plan to attend the meeting in person, it is important that your shares be represented. Please vote as soon as possible.

 

Sincerely,

 

 

Brocade Communications Systems, Inc.

1745 Technology Drive, San Jose, CA 95110

www.brocade.com

 

 

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD ON APRIL 10, 2008

 

On Thursday, April 10, 2008, Brocade Communications Systems, Inc. (“Brocade”) will hold its 2008 Annual Meeting of Stockholders at 2:00 p.m. Pacific Time. The meeting will be held at Brocade’s corporate offices located at 1745 Technology Drive, San Jose, California 95110 for the following purposes:

 

 

More information about these business items is described in the proxy statement accompanying this notice. Any of the above matters may be considered at the Annual Meeting at the date and time specified above or at an adjournment or postponement of such meeting.

 

Your vote is important. Whether or not you plan to attend the meeting in person, it is important that your shares be represented. Please vote as soon as possible.

 

For the Board of Directors,

 

Tyler Wall

Vice President, General Counsel and

Corporate Secretary

 

San Jose, California

February 25, 2008

 

 

 

 

TABLE OF CONTENTS

 

BROCADE COMMUNICATIONS SYSTEMS, INC.

 

PROXY STATEMENT FOR 2008 ANNUAL MEETING OF STOCKHOLDERS

 

Brocade’s Board of Directors is providing these proxy materials to you for use at the 2008 Annual Meeting of Stockholders to be held on Thursday, April 10, 2008 at 2:00 p.m. Pacific Time, and at any postponement or adjournment of the meeting. The Annual Meeting will be held at our offices located at 1745 Technology Drive, San Jose, California 95110. Stockholders are invited to attend the Annual Meeting and are asked to vote on the proposals described in this proxy statement.

 

These proxy solicitation materials and the enclosed Annual Report on Form 10-K for the fiscal year ended October 27, 2007, including financial statements, were first made available to you on the Internet on or about February 25, 2008 or, upon request subsequently mailed, to all stockholders entitled to vote at the Annual Meeting. Our principal executive offices are located at 1745 Technology Drive, San Jose, California 95110, and our telephone number is (408) 333-8000.

 

 

 

 

 

The Board of Directors is presently composed of 9 members: Renato (Renny) A. DiPentima, John W. Gerdelman, David L. House, Glenn C. Jones, Michael Klayko, L. William Krause, Michael Rose, Sanjay Vaswani, and Robert R. Walker. Mr. House serves as Chairman of the Board of Directors. Each of the directors other than Mr. Klayko is an independent director within the meaning set forth in the NASDAQ rules, as currently in effect. There are no family relationships between any director and executive officer.

 

The Board of Directors held seven (7) meetings during fiscal year 2007, five (5) of which were regularly scheduled meetings and two (2) of which were special meetings. The Board also acted one (1) time by unanimous written consent. Each director attended at least 75% of the aggregate number of meetings of our Board of Directors and the committees on which each director served during fiscal year 2007 and was eligible to attend.

 

Set forth below is information regarding our directors and the nominees as of February 2, 2008:

 

Nominees for Election as Class III Directors — Term Would Expire at the 2011 Annual Meeting

 

John W. Gerdelman has served as director since February 2007 when he was appointed to the Board in connection with Brocade’s acquisition of McDATA Corporation. Since January 2004, Mr. Gerdelman has been the Chairman of Intelliden Corporation, a company which he co-founded that provides software solutions that enable networks to operate more intelligently by automating network change management and enforcing business policy in network operations. From April 2002 to December 2003, Mr. Gerdelman was the Chief Executive Officer for Metromedia Fiber Networks during its bankruptcy reorganization. From January 2000 until March 2002, Mr. Gerdelman worked with several new ventures as Managing Member of Mortonsgroup LLC. From April 1999 to December 1999, he served as the President and CEO of USA.NET. From 1986 until 1999, Mr. Gerdelman held various positions with MCI Communications Corporation in Sales, Marketing, Sales Operations, Network Operations and Information Technology, including President of the Network and Information Technology Division and served as CEO of Long Lines Limited, a startup call center company. Before joining MCI, Mr. Gerdelman was with Baxter Travenol Corporation in Sales Operations and served in the U.S. Navy as a Naval Aviator. He received his B.S. degree in chemistry from the College of William and Mary, where he now serves on the Board of Visitors. Mr. Gerdelman also currently serves as a director of Sycamore Networks, Inc., an optical switching company, APAC Customer Services, Inc., a call center company, and Proxim Wireless Corporation (formerly, Terabeam Corporation) a broadband provider. Mr. Gerdelman serves on Brocade’s Compensation Committee.

 

Glenn C. Jones has served as director since April 2006. Mr. Jones has served as a business consultant to technology companies since 1998. Mr. Jones previously served as Chief Financial Officer of Cirrus Logic, Inc. as well as Chief Financial Officer of PMC-Sierra, Inc. Prior to these public company roles, he was Chief Financial Officer for Metaphor Computer Systems, Inc. and served as General Manager of Metaphor’s computer systems business which was acquired by IBM Corporation. He also was the founding Chief Financial Officer and Vice President of Operations for Gain Computer Systems, which was acquired by Sybase Corp. Mr. Jones, a CPA, holds a B.S. in Accounting from the University of Illinois and an M.B.A. from Golden Gate University. Mr. Jones serves on Brocade’s Audit Committee.

 

Michael Klayko has served as our Chief Executive Officer and as a director since January 2005. Prior to that, he served as Vice President, Worldwide Sales from May 2004 until January 2005. From April 2003 until May 2004, Mr. Klayko served as Vice President, Worldwide Marketing and Support, and from January 2003 until April 2003, he was Vice President, OEM Sales. From May 2001 to January 2003, Mr. Klayko was Chief Executive Officer and President of Rhapsody Networks, a privately held technology company acquired by Brocade. From December 1998 to April 2001, Mr. Klayko served as Executive Vice President of McDATA Corporation, a storage networking company. From March 1995 to November 1998, Mr. Klayko was Senior Vice President for North American Sales at EMC Corporation, a provider of information storage systems products. Mr. Klayko also held various executive sales and marketing positions at Hewlett-Packard Company and IBM Corporation. Mr. Klayko received a B.S. in Electronic Engineering from Ohio Institute of Technology, in Columbus, Ohio. Mr. Klayko is the Chairman of our Corporate Development Committee.

 

Class I Directors — Term Expires at the 2009 Annual Meeting

 

David L. House has served as director since 2004 and as the Chairman of our Board of Directors since December 2005. From January 2005 through December 2005, he served as Executive Chairman of the Board. Mr. House has served as the Chairman of the Board of Directors of Credence Systems Corporation since December 2007 and a director since December 2005 and served as the Executive Chairman of the Board of Credence Systems Corporation from December 2005 until December 2007. Mr. House served as Chairman and Chief Executive Officer of Allegro Networks from January 2001 until April 2003. Prior to that, he served as President of Nortel Networks Corp. from August 1998 until August 1999. Mr. House joined Nortel Networks Corp. when it was merged with Bay Networks, Inc., where he served as Chairman of the Board, President and Chief Executive Officer from October 1996 until August 1998. Mr. House served in senior management positions at Intel Corporation for 23 years. Mr. House received a B.S.E.E. degree from Michigan Technological University and an M.S.E.E. degree from Northeastern University of Boston. Mr. House serves on our Compensation, Nominating and Corporate Governance and Corporate Development Committees.

L. William Krause has served as director since 2004. Mr. Krause has been President of LWK Ventures, a private investment firm since 1991. In addition, Mr. Krause served as Chairman of the Board of Caspian Networks, Inc., an IP networking systems provider, from April 2002 to September 2006 and as Chief Executive Officer from April 2002 until June 2004. From September 2001 to February 2002, Mr. Krause was Chairman and Chief Executive Officer of Exodus Communications, Inc., which he guided through Chapter 11 Bankruptcy to a sale of assets. He also served as President and Chief Executive Officer of 3Com Corporation, a global data networking company, from 1981 to 1990, and as its Chairman from 1987 to 1993 when he retired. Mr. Krause currently serves as director of Core-Mark Holdings, Inc., a distributor of packaged consumer goods, Packeteer, Inc., a provider of application traffic management systems, Sybase, Inc., a provider of enterprise and mobile software solutions for information management, development and integration, and Trizetto Group, Inc., a supplier of software and services to the healthcare industry. Mr. Krause holds a B.S. degree in electrical engineering and received an honorary Doctorate of Science from The Citadel. Mr. Krause serves on our Compensation Committee and as Chairman of our Nominating and Corporate Governance Committee.

 

Michael J. Rose has served as director since April 2006. Mr. Rose is the retired Executive Vice President and Chief Information Officer of Royal Dutch Shell plc where he served from 2001 to December 2005. Prior to Royal Dutch Shell, Mr. Rose worked for 23 years in a wide range of positions at Hewlett Packard, including controller for various business groups. In 1997, he was named Hewlett Packard’s Chief Information Officer, and in 2000 he was elected an officer by the Board of Directors of Hewlett Packard. He was named the company’s Controller in 2001. Mr. Rose currently serves as a director of Juniper Networks, a network infrastructure company. He holds a B.A. in Economics from the State University of New York at Genesee, N.Y. Mr. Rose serves on Brocade’s Audit and Corporate Development Committees.

 

Class II Directors — Term Expires at the 2010 Annual Meeting

 

Renato (Renny) A. DiPentima has served as director since February 2007 when he was appointed to the Board in connection with Brocade’s acquisition of McDATA Corporation. Dr. DiPentima is the retired President and Chief Executive Officer of SRA International, a provider of technology and strategic consulting services and solutions, where he served from January 2005 until March 2007. From November 2003 to January 2005, he served as SRA’s President and Chief Operating Officer. Prior to that, Dr. DiPentima served as Senior Vice President and President of SRA’s consulting and systems integration division since the division’s formation in January 2001. From July 1997 to January 2001, he served as President of SRA’s government sector, overseeing government business, projects, and contracts. From July 1995 to July 1997, Dr. DiPentima served as Vice President and as SRA’s Chief Information Officer. Prior to joining SRA, Dr. DiPentima held several senior management positions in the U.S. federal government, most recently serving as deputy commissioner for systems at the Social Security Administration, from May 1990 to June 1995. Dr. DiPentima is a director of SRA International. Dr. DiPentima is also currently serving on several governmental and corporate advisory boards. Dr. DiPentima received a B.A. from New York University, an M.A. from George Washington University and a Ph.D. from the University of Maryland. He has also completed the program for Senior Managers at the John F. Kennedy School of Government at Harvard University. Dr. DiPentima serves on Brocade’s Nominating and Corporate Governance Committee.

 

Sanjay Vaswani has served as a director since April 2004. Mr. Vaswani has been a managing partner of the Center for Corporate Innovation, Inc. since 1990. From 1987 to 1990 he was with McKinsey & Company. Prior to that, Mr. Vaswani was employed by Intel Corporation. Mr. Vaswani serves as a director of Blue Star Infotech Ltd., an Indian publicly traded software services firm. Mr. Vaswani earned a bachelor’s degree from the University of Texas at Austin and an M.B.A. from the Wharton School of Business at the University of Pennsylvania. Mr. Vaswani serves on our Compensation and Nominating and Corporate Governance Committees.

 

Class III Director Not Standing for Re-election

 

Robert R. Walker has served as a director since April 2005. Mr. Walker is the retired Executive Vice President and Chief Financial Officer for Agilent Technologies, Inc., an electronic instrument company, where he served from May 2000 until December 2001. From May 1999 until May 2000, he was Senior Vice President and Chief Financial Officer. During 1997 and 1998, Mr. Walker served as Vice President and General Manager of Hewlett-Packard’s Professional Services Business Unit. From 1993 to 1997, he led Hewlett-Packard’s information systems function,

including as Vice President and Chief Information Officer from 1995 to 1997. Mr. Walker is also a director of Electro Scientific Industries, a company that designs and manufactures microelectronics production equipment. He received both a B.S. in electrical engineering and an M.B.A. from Cornell University. Mr. Walker is the Chairman of our Audit Committee.

 

We expect that one of the current directors of the Company will join the Audit Committee immediately following the Annual Meeting to fill the vacancy created by Mr. Walker’s departure from the Audit Committee.

 

The Board of Directors has the following standing committees: Audit, Compensation, Nominating and Corporate Governance, and Corporate Development. The Board of Directors has adopted a written charter for each of these committees, copies of which can be found on our website at www.brocade.com in the Corporate Governance section of our investor relations webpage. All members of the committees appointed by the Board of Directors are non-employee directors and are independent directors within the meaning set forth in the NASDAQ rules, as currently in effect, except Michael Klayko, Brocade’s CEO, who serves on Brocade’s Corporate Development Committee.

 

The following chart details the current membership and the membership of each committee during fiscal year 2007 and the number of meetings each committee held in 2007.

 

 

 

 

Audit Committee

 

The Audit Committee oversees our accounting, financial reporting and audit processes; appoints, determines the compensation of, and oversees, the independent auditors; pre-approves audit and non-audit services provided by the independent auditors; reviews the results and scope of audit and other services provided by the independent auditors; reviews the accounting principles and practices and procedures used in preparing our financial statements; and reviews our internal controls.

 

The Audit Committee works closely with management and our independent auditors. The Audit Committee also meets with our independent auditors without members of management present, on a quarterly basis, following completion of our auditors’ quarterly reviews and annual audit and prior to our earnings announcements, to review

the results of their work. The Audit Committee also meets with our independent auditors to approve the annual scope and fees for the audit services to be performed.

 

Each of the Audit Committee members is an independent director within the meaning set forth in the NASDAQ rules, as currently in effect. In addition, the Board of Directors has determined that each of Messrs. Walker, Jones and Rose is an “audit committee financial expert” as defined by SEC rules.

 

The Audit Committee Report is included in this proxy statement on page 48. A copy of the Audit Committee’s written charter was attached as Appendix I to the Company’s proxy statement for the annual meeting of stockholders held on April 17, 2006 and is also available on our website at www.brocade.com in the Corporate Governance Section of our investor relations webpage.

 

Compensation Committee

 

The Compensation Committee (i) oversees and makes general recommendations to the Board of Directors regarding our compensation and benefits policies; (ii) oversees, evaluates and approves cash and stock compensation plans, policies and programs for our executive officers; and (iii) oversees and sets compensation for the Board of Directors.

 

Each current member of the Compensation Committee is an independent director within the meaning set forth in the NASDAQ rules, as currently in effect.

 

The Compensation Committee Report is included herein on page 39. A copy of the Compensation Committee’s written charter is available on our website at www.brocade.com in the Corporate Governance section of our investor relations webpage.

 

Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee (i) considers and periodically reports on matters relating to the identification, selection and qualification of the Board of Directors and candidates nominated to the Board of Directors and its committees; (ii) develops and recommends governance principles applicable to Brocade; and (iii) oversees the evaluation of the Board of Directors and management from a corporate governance perspective.

 

Each member of the Nominating and Corporate Governance Committee is an independent director within the meaning set forth in the NASDAQ rules, as currently in effect.

 

The Nominating and Corporate Governance Committee considers properly submitted stockholder recommendations for candidates for membership on the Board of Directors as described below under “Identification and Evaluation of Nominees for Directors.” In evaluating such recommendations, the Nominating and Corporate Governance Committee seeks to achieve a balance of knowledge, experience and capability on the Board of Directors and to address the membership criteria set forth under “Director Qualifications.” Any stockholder recommendations proposed for consideration by the Nominating and Corporate Governance Committee should include the candidate’s name and qualifications for membership on the Board of Directors and should be addressed to the attention of our Corporate Secretary — re: stockholder director recommendation. In addition, procedures for stockholder direct nomination of directors are discussed above in the Q&A, and are discussed in detail in our bylaws, a copy of which is available on the SEC’s EDGAR website at www.sec.gov as Exhibit 3.1 to our Form 8-K filed with the SEC on February 22, 2008.

 

Director Qualifications.  The Nominating and Corporate Governance Committee does not have any specific, minimum qualifications that must be met by a Nominating and Corporate Governance Committee-recommended nominee, but uses a variety of criteria to evaluate the qualifications and skills necessary for members of our Board of Directors. Under these criteria, members of the Board of Directors should have the highest professional and personal ethics and values. A director should have broad experience at the policy-making level in business, government, education, technology or public interest. A director should be committed to enhancing stockholder value and should have sufficient time to carry out their duties, and to provide insight and practical wisdom based on their past experience. A director’s service on other boards of public companies should be limited to a number that

permits them, given their individual circumstances, to perform their director duties responsibly. Each director must represent the interests of Brocade stockholders.

 

In addition to the foregoing, effective following the 2008 Annual Meeting of Stockholders, prior to any meeting of stockholders at which directors will be elected, as a condition to re-nomination, incumbent directors will be required to submit a resignation of their directorships in writing to the Chairman of the Nominating and Corporate Governance Committee of the Board. The resignation will become effective only if the director fails to receive a sufficient number of votes for re-election at the meeting of stockholders, as described in the Company’s bylaws as recently amended and the Board accepts the resignation.

 

Identification and Evaluation of Nominees for Directors.  The Nominating and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director. The Nominating and Corporate Governance Committee regularly assesses the appropriate size of the Board of Directors, and whether any vacancies on the Board of Directors are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Nominating and Corporate Governance Committee considers various potential candidates for director. Candidates may come to the attention of the Nominating and Corporate Governance Committee through current members of the Board of Directors, professional search firms, stockholders or other persons. These candidates are evaluated at regular or special meetings of the Nominating and Corporate Governance Committee, and may be considered at any point during the year. The Nominating and Corporate Governance Committee considers properly submitted stockholder recommendations for candidates for the Board of Directors. In evaluating such recommendations, the Nominating and Corporate Governance Committee uses the qualifications standards discussed above and seeks to achieve a balance of knowledge, experience and capability on the Board of Directors.

 

A copy of the Nominating and Corporate Governance Committee’s written charter is available on our website at www.brocade.com in the Corporate Governance section of our investor relations webpage.

 

Corporate Development Committee

 

The Corporate Development Committee works with management to review, consider and consult on potential strategic investment transactions that are consistent with the Company’s strategy. The Corporate Development Committee has the authority to approve certain transactions; and for certain other transactions, the Corporate Development Committee submits a recommendation to the Board of Directors for its consideration.

 

A copy of the Corporate Development Committee’s written charter is available on our website at www.brocade.com in the Corporate Governance section of our investor relations webpage.

 

During fiscal year 2007, no member of the Compensation Committee was an officer or employee of Brocade. In addition, no member of the Compensation Committee or executive officer of Brocade served as a member of the Board of Directors or Compensation Committee of any entity that has an executive officer serving as a member of our Board of Directors or Compensation Committee.

 

We do not have a formal policy regarding attendance by members of the Board of Directors at our annual meetings of stockholders although directors are encouraged to attend annual meetings of Brocade stockholders. Nine (of the ten then current) directors attended the 2007 Annual Meeting of Stockholders.

 

Although we do not have a formal policy regarding communications with the Board of Directors, stockholders may communicate with the Board of Directors by submitting an email to investor-relations@brocade.com or by writing to us at Brocade Communications Systems, Inc., Attention: Investor Relations, 1745 Technology Drive, San Jose, California 95110. Stockholders who would like their submission directed to a member of the Board of Directors may so specify. All communications will be reviewed by the General Counsel and Director of Investor

Relations. All appropriate business-related communications as reasonably determined by the General Counsel or Director of Investor Relations will be forwarded to the Board of Directors or, if applicable, to the individual director.

 

In July 2003, the Board of Directors adopted a Code of Ethics for Principal Executive and Senior Financial Officers, which applies to our Chief Executive Officer, Chief Financial Officer and any other principal financial officer, Controller and any other principal accounting officer, and any other person performing similar functions. The Code of Ethics is posted on our website at www.brocade.com in the Corporate Governance section of our investor relations webpage. The information on our website is not a part of this proxy statement. Brocade will disclose any amendment to the Code of Ethics or waiver of a provision of the Code of Ethics that applies to the Company’s Chief Executive Officer, Chief Financial Officer and any other principal financial officer, Controller and any other principal accounting officer, and any other person performing similar functions and relates to certain elements of the Code of Ethics, including the name of the officer to whom the waiver was granted, on our website at www.brocade.com, on our investor relations webpage.

 

The following tables provide information about the actual compensation earned by non-employee directors who served during the 2007 fiscal year.

 

2007 Compensation of Non-Employee Directors

 

 

 

 

 

Cash Compensation.  Our directors play a critical role in guiding the Company’s strategic direction and overseeing the management of the Company. The increased demand for qualified and talented public company directors requires that we provide adequate incentives for our directors’ continued performance and participation. Each non-employee member of a committee of the Board received, and will receive, the fees as set forth below for his service on the Board and each committee of the Board:

 

 

 

 

 

Members of the Company’s Settlement Committee, a special committee authorized to review the Company’s federal and state derivative actions and related matters and make recommendations to the Board, are entitled to receive per meeting fees (but no additional Chair or member retainers for serving on such committee).

 

We are also authorized to reimburse directors for expenses in connection with attendance at meetings.

 

Equity Compensation.  Non-employee directors also participated in the Company’s 1999 Director Option Plan (the “Director Plan”) which provides for automatic option grants to directors for their service to the Company. Only non-employee directors may participate in the Director Plan.

 

As part of this Annual Meeting, we are asking our stockholders to approve an amendment to the Director Plan. Please see Proposal 2 of this Proxy for a detailed description of the proposed changes, including changes to the automatic grants of equity awards to each non-employee directors. If the stockholders approve the amendment, it will modify the current version of the Director Plan. Otherwise, the current version of the Director Plan will remain in effect.

Under the current version of the Director Plan, each non-employee director is entitled to receive the following automatic, non-discretionary grants of options:

 

 

 

 

All options granted under the Director Plan have a term of 10 years. The exercise price of options granted under the Director Plan is 100 percent of the fair market value of the Common Stock, as determined by reference to the closing sales price of the Company’s Common Stock as reported on the Nasdaq Global Select Market on the date of grant.

 

In addition to the grants above, the Chairman of the Board is entitled to receive an automatic grant each February 28th of an option to purchase 7,500 shares of Common Stock under the Company’s Amended and Restated 1999 Stock Plan. The option will be exercisable at 100 percent of the fair market value of the Common Stock as determined by reference to the closing sales price of the Company’s Common Stock as reported on the Nasdaq Global Select Market on the date of grant., will have a term of 10 years and will vest as to 1/4th of the shares each quarter, commencing on the 3rd anniversary of the date of grant and be fully vested on the fourth anniversary of each grant.

 

In the event of a merger or the sale of substantially all of the assets of the Company, and if the option is not assumed or substituted, each option granted under the Director Plan becomes fully vested and exercisable. In such event, the Board of Directors shall notify the option holder that the option will be fully exercisable for a period of 30 days from the date of the notice. Upon expiration of the 30-day period, the option shall terminate. If the option is assumed or substituted, and the option holder’s status as a director of Brocade or the successor corporation, as applicable, is terminated other than upon a voluntary resignation by such option holder, the option shall be accelerated and become fully exercisable with respect to all shares.

 

Options granted under the Director Plan may be exercised within 3 months following the date a director’s board service terminates, or within 12 months if termination of service was due to death or disability, but only to the extent that the director was entitled to exercise the option on the date of termination. If an option is not exercised within such 3 or 12-month time period, as applicable, the option shall terminate. In any event, a director may not exercise any option later than the expiration of the option’s ten-year term.

 

The following table sets forth information regarding the beneficial ownership of our Common Stock as of February 1, 2008 as to (i) each person who is known by us to own beneficially more than 5% of our outstanding Common Stock, (ii) each of the executive officers and other persons named in the Summary Compensation Table, (iii) each director and nominee for director, and (iv) all directors and executive officers as a group. Unless otherwise indicated, the address of each listed stockholder is c/o Brocade Communications Systems, Inc., 1745 Technology Drive, San Jose, California 95110.

 

 

 

 

 

We have a classified Board of Directors. The Board of Directors currently consists of nine directors: three Class I directors, two Class II directors and four Class III directors. In light of Mr. Walker’s decision not to seek re-election to the Board of Directors, the Board of Directors has adopted an amendment to the bylaws fixing the number of authorized members at eight, effective following the 2008 Annual Meeting. At each annual meeting of stockholders, directors are elected for a term of three years and until their respective successors are duly qualified and elected to succeed those directors whose terms expire on the annual meeting dates or such earlier date of resignation or removal.

 

The Board of Directors has determined that each of its current directors, including all directors standing for reelection, except Mr. Klayko, who currently serves as Brocade’s Chief Executive Officer, is an independent director within the meaning set forth in the NASDAQ rules, as currently in effect.

 

The Nominating and Corporate Governance Committee of the Board of Directors recommended, and the Board of Directors approved, John W. Gerdelman, Glenn C. Jones and Michael Klayko as nominees for election at the Annual Meeting to Class III of the Board of Directors. If elected, John W. Gerdelman, Glenn C. Jones and Michael Klayko will serve as directors until our annual meeting in 2011, and until a successor is qualified and elected or earlier resignation or removal. Each of the nominees is currently a director of the Company. Please see “Nominees for Election as Class III Directors — Term Would Expire at the 2011 Annual Meeting” on page 6 of this proxy statement for information concerning our incumbent directors standing for re-election.

 

Unless otherwise instructed, the proxy holders will vote the proxies received by them FOR John W. Gerdelman, Glenn C. Jones and Michael Klayko. If the nominees are unable or decline to serve as a director at the time of the Annual Meeting, the proxies will be voted for another nominee designated by the Board of Directors. We are not aware of any reason that a nominee would be unable or unwilling to serve as a director.

 

If a quorum is present, the nominees receiving the highest number of votes will be elected to the Board of Directors. Abstentions and broker non-votes will have no effect on the election of directors. Three directors have been nominated for election as a Class III director. Proxies may not be voted for a greater number of persons than the number of nominees named.

 

On February 22, 2008, the Board approved amendments to our bylaws that, among other things, adopted a majority voting standard for the election of directors effective after the 2008 Annual Meeting. The amendments are described in more detail in our Form 8-K filed with the SEC on February 22, 2008.

 

The Board of Directors unanimously recommends that stockholders vote “FOR” the election of John W. Gerdelman, Glenn C. Jones and Michael Klayko.

 

We are asking our stockholders to approve an amendment to and restatement of the 1999 Director Option Plan (the “Plan”). The Compensation Committee, on behalf of our Board of Directors (“Board”), has approved the amendment, subject to approval from our stockholders at the Annual Meeting. If the stockholders approve the amendment, it will modify the current version of the Plan. Otherwise, the current version of the Plan will remain in effect. All of our non-employee directors (“Outside Directors”), to the extent that they may receive additional awards under the Plan in the future, have an interest in the proposal.

 

We are proposing to amend and restate the Plan so that we can continue to use the Plan to attract and retain the best available personnel for service as Outside Directors and to encourage their continued service on our Board. Currently, an Outside Director receives an automatic and non-discretionary initial stock option grant upon becoming an Outside Director and a subsequent annual grant upon each anniversary of the date he or she became an Outside Director. The following represents a brief summary of the material changes to the Plan:

 

 

The following table provides a summary of grants under the current Plan compared to the Plan as proposed to be amended and is qualified by the greater detail below and the terms of the Plan itself:

 

 

 

 

We believe strongly that the approval of the Plan is essential to our continued success. Stock-based awards are vital to our ability to attract and retain outstanding and highly skilled individuals to serve on the Board. With

increasing workloads, greater exposure and more stringent independence standards, recruiting and retaining Board members has become challenging. Concerns over executive compensation are drawing greater attention to corporate governance, Board independence and Board compensation; the SEC’s new disclosure rules will bring greater visibility and scrutiny to Board and executive compensation. The Board believes that the Plan is necessary so that the Company can continue to provide meaningful, long-term equity based incentives to present and future Outside Directors.

 

The following paragraphs provide a summary of the principal features of the Plan and its operation, as amended. The following summary is qualified in its entirety by reference to the amendment attached herein as Appendix A.

 

Purpose of the Plan

 

The Plan is intended to attract and retain the best available personnel for service as Outside Directors and to encourage their continued service on our Board. Currently, the Plan permits the grant of nonstatutory stock options. Assuming we obtain shareholder approval for the amendment, the Plan will permit the grant of restricted stock units in addition to stock options (collectively “Awards”).

 

Stock Subject to the Plan

 

A total maximum aggregate of 1,600,000 shares of our common stock may be granted as restricted stock units or stock options under the Plan (where restricted stock unit awards count as 2.5 shares). As of February 20, 2008, 940,000 shares were subject to outstanding options granted under the 1999 Director Option Plan, and 550,000 shares remained available for any new options or restricted stock units (where restricted stock unit awards count as 2.5 shares) to be granted in the future. We are not proposing to add any shares to the pool available for issuance under the Plan.

 

If an outstanding option award expires or becomes unexercisable without having been exercised in full, the unpurchased shares generally will become available for future grant or sale under the Plan. Also, if we experience a stock split, reverse stock split, stock dividend, combination or reclassification of our common stock, or any other similar event affecting our common stock without receipt of consideration by the Company, the number of shares available for issuance will be adjusted and the exercise price of outstanding Awards, as appropriate, to reflect any such change, provided that the number of shares subject to subsequently granted Awards will not be proportionately adjusted.

 

The Company believes that restricted stock unit awards can be an important and effective part of an equity compensation strategy consistent with best practices and can help limit stockholder dilution related to the Company’s equity compensation program. However, the Company recognizes that the issuance of restricted stock unit awards can potentially be more costly to its stockholders than stock options. Accordingly, any award of restricted stock units will be counted against the Plan’s share reserve as two and a half shares for every one share subject to such award. Correspondingly, to the extent that an award that counted as two and a half shares against the Plan reserve at the time of grant pursuant to the preceding sentence is recycled back into the Plan (e.g., upon award termination), the Plan will be credited with two and a half shares that will thereafter be available for future issuance under the Plan.

 

Eligibility

 

Awards may be granted only to Outside Directors. The Plan does not confer upon any participant any right with respect to continuation of service as a member of our Board (“Director”) or nomination to serve as a Director, nor will it interfere in any way with any rights which the Director of the Company may have to terminate the Director’s relationship with the Company at any time.

Administration and Grants of Options Under the Plan

 

All grants of options to Outside Directors will be automatic and nondiscretionary and in strict accordance with the provisions of the Plan; provided, however, that the Board may, in its discretion, provide that certain Outside Directors are not eligible to receive options for specified periods of time.

 

Currently under the Plan, each Outside Director is automatically granted an option to purchase 80,000 shares of Common Stock on the date such person first becomes an Outside Director (“First Option”), whether through election by shareholders or appointment by the Board. (A Director who is an employee of the Company (“Inside Director”) who ceases to be an Inside Director but remains a Director does not receive a First Option.) Under the proposed amendment, the First Option will be adjusted to be an option grant to purchase 50,000 shares of Common Stock.

 

Currently under the Plan, the First Option vests as to 1/16^th of the shares subject to it each three months following its date of grant, so as to become 100% vested on the fourth anniversary of the date of grant, provided that the participant continues to serve as a Director on such date. Under the proposed amendment, the First Option will become exercisable as to 1/3^rd of the shares each anniversary following the date of grant. Thus, the First Option would be 100% vested on the third anniversary of the date of grant, provided that the participant continues to serve as a Director.

 

The term of the First Option is 10 years. The First Option is exercisable only while the Outside Director remains a Director of the Company, subject to the post-termination and adjustments provisions in the Plan. The exercise price of the First Option is 100% of the fair market value on the date of grant.

 

The current Plan also provides for an automatic annual grant of an option to purchase 20,000 shares of Common Stock (the “Subsequent Option”) on each anniversary of such Outside Director receiving a First Option, subject to continued status as an Outside Director. Under the proposed amendment, the Subsequent Option would remain an option to purchase 20,000 shares of Common Stock. Currently under the Plan, the Subsequent Option vests starting on the third anniversary of the date of grant as to 1/4^th of the shares subject to it each three months following such anniversary. Thus, the Subsequent Option is 100% vested on the fourth anniversary of the date of grant. Under the proposed amendment, the Subsequent Option would become 100% exercisable on the one-year anniversary of the date of grant.

 

The Subsequent Option is exercisable for a term of ten years, its exercise price will be 100% of the fair market value on the date of grant, and is exercisable only while the Outside Director remains a Director of the Company, subject to the post-termination and adjustment provisions of the Plan.

 

Notwithstanding the foregoing, in the event that a director serves through the date of an annual meeting, but is not standing for re-election at that annual meeting, the First Option (if granted on the date of an annual stockholders meeting, and then only with respect to the portion of the option due to vest in the applicable year) and Subsequent Option will vest on the earlier of: (1) the anniversary of the date of grant or (2) the annual meeting date for that year.

 

Also, under the proposed amendment, the Plan would explicitly prohibit the repricing of options granted pursuant to the Plan. Pursuant to the amendment, the terms of any option may not be amended to reduce the exercise price of outstanding options or cancel outstanding options in exchange for cash, other Awards or options with an exercise price that is less than the exercise price of the original option without shareholder approval.

 

Administration and Grants of Restricted Stock Units Under the Plan

 

Currently the Plan does not permit the grant of restricted stock units. A restricted stock unit is a bookkeeping entry representing an amount equal to the fair market value of one share and is settled in stock. Each restricted stock unit represents an unfunded and unsecured obligation of the Company. Under the proposed amendment and commencing immediately after the 2008 Annual Meeting, each new Outside Director would be automatically granted 15,000 restricted stock units on the date such person first becomes an Outside Director (the “Initial RSU Grant”). Also commencing immediately after the 2008 Annual Meeting, each Outside Director would be automatically granted 10,000 restricted stock units annually (the “Annual RSU Grant”) on the date of each Annual Meeting, provided that such Outside Director had served as an Outside Director prior to such Annual

Meeting and that he or she continues to be an Outside Director at such Annual Meeting. Annual grants at the first Annual Meeting after appointment will be prorated as described below under “Timing of Grants Under the Plan” for new directors that join the Board between annual meetings.

 

Under the proposed amendment, the Initial RSU Grant will vest and become payable as to 1/3^rd of the shares subject to it on the one year anniversary of the date of grant, so as to be 100% vested on the third anniversary of the date of grant, provided that the participant remains a Director on such dates. Also, the proposed amendment provides that the Annual RSU Grant will vest and become payable as to 100% of the shares subject to it on the one-year anniversary of the date of grant, provided that the participant remains a Director on such date. The proposed amendment to the Plan would require payment of earned restricted stock units to be made as soon as practicable after the date set forth in the forth in the award agreement evidencing the terms and conditions of the grant. On the participant’s termination as a Director, all unvested restricted stock units will be forfeited to the Company.

 

Notwithstanding the foregoing, in the event that a director serves through the date of an annual meeting, but is not standing for re-election at that annual meeting, the Initial RSU Grant (if granted on the date of an annual stockholders meeting and then, only with respect to the portion of the Initial RSU Grant due to vest in the applicable year) and the Annual RSU Grant will vest on the earlier of: (1) the anniversary of the date of grant or (2) the annual meeting date for that year.

 

Timing of Grants Under the Plan

 

Under the current Plan, annual grants of awards generally occurred on the anniversary of an Outside Director’s appointment or election to the Board. Under the proposed amendment, grants of options to continuing Outside Directors will be made on the Annual Meeting date starting with the 2009 Annual Meeting of Stockholders.

 

If the amendment to the Plan is approved, as a transition matter, continuing directors will receive an option grant that is reduced 25% in amount for each fiscal quarter after the 2008 Annual Meeting, but will vest one year from the date of grant. For new Outside Directors, their first annual option and restricted stock unit grant would also be similarly reduced in amount when granted at the first annual shareholder meeting after joining the Board. The following chart illustrates how this would apply in each case:

 

 

Subsequent annual grants would then be at 100% of the amounts in the Plan (and awarded on the annual meeting dates).

Awards to be Granted to Certain Individuals

 

Assuming we obtain approval, the number of Awards that an Outside Director may receive under the Plan would be automatic and non-discretionary. The following table sets forth for fiscal year 2008(a) that aggregate number of shares subject to Awards that will be received by or allocated to each of the participants under the plan being acted upon, and (b) the average dollar value of each share.

 

 

 

 

Non-Transferability of Awards

 

Awards granted under the Plan may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the participant, only by the participant.

 

Tax Considerations

 

The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers and the Company of Options granted under the Plan. Tax consequences for any particular individual may be different.

 

Stock Options

 

No taxable income is reportable when a stock option is granted to an Outside Director. Upon exercise, the Outside Director will recognize ordinary income in an amount equal to the excess of the fair market value (on the exercise date) of the Shares purchased over the exercise price of the option. Any additional gain or loss recognized upon any later disposition of the Shares would be capital gain or loss.

 

Restricted Stock Units

 

No taxable income is reportable when a restricted stock unit is granted. Instead, an Outside Director will generally recognize ordinary income when the units vest and the shares are delivered to the Outside Director. The amount of ordinary income recognized will equal the value of the shares on the vesting date, less the amount (if any) the Outside Director paid for the shares.

Any gain or loss the Outside Director recognizes upon the sale or exchange of shares acquired through a grant of restricted stock units generally will be treated as capital gain or loss and will be long-term or short-term depending upon the holding period of the shares.

 

Tax Effect for the Company

 

The Company generally will be entitled to a tax deduction in connection with an Award under the Plan in an amount equal to the ordinary income realized by an Outside Director at the time the Outside Director recognizes such income.

 

Amendment & Termination

 

The Board generally may amend or terminate the Plan at any time for any reason, except that the Board will obtain shareholder approval of material amendments as required by any applicable law or stock exchange rule.

 

Equity Compensation Plan Information

 

The following table summarizes information, as of October 27, 2007, with respect to shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans (in thousands except per share amounts):

 

 

 

 

If a quorum is present, the affirmative vote of a majority of the total votes cast at the Annual Meeting will be required to approve the amendment to the 1999 Director Option Plan. Broker non-votes and abstentions will have no effect on the outcome of the vote.

 

The Board of Directors recommends that stockholders vote “FOR” the amendment and restatement of the 1999 Director Option Plan.

 

The Audit Committee has selected KPMG LLP as our independent auditors for the fiscal year ending October 25, 2008 and recommends that stockholders vote for ratification of such appointment. Although ratification by stockholders is not required by law, the Company has determined that it is desirable to request ratification of this selection by the stockholders. Notwithstanding its selection, the Audit Committee, in its discretion, may appoint new independent auditors at any time during the year if the Audit Committee believes that such a change would be in the best interests of Brocade and its stockholders. If the stockholders do not ratify the selection of KPMG LLP, the Audit Committee may reconsider its selection.

 

KPMG LLP was first appointed in fiscal year 2002, and has audited our financial statements for fiscal years 2002, 2003, 2004, 2005, 2006 and 2007. We expect that representatives of KPMG LLP will be present at the Annual Meeting to respond to appropriate questions and to make a statement if they so desire.

 

 

 

 

“Audit Fees” consisted of fees for the audit of our annual financial statements, review of the financial statements included in our quarterly reports on Form 10-Q and services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements, statutory audits required by non-U.S. jurisdiction, the preparation of an annual “management letter” on internal control matters and assurance services provided in connection with the assessment and testing of internal controls with respect to Section 404 of the Sarbanes-Oxley Act of 2002.

 

“Audit-Related Fees” consisted of assurance and related services by KPMG LLP that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.”

 

“Tax Fees” consisted of professional services rendered by KPMG LLP for tax compliance and tax planning. The services for the fees disclosed under this category include tax return preparation and technical tax advice.

 

“All Other Fees” for fiscal year 2006 were substantially all related to fees incurred in connection with Audit Committee internal reviews regarding historical stock option granting practices, including leaves of absence and transition and advisory roles, which was completed in November 2005.

 

Pre-approval Policy.  The Audit Committee has established a policy governing our use of KPMG LLP for non-audit services. Under the policy, the Audit Committee is required to pre-approve all audit and non-audit services performed by the Company’s independent auditors in order to ensure that the provision of such services does not impair the auditors’ independence. The Audit Committee pre-approves certain Audit and Audit-Related Services, subject to certain fee levels. Any proposed services that are not a type of service that has been pre-approved or that exceed pre-approval cost levels require specific approval by the Audit Committee in advance. The Committee periodically reviews the lists of pre-approved service types set forth in the policy as required. In fiscal years 2007 and 2006, all fees identified above under the captions “Audit-Related Fees,” “Tax Fees” and “All Other

Fees” that were billed by KPMG LLP were approved by the Audit Committee in accordance with SEC requirements.

 

The Audit Committee has determined that the rendering of other professional services for tax compliance and tax advice by KPMG LLP is compatible with maintaining their independence.

 

If a quorum is present, the affirmative vote of a majority of the shares present and entitled to vote at the Annual Meeting will be required to ratify the selection of KPMG LLP as our independent auditors. Abstentions will have the effect of a vote “against” the ratification of KPMG LLP as our independent auditors. Broker non-votes will have no effect on the outcome of the vote.

 

The Board of Directors, on behalf of the Audit Committee, recommends that stockholders vote “FOR” the ratification of the selection of KPMG LLP as Brocade’s independent auditors for the fiscal year ending October 25, 2008.

 

Set forth below is information regarding our executive officers as of February 2, 2008.

 

 

Michael Klayko has served as our Chief Executive Officer and a director since January 2005. Prior to that, he served as Vice President, Worldwide Sales from May 2004 until January 2005. From April 2003 until May 2004, Mr. Klayko served as Vice President, Worldwide Marketing and Support, and from January 2003 until April 2003, he was Vice President, OEM Sales. From May 2001 to January 2003, Mr. Klayko was Chief Executive Officer and President of Rhapsody Networks, a privately held technology company acquired by Brocade. From December 1998 to April 2001, Mr. Klayko served as Executive Vice President of McDATA Corporation, a storage networking company. From March 1995 to November 1998, Mr. Klayko was Senior Vice President for North American Sales at EMC Corporation, a provider of information storage systems products. Mr. Klayko also held various executive sales and marketing positions at Hewlett-Packard Company and IBM Corporation. Mr. Klayko received a B.S. in Electronic Engineering from Ohio Institute of Technology, in Columbus, Ohio.

 

Richard Deranleau has served as Brocade’s Chief Financial Officer since May 2006 and as Vice President since November 2005. Mr. Deranleau served as our interim Chief Financial Officer from December 2005 until May 2006. He held the title Controller and Treasurer from May 2003 until December 2005. From 1992 to May 2003, Mr. Deranleau served in various management positions for Polycom, Inc., including Vice President of Finance and Treasurer from January 2001 to May 2003. Prior to Polycom, Mr. Deranleau held various accounting and finance positions at Tandem Computers and Coopers and Lybrand, LLC. Mr. Deranleau holds a B.S. in Economics from Iowa State University, an M.B.A. from San Jose State University in San Jose, California, and is a Certified Public Accountant.

 

Tejinder (TJ) Grewal, has served as Vice President of Corporate Development since August 2004, and is responsible for developing and managing strategic Brocade corporate initiatives, including merger and acquisitions, alliances, key business initiatives, and the Brocade investment portfolio. From 1999 through August 2004, Mr. Grewal worked with McKinsey & Company, where he advised software, semiconductor, and consumer hardware clients as part of the company’s High Technology Practice. Prior to joining McKinsey, he was a senior manager in Ernst & Young’s technology practice. Mr. Grewal holds an M.B.A. from McMaster University and a B.A. from York University, both in Canada.

 

Don Jaworski has served as our Vice President and General Manager, Files since November 2007 and our Vice President, Product Development since November 2004. Prior to that, Mr. Jaworski served as our Vice President, Engineering from April 2003 to November 2004. From January 2002 to December 2002, Mr. Jaworski was with Mohr, Davidow Ventures, an early stage venture capital firm, as an Entrepreneur in Residence. From June 2000 to July 2001, Mr. Jaworski served as Senior Vice President of Product Development of Cacheflow, Inc., which acquired SpringBank Network, Inc., a privately held company, where Mr. Jaworski held the position of Chief Executive Officer and Vice President of Engineering from May 2000 to June 2000. Mr. Jaworski holds a B.S. in Computer Science from Bowling Green State University and an M.B.A. from Santa Clara University in Santa Clara, California.

Hugues Meyrath has served as Vice President and General Manager, Services, Support and Solutions (SSS) since November 2007. Prior to that, Mr. Meyrath served as our Senior Director, Product Management from January 2007 to November 2007 and Senior Director, Product Marketing from September 2006 to January 2007. Mr. Meyrath served as Director, Product Marketing from January 2006 to September 2006 and Senior Manager, Product Marketing from September 2003 to January 2005. Prior to joining Brocade, he served as the Senior Manager, Business Development for Quantum Corporation from January 2002 to September 2003. Mr. Meyrath holds a B.S. in Engineering from the University of Louvain in Belgium and M.B.A. from the University of California, Berkeley

 

Luc Moyen has served as Vice President and General Manager, Server Edge and Support (SES) since November 2007. Prior to that, Mr. Moyen served as our Vice President, Worldwide Operations from October 2004 to October 2007. He served as Vice President, Product Operations from August 2004 to October 2004, Vice President, Product Operations and Program Management from March 2004 to August 2004, Vice President, Program Management from May 2003 to March 2004, and Director, Product Operations and Quality from May 2002 to May 2003. Mr. Moyen holds both B.S.E.E. and M.S.E.E. degrees from the University of Illinois, Urbana-Champaign.

 

Tyler Wall has served as our Vice President and General Counsel since June 2005 and as Corporate Secretary and Chief Compliance Officer since July 2005. Prior to joining Brocade and from February 2000, he served as Vice President and General Counsel of Chordiant Software, Inc., an enterprise software applications corporation, where he was also Corporate Secretary from January 2004. From 1998 to February 2000, he served as Chordiant’s Director of Legal Affairs. Prior to joining Chordiant, Mr. Wall worked at Oracle Corporation, a provider of database and application software, where he served as Corporate Counsel for the commercial licensing and distribution group. Mr. Wall holds a B.S. in economics with English literature minor from University of Utah; a J.D. from Santa Clara University School of Law; and an M.B.A. from Santa Clara University School of Business.

 

Ian Whiting has served as our Vice President and General Manager, Data Center Infrastructure (DCI) since November 2007 and our Vice President, World Wide Sales since May 2005. From 2003 to May 2005, Mr. Whiting served as our Vice President of EMEA and Latin America, and from 2001 through 2002, as our Executive Director of Partner Sales for EMEA. Prior to joining us in 2001, he was Director of Compaq Storage Works EMEA. Mr. Whiting holds a bachelor’s degree in French and German from the University College Swansea, an M.A. in European Business Studies from Cranfield School of Management, and a diploma of marketing from the Chartered Institute of Marketing in Maidenhead, United Kingdom.

 

 

We had five named executive officers (“NEOs”) for fiscal 2007. Details of compensation for our NEOs can be found in the tables and associated narrative disclosure beginning on page 47 of this proxy statement. This Compensation Discussion and Analysis addresses the following topics:

 

 

Role of the Compensation Committee

 

The purpose of our Compensation Committee (the “Committee”) is to discharge the Board’s responsibilities relating to compensation of our executive officers and directors. The Committee has overall responsibility for (i) overseeing the Company’s compensation and benefits policies generally; and (ii) overseeing, evaluating and approving executive officer and director compensation plans, policies and programs. More specifically, with respect

to our NEOs, the Committee reviews and approves: (i) annual base salaries; (ii) annual incentive compensation; (iii) long-term incentive compensation; (iv) employment, severance and change-in-control agreements; and (v) other compensation, perquisites or special benefit items, if any.

 

Committee Interaction with Management

 

In carrying out its responsibilities, the Committee works with members of our management team, including the CEO and Vice President, Human Resources. The management team assists the Committee by providing information on Company and individual performance, market data and management’s perspective and recommendations on compensation matters, except that the management team does not make recommendations with respect to the CEO’s compensation. Although the Committee solicits and reviews management’s (including the CEO’s) recommendations and proposals with respect to annual cash compensation adjustments, long-term equity incentive awards, program structures and other compensation-related matters, the Committee only uses management’s recommendations and proposals as one factor in making compensation decisions for our NEOs and directors.

 

Committee Process

 

In carrying out its responsibilities, the Committee:

 

 

The Committee regularly reports to, and occasionally consults with, the Board on the results of its reviews and any actions it takes or proposes to take with respect to compensation policies and executive officer compensation decisions. As permitted by its Charter, during fiscal year 2007, the Committee delegated its authority, within certain preset limits and grant guidelines, with respect to the grant of long-term equity incentives to employees other than executive officers, to the Company’s Grant Committee, consisting of the Chairman of the Board and the CEO.

 

A copy of the Committee’s charter can be found at http://media.corporate-ir.net/media_files/irol/90/90440/corpgov/Compensation_Committee.pdf.

 

Committee Membership and Meetings

 

At the fiscal year ended October 27, 2007, the Committee was composed of John W. Gerdelman, David L. House, L. William Krause and Sanjay Vaswani. Mr. Gerdelman joined the Committee effective February 12, 2007. Neil Dempsey also served as the Committee’s chair through April 19, 2007, but did not stand for re-election to the Board of Directors at the Company’s April 19, 2007 stockholder meeting. All Brocade Committee members meet the “independent director” definition of the Nasdaq Stock Market Marketplace Rules; the “non-employee director” definition of Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934; and the “outside director” definition of Section 162(m) of the Internal Revenue Code of 1986.

 

The Committee holds regular quarterly meetings and, in addition, meets as often as it deems necessary to carry out its responsibilities. The Committee met 11 times in fiscal year 2007.

 

Compensation Review Cycle

 

Historically, executive officer base salaries, as well as annual cash incentive opportunities and awards were generally reviewed annually, or more frequently as warranted, with adjustments generally effective in July. In order to better align with fiscal year performance and other compensation determinations (for example, annual equity awards), during fiscal year 2007, the Committee changed the annual review cycle so that adjustments will be effective in November. To transition to this new review cycle, and in order to avoid a prolonged period between base

salary adjustments and annual incentive compensation reviews, the Committee reviewed NEO cash compensation twice in fiscal 2007, with adjustments effective in both August 2007 and November 2007.

 

Use of External Advisors

 

Beginning in fiscal 2006, the Committee engaged Compensia, Inc., an independent compensation advisor, to provide it with advice, information and recommendations relating to executive compensation. Compensia serves at the discretion of the Committee. Compensia’s fees and expenses for the services provided to the Committee for fiscal 2007 totaled $216,919.25. Compensia did not provide any other services to the Company in fiscal 2007.

 

In fiscal 2007, Compensia regularly participated in Committee meetings and provided assistance to the Committee, including:

 

 

Compensation Philosophy

 

Our compensation programs are generally based on an overarching pay-for-performance philosophy. In this respect, we design our compensation programs to provide total pay that aligns corporate performance with individual performance. Within this framework, we provide compensation and benefit levels that will attract, retain and motivate a highly talented executive team within the context of responsible cost management.

 

Compensation Objectives

 

Consistent with our pay-for-performance philosophy, our compensation programs (including those for our NEOs) are designed around five primary objectives:

 

1. Establish a direct link between business financial results and individual/team performance and rewards.

 

2. Align the interests and objectives of management and employees with driving Company growth and creating stockholder value.

 

3. Share the enterprise value created by employees through our equity programs.

 

4. Provide health and welfare protection to assist employees and their families with catastrophic events, such as death, disability or illness.

 

5. Provide employees with tax-effective retirement savings programs.

 

Compensation Mix

 

Consistent with our compensation objectives, the Committee provides a mix of compensation elements that emphasizes annual cash incentives and long-term equity incentives. The primary elements of our NEOs’ compensation program are base salary, an annual cash incentive award opportunity, and long-term equity incentive awards. Each of these components is discussed in greater detail below under “NEO Compensation Components.” In addition, we provide our NEOs with health and welfare benefits on substantially the same terms and conditions as they are provided to most other employees, as well as change of control and severance protection.

Consistent with our pay-for-performance philosophy, for fiscal 2007, on average, 80% of our NEOs’ compensation was delivered in the form of variable annual cash incentives or long-term equity incentives. Average pay mix for the NEOs is illustrated below:

 

 

NOTE: For details on the Fiscal 2007 Retention Bonus payment, see the Bonus discussion below; this program concluded with the payments at the end of fiscal 2007. Senior Leadership Plan (SLP) Bonus represents target awards based on Adjusted FY07 base salary and target bonuses in effect during the year. Fiscal 2007 Long-term Incentive awards included stock options (grant date Black-Scholes value), Performance Restricted Stock Units (grant date face value), Restricted Stock Units (grant date face value) and the Market Outperform Plan (Monte Carlo simulation value).

 

Compensation Positioning

 

While the Committee does not target a specific competitive percentile for the total compensation of our NEOs, it considers the following factors when setting NEO compensation levels:

 

 

Benchmarking

 

To assess the competitiveness of our executive compensation programs and compensation levels, the Committee examined, with Compensia’s assistance, the executive compensation practices of a peer group of 16 high-technology companies for fiscal 2006 and 19 high-technology companies for fiscal 2007. Compensation data for the peer group companies was gathered from public filings and Radford’s High-Tech Executive Survey database.

 

The peer group companies were selected on the basis of their similarity to the Company in size (as determined by revenue, market capitalization, net income, and employee base), business strategy and industry. The Committee reviews our peer group at least annually and makes adjustments to its composition as necessary. The fiscal 2007 peer

group was finalized in April 2007 and reflects, among other things, the Committee’s consideration of the Company’s change in size following the acquisition of McData Corporation in January 2007.

 

The fiscal 2006 and 2007 peer groups were as follows:

 

Fiscal 2006 Peer Group

 

 

Fiscal 2007 Peer Group

 

 

The primary elements of our NEO compensation program are base salary, an annual cash incentive award opportunity, and a long-term equity incentive award.

 

Base Salary

 

Base salary represents the fixed portion of our NEOs’ compensation. As noted above, while the Committee typically reviews our NEOs’ base salaries in July, this year the Committee decided to shift this review to November of each year. Consequently, in fiscal 2007, our NEOs’ base salaries were reviewed in both July and November.

 

The Committee considered the management team’s base salary recommendations for the NEOs (other than the CEO), the market analyses and salary adjustment recommendations from Compensia for all NEOs (including the CEO), and the factors set forth under “Compensation Positioning” on page 29 above, and made the following adjustments to NEO base salaries:

 

 

 

 

Annual Cash Incentives

 

In fiscal 2007, the annual cash incentives for our NEOs consisted of our Senior Leadership Plan (SLP) and a special service-based bonus program, the final payment of which was made in December 2007.

 

Fiscal 2007 Senior Leadership Plan

 

The Senior Leadership Plan (SLP) is an annual cash incentive program that rewards achievement of individual and corporate goals. The employees most responsible for delivering revenue, income and margin performance, including our NEOs, participate in this program. In fiscal 2007, 20 employees (including our NEOs) participated in the SLP.

 

SLP Formula

 

In fiscal 2007, annual cash incentive award payouts under the SLP were determined based on the following formula:

 

Payout = Performance Component Percentage x Operating Margin Multiplier Percentage x
Target Annual Cash Incentive Opportunity

 

Performance Component Percentage

 

The performance component of the SLP is based on a point system. Points can be earned by SLP participants based on the Company’s revenue performance, the Company’s non-GAAP operating income performance and individual executive performance as follows:

 

 

 

 

Each NEO can earn from 0% to 100% of the points allocated to each performance category. The points earned in each category are added together to determine the “performance component percentage” in the formula above.

 

The target levels of revenue performance and non-GAAP operating income performance were based on our Board-approved annual operating plan for fiscal 2007. Our annual operating plan is generally discussed extensively between the Board and our management team before it is approved by the Board. These target levels were set at levels that the Committee believed were difficult to achieve. Because the Company’s actual financial performance and individual executive performance are inherently uncertain, we are unable to more precisely quantify the probability that target performance (or other levels of performance) would be achieved.

 

These corporate financial targets were communicated to the NEOs at the beginning of fiscal 2007. Concurrently, our CEO and each of the other NEOs completed a performance contract, which outlined Company and functional specific goals for each of our NEOs for the fiscal year. The CEO reviewed and approved the performance contracts of his direct reports (including each of the other NEOs). The Chairman of the Board and the Committee Chairman reviewed and approved the CEO’s performance contract. In the case of our NEOs other than the CEO, these performance contracts serve as the basis for measuring their individual performance. In the case of the CEO, individual performance is measured against the following criteria, which are elements of his performance contract:

 

 

 

Consistent with the practices of the 2007 peer group and the factors set forth under “Compensation Positioning” on page 29 above, the Committee determined to increase his target annual cash incentive from 75% of base salary (its fiscal 2006 level) to 100% of base salary. For fiscal 2007, the Committee allocated 25% of Mr. Klayko’s total annual cash incentive to its quantitative and qualitative assessment of his and our performance against the performance contract criteria listed above. For fiscal year 2008, Mr. Klayko’s target annual cash incentive will remain at 100% of his base salary, but will be based solely on our corporate performance as discussed in greater detail under “Changes to Senior Leadership Plan for Fiscal Year 2008.”

 

Operating Margin Multiplier Percentage

 

The second component in the calculation is an “Operating Margin Multiplier.” The target level for our operating margin under the SLP is based on our Board-approved annual operating plan and was communicated to program participants at the beginning of the fiscal year. If the Operating Margin Multiplier is below threshold, no payouts were to be made under the SLP. The Operating Margin Multiplier is not capped for above target levels of Operating Margin performance, but payouts under the SLP have not exceeded 200% of target in any of the past three fiscal years.

 

 

Target Annual Cash Incentive Opportunity

 

The third component in the calculation is the target annual cash incentive opportunity for each NEO. Target annual cash incentives for each NEO were established by the Committee based on the recommendations of both the management team and Compensia and the factors set forth under “Compensation Positioning” on page 29 above. As described above, the Committee changed its annual compensation review cycle to November. Consequently, target cash incentive award opportunities were reviewed and adjusted in August 2007 and maintained in November 2007 for fiscal year 2008. The target cash incentive award opportunities for each NEO were as follows:

 

 

Because the target cash incentive award opportunities were adjusted three-quarters of the way through fiscal 2007, for the purpose of calculating fiscal 2007 annual incentives, the “Prior to 8/1/07” percentage displayed in the table above was applied to 75% of the NEO’s ending 2007 base salary, and the “After 8/1/07” target percentage was applied to 25% of the NEO’s ending 2007 base salary. The “After 11/1/07” target percentage will be applied for fiscal year 2008.

 

2007 Annual Cash Incentive Award Determinations

 

In November 2007, the Committee reviewed executive compensation based on Company and individual NEO performance. The Company achieved 99.7% of its target revenue performance and 112.4% of its target operating income performance. Operating margin was 112.8% of target, resulting in an operating margin multiplier of 141.5%. In December 2007, performance against the performance contracts for the NEOs other than the CEO was also reviewed (with input from the CEO) to determine each NEO’s individual performance. Individual performance was determined to be 100% of target for each of the NEOs. During this same period, the Committee also assessed the CEO’s performance against the criteria listed above under “Performance Component Percentage.” While certain

minor individual performance goals may not have been fully attained, the Committee determined that Mr. Klayko had met or exceeded other more significant individual performance goals and therefore should be awarded his full bonus.

 

On average, the annual cash incentive awards approved by the Committee for the NEOs in fiscal 2007 were 141% of target.

 

Special Retention Bonuses

 

For fiscal 2007, in addition to the SLP, each of our NEOs was eligible to receive an additional cash bonus equal to 50% of his or her respective regular target annual cash incentive award opportunity for fiscal 2007, prior to any adjustments to target incentive opportunities in August 2007, provided such NEO remained employed with us through the end of the fiscal 2007. The Committee approved this retention program in fiscal 2005 in connection with the internal and SEC investigations of the Company’s stock option grant practices, which created an environment of significant uncertainty for the Company and its executive officers. The Committee believed that the retention program was in the best interests of the Company and its stockholders in that it would support the on-going employment, focus and dedication of the NEOs under difficult circumstances. The payments made to our NEOs in December 2007 were the final scheduled payments under this program.

 

Annual Cash Incentive Payouts

 

Annual cash incentive award payouts based upon fiscal 2007 performance and the special retention bonus program for our NEOs were made in December 2007, and are summarized in the table below.

 

 

 

 

Changes to Senior Leadership Plan for Fiscal 2008

 

For fiscal 2008, after consultation with management and Compensia, the Committee has modified the SLP in four significant ways:

 

1. The operating margin multiplier will be replaced with an operating income multiplier

 

2. The performance component percentage will be based on our revenue and operating margin

 

3. For NEOs in charge of our business units, the performance component percentage will be based on a combination of our revenue and operating margin and specific business unit revenue and operating margin targets

 

4. Consistent with market practices, the CEO’s performance component percentage for fiscal 2008 will be equally weighted between revenue and operating margin and will not contain an individual performance component for fiscal 2008

 

These changes are intended to ensure that, in pursuing the financial objectives tied to our annual operating plan, our NEOs will focus their attention on both revenue growth and operating efficiency gains for the fiscal year, rather than primarily on efficiency gains. The Committee believes that by rewarding the NEOs for increasing

productivity and efficiency, it will lead to greater profitability than the current program design. In addition, replacing the operating margin multiplier with an operating income multiplier ensures that the program will be funded, and annual incentive awards paid out, only if we are profitable at a level that the Committee believes signifies successful execution of our annual operating plan.

 

Long-term Equity Incentives

 

Our equity award practices are designed to reflect a balance between stockholders’ dilution concerns and the Company’s need to remain competitive in recruiting and retaining executive talent. Accordingly, our actual average burn rate (shares granted subject to long-term equity incentives divided by our total shares outstanding), excluding acquisitions, has been approximately 3.6% over the past three fiscal years. The Committee further believes that our equity program should focus our NEOs on stockholder value creation through long-term Company performance, as well as motivate them and retain their services in a competitive job market by providing significant long-term earnings potential.

 

Award Mix

 

Our long-term equity incentive program framework for fiscal year 2006 and fiscal year 2007 is summarized in the tables below.

 

 

As in fiscal year 2006, for fiscal year 2007, the Committee decided that a mix of service-based awards and performance-based awards would best meet its motivation and retention objectives. The service-based awards consisted of stock options and service-based restricted stock units. The performance-based awards consisted of performance restricted stock units and a new performance-based long-term incentive program aimed at rewarding superior relative performance against the broader technology market, which we titled the Market Outperform Plan.

 

Service-based Awards

 

We believe that stock options (when granted at fair market value) provide an appropriate long-term incentive for our NEOs since they reward them only to the extent that the Company’s stock price grows and stockholders realize value following their grant date. Similarly, restricted stock units provide an incentive for our NEOs to remain employed with us and to focus on driving increased stockholder value over their vesting period. The stock options granted to our NEOs in fiscal 2007 vest over four years from the grant date, and the restricted stock units vest on the second anniversary of the grant date. The Committee believes that four-year vesting of stock options is consistent with peer group practices and provides rewards for longer-term stock price appreciation. The two-year vesting of

the restricted stock unit awards was intended to provide retention and motivation incentives over a shorter period of time to address continuing uncertainty related to the then-ongoing stock option investigations and related issues.

 

Performance-based Awards

 

Performance-Restricted Stock Units

 

The Committee introduced the performance restricted stock units in November 2006 with the belief that tying a material element of our NEOs’ compensation to relative performance (in the case of the performance restricted stock units, versus the fiscal 2006 peer group) would enhance the creation of long-term stockholder value. Specifically, vesting of these awards is contingent on the Company’s three-year performance relative to the fiscal 2006 peer group, based on the following equally-weighted metrics: revenue growth, operating income growth, free cash flow growth and stock price growth. The Committee selected these metrics to encourage and reward:

 

 

Depending on our performance, the actual number of shares of our common stock earned under the performance restricted stock units by each NEO could range from zero for below-threshold performance to 200% at maximum performance. To determine actual payouts, our average percentile rank against the fiscal 2006 peer group across the four metrics will be measured at the end of the three-year performance period. Target awards are earned at 50^th percentile average performance against the fiscal 2006 peer group, threshold payouts (25% of target) are earned at 35^th percentile average performance against the fiscal 2006 peer group, and maximum payouts (200% of target) are earned at 75^th percentile average performance against the fiscal 2006 peer group.

 

Market Outperform Plan

 

Following the award of performance restricted stock units in October 2006, the Committee continued to consider how to best measure and reward superior relative performance. Based on extensive review and consultation with the management team and Compensia, the Committee approved the Market Outperform Plan in July 2007. In connection with this new approach to rewarding superior relative performance, the Committee expects to discontinue the performance restricted stock unit approach it used for the November 2006 awards.

 

Under the Market Outperform Plan, awards are determined based on a dollar-denominated award pool that is funded solely to the extent that the Company’s percentage market capitalization growth (adjusted to offset the impact of stock-based acquisitions) exceeds the percentage growth of the Nasdaq-100 Index Tracking Stock issued by the PowerShares QQQ Trust, Series 1 (often referred to by its ticker symbol, QQQQ). Initial performance is expected to be measured over the 27-month period from August 2007 through October 2009. Subsequent performance periods are expected to be 24 months in duration. The award pool for the initial performance period will be based on the following formula:

 

Payout = Brocade Market Capitalization Growth − QQQQ Performance * Beginning Brocade
Market Capitalization * 2%

 

Each NEO has been awarded the right to receive a percentage of this award pool as set forth in the table below:

 

 

To the extent an award pool is funded under the plan, it will be converted into fully-vested shares of common stock (based on our stock price at the end of the performance period) and will be issued to participants shortly following the end of the performance period. Compensia provided the Committee with extensive modeling of potential payouts under the Market Outperform Plan, and the Committee believes that payouts will be appropriate to the levels of performance achieved. However, the Committee may reduce the number of shares issuable to plan participants at its sole discretion, and, in any event, the maximum number of shares that may be issued under the

plan in a single fiscal year is subject to the following caps: 1,500,000 shares for Mr. Klayko; 500,000 shares for each of Messrs. Deranleau, Grewal, Jaworski and Whiting; 250,000 shares for each of the other executive participants, and 100,000 shares for each of the other plan participants.

 

The Market Outperform Plan also provides that the Company may recover compensation issued under the program in the event of a financial restatement resulting from a participant’s fraudulent conduct. Specifically, this “clawback” provision enables the Company to demand a cash repayment from the executive in the event the Board determines within four years following the pertinent performance period (and prior to a change of control of the Company) that: (i) the executive committed financial-based fraud in financial statements filed with the Securities and Exchange Commission that precipitated the restatement; and (ii) such fraud positively impacted Brocade’s market capitalization growth rate during the performance period.

 

Approximately 86 employees (including our NEOs) have been selected to participate in the first performance period under the Market Outperform Plan.

 

Fiscal 2007 Equity Awards

 

As with the other elements of our NEO’s compensation, actual long-term incentives for our NEOs are determined based on the following factors:

 

 

In November 2006, the Committee approved the equity grants to our NEOs set forth in the table below. The stock options were granted with an exercise price of $9.27 per share (Brocade’s closing stock price on November 24, 2006, which was the effective date of grant). In July 2007, the Committee approved the Market Outperform Plan and the participation opportunity for each NEO, the value of which is also estimated in the table below.

 

 

 

 

Benefits and Perquisites

 

Our NEOs are provided with a carefully developed health and welfare benefit program, as well as the opportunity to participate in a Section 401(k) profit sharing-plan. They participate in these plans on substantially the same terms and conditions as most of our other employees. The Company does not provide any additional perquisites to its NEOs. Brocade also offers employees, including our NEOs, the ability to purchase Company stock at a discount under its 1999 Employee Stock Purchase Plan.

Post-Employment Obligations

 

The uncertainty that can arise among management from concerns about potential job loss and/or the possibility or occurrence of a change-of-control can result in the untimely departure or distraction of key executives. The Committee believes that executive employment agreements which provide severance and change-of-control protection support the continued attention and dedication of our NEOs to their assigned duties, and thus help ensure the best interests of our stockholders. These agreements help to mitigate that risk, as well as provide additional incentives to the covered NEOs to remain employed with the Company. In fiscal 2007, the Committee commenced a review, with Compensia’s assistance, of our NEOs’ existing employment agreements with the following goals: (i) simplify the current structure, (ii) provide greater uniformity of treatment among the NEOs in connection with terminations of employment either in connection with or apart from a change of control of the Company (as defined in the agreements), and (iii) evaluate the agreements against peer practices and market best practices. Based on this review, we amended the employment agreements with each of our NEOs.

 

As amended, these agreements provide that each NEO will receive certain severance benefits if he or she is terminated without “cause” or resigns for “good reason” (as those terms are defined in the employment agreements), whether or not the termination is associated with a change in control of the Company. However, the applicable benefit levels differ depending upon whether or not the termination is in connection with a change of control of the Company. The primary changes from the existing agreements were to impose an overall five-year term on the agreements and to provide for full accelerated vesting of long-term equity incentive awards for a qualifying termination of employment in connection with a change of control of the Company.

 

The potential benefits associated with the severance agreements are as follows for our NEOs:

 

 

For additional details on the employment agreements and their potential costs, see the tabular disclosure section in this proxy statement.

 

Section 409A/Option Exchange

 

On May 12, 2006, Brocade filed a Schedule TO (“Tender Offer”) with the SEC. The Tender Offer was filed to address recent changes to tax laws that could have serious, unfavorable personal tax consequences for some of Brocade’s employees, including our NEOs, who received certain stock options that were granted at a discount from fair market value at the time of grant. Specifically, under Section 409A of the Internal Revenue Code, certain options granted at a discount may trigger certain adverse tax consequences, including income tax at vesting, an additional 20% tax and interest charge, in addition to standard federal, state and other applicable taxes. The Tender Offer provided affected employees with the opportunity to amend or cancel their affected options to remedy the unfavorable personal tax consequences of the tax law change.

 

Specifically, the Company offered to amend certain discounted options granted after August 14, 2003 to increase the option grant price to the fair market value on the date of grant, and to give the employee a cash payment for the difference in option grant price between the higher amended option and the original discounted price. For certain options granted prior to August 14, 2003 that may have been granted at a discount, the Company offered to cancel the options in exchange for a cash payment based on the Black-Scholes value of the option. The Tender Offer was completed effective June 12, 2006; payment for the tendered options was made January 1, 2007.

The following tables provide a summary of the details associated with the tender offer for our NEOs:

 

 

 

 

 

 

 

Reasonableness of Compensation

 

The Committee believes the Company is operating in accordance with its compensation philosophy and is achieving its compensation objectives. The Committee believes the target pay positioning and pay mix are reasonable and appropriate for our NEOs. Specifically, the Committee believes that our NEOs are appropriately rewarded for their individual contributions, the achievement of operational success and the creation of stockholder value.

 

Equity Grant Practices

 

Our equity grant practices are set forth in our “Equity Awards Granting Policy.” In accordance with this policy, and with respect to annual equity awards granted to our NEOs, grants are typically made and grant prices set on the second Thursday of December. Grant dates for new hire awards are set on the fourth Thursday of each month (other than in December, in which case it is the second Thursday of the month). In the case of both annual and new hire awards, grant dates are set irrespective of blackout periods. The exercise price is determined based on the closing market price of Brocade’s common stock on the date of the grant. Grants are determined by the Committee, or its designated subcommittee, in accordance with both the Committee’s charter and the “Equity Awards Granting Policy.”

Grants (other than acquisition-related awards) are made subject to an annual equity pool approved by the Committee, which in fiscal 2007 was a net pool of approximately 11.3 million shares or 4.0% of the Company’s outstanding shares.

 

Tax Considerations

 

The Committee considers the potential effects of Section 162(m) of the Internal Revenue Code on the compensation paid to our NEOs. Section 162(m) disallows a tax deduction for any publicly held corporation for individual compensation exceeding $1.0 million in any taxable year for certain executive officers, unless the compensation is performance-based.

 

The Committee has examined our current executive compensation program and understands that some compensation paid to our NEOs may not be deductible under Section 162(m). However, based on its examination, the Committee does not believe that the loss of any deductions will be likely to have a material negative financial impact on the Company. The Committee also believes that it is important to retain the flexibility to motivate superior performance through awards or programs that do not meet all of the requirements of Section 162(m). The Committee will continue to monitor the issue of deductibility, and make adjustments to our executive compensation programs as circumstances warrant.

 

Section 409A of the Internal Revenue Code

 

Section 409A imposes additional significant taxes in the event that an NEO, director or other service provider receives “deferred compensation” that does not satisfy the requirements of Section 409A. Although we do not maintain a traditional nonqualified deferred compensation plan, Section 409A applies to certain severance arrangements and equity awards. Consequently, to assist in avoiding additional tax under Section 409A, we developed the severance arrangements described above and structured our equity awards in a manner intended to either avoid the application of Section 409A or, to the extent doing so is not possible, comply with the applicable Section 409A requirements.

 

10b5-1 Trading Plans

 

Each of our NEOs and Directors may enter into a written plan for the automatic trading of securities in accordance with Exchange Act Rule 10b5-1. The Company may also enter into a written plan for the automatic trading of securities in accordance with Rule 10b5-1 with respect to its stock repurchase program.

 

The Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management. Based on such review and discussions, the Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s annual report on Form 10-K and this proxy statement.

 

Respectfully submitted by the members of the Compensation Committee of the Board of Directors:

 

Sanjay Vaswani (Chair)

 

John W. Gerdelman

 

David L. House

 

L. William Krause

 

The following table sets forth summary information concerning compensation paid or accrued for services rendered to the Company in all capacities to (i) the Company’s Chief Executive Officer, (ii) the Company’s Chief Financial Officer and (iii) the Company’s other three most highly compensated executive officers who were serving as executive officers at the end of fiscal year 2007.

 

 

 

 

The following table shows all plan-based awards granted to the named executive officers during fiscal year 2007. The SLP and Retention type awards are cash awards and the others are non-cash awards. The option awards and the unvested portion of the stock awards identified in the table below are also reported in the “Outstanding Equity Awards at 2007 Fiscal Year-End” table below.