8. Borrowings

Senior Secured Notes

On January 20, 2010, the Company issued $300.0 million aggregate principal amount of its 6.625% Senior Secured Notes due 2018 at an issue price of 99.239% of the principal amount of the notes (the "2018 Notes") and $300.0 million aggregate principal amount of its 6.875% Senior Secured Notes due 2020 at an issue price of 99.114% of the principal amount of the notes (the "2020 Notes" and, together with the 2018 Notes, the "Senior Secured Notes"), in a private placement to "qualified institutional buyers" in the United States defined in Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and outside the United States pursuant to Regulation S under the Securities Act (the "Notes Offering"). The 2018 Notes mature on January 15, 2018 and bear interest at a rate of 6.625% per annum, payable semi-annually on January 15 and July 15 of each year, commencing on July 15, 2010. The 2020 Notes mature on January 15, 2020 and bear interest at a rate of 6.875% per annum, payable semi-annually on January 15 and July 15 of each year, commencing on July 15, 2010. The Company's obligations under the Senior Secured Notes are guaranteed by certain of the Company's domestic subsidiaries (the "Subsidiary Guarantors"). The obligations of the Company and the Subsidiary Guarantors under the Senior Secured Notes and the related guarantees are secured by liens, subject to certain exceptions and permitted liens and subject to the terms of an intercreditor agreement, on all assets of the Company and the Subsidiary Guarantors that secure any obligations under the Senior Secured Credit Facility, as described below.

The Company used approximately $435.0 million of the net proceeds of the Notes Offering to prepay a portion of the outstanding term loan under the Senior Secured Credit Facility on January 20, 2010, and used the remaining net proceeds, together with cash on hand, to retire on February 16, 2010 the 2.25% subordinated convertible notes ("2.25% Notes") originally issued by McDATA Corporation ("McDATA"), a wholly owned subsidiary of Brocade.

As of July 30, 2011, the liability associated with the 2018 Notes of $298.1 million, net of the debt discount of $1.9 million, and the liability associated with the 2020 Notes of $297.6 million, net of the debt discount of $2.4 million, are together reported as "Senior Secured Notes" on the Condensed Consolidated Balance Sheets. As of October 30, 2010, the liability associated with the 2018 Notes of $297.9 million, net of the debt discount of $2.1 million, and the liability associated with the 2020 Notes of $297.5 million, net of the debt discount of $2.5 million, are together reported as "Senior Secured Notes" on the Condensed Consolidated Balance Sheets.

Debt issuance costs totaling $11.0 million associated with the Senior Secured Notes are classified entirely as long-term and have been capitalized as deferred financing costs, with $1.4 million and $0.7 million amortized as of July 30, 2011 and October 30, 2010, respectively. As of July 30, 2011 and October 30, 2010, deferred financing costs were $9.6 million and $10.3 million, respectively, and are reported within "Other assets" on the Condensed Consolidated Balance Sheets. The deferred financing costs of the 2018 Notes and the 2020 Notes are being amortized using the effective interest method over the eight-year and ten-year term of the debt, respectively. No payments were made towards the principal of the Senior Secured Notes during the nine months ended July 30, 2011. As of July 30, 2011 and October 30, 2010, the fair value of the Company's Senior Secured Notes was approximately $642.8 million and $645.4 million, respectively, estimated based on broker trading prices.

The 2018 Notes were issued pursuant to an indenture, dated as of January 20, 2010 (the "2018 Indenture"), among the Company, the Subsidiary Guarantors and Wells Fargo Bank, National Association, as trustee. The 2020 Notes were issued pursuant to an indenture, dated as of January 20, 2010 (the "2020 Indenture" and, together with the 2018 Indenture, the "Indentures"), among the Company, the Subsidiary Guarantors and Wells Fargo Bank, National Association, as trustee.

On or after January 15, 2013, the Company may redeem all or a part of the 2018 Notes at the redemption prices set forth in the 2018 Indenture, plus accrued and unpaid interest and special interest, if any, to the applicable redemption date. In addition, at any time prior to January 15, 2013, the Company may, on one or more than one occasion, redeem some or all of the 2018 Notes at any time at a redemption price equal to 100% of the principal amount of the 2018 Notes redeemed, plus a "make-whole" premium as of, and accrued and unpaid interest and special interest, if any, to the applicable redemption date. On or after January 15, 2015, the Company may redeem all or a part of the 2020 Notes at the redemption prices set forth in the 2020 Indenture, plus accrued and unpaid interest and special interest, if any, to the applicable redemption date. In addition, at any time prior to January 15, 2015, the Company may, on one or more than one occasion, redeem some or all of the 2020 Notes at any time at a redemption price equal to 100% of the principal amount of the 2020 Notes redeemed, plus a "make-whole" premium as of, and accrued and unpaid interest and special interest, if any, to the applicable redemption date. At any time prior to January 15, 2013, the Company may also redeem up to 35% of the aggregate principal amount of the 2018 Notes and 2020 Notes, using the proceeds of certain qualified equity offerings, at the redemption prices set forth in the 2018 Indenture and the 2020 Indenture, respectively.

If the Company experiences specified change of control triggering events, it must offer to repurchase the Senior Secured Notes at a repurchase price equal to 101% of the principal amount of the Senior Secured Notes repurchased, plus accrued and unpaid interest and special interest, if any, to the applicable repurchase date. If the Company or its subsidiaries sell assets under certain specified circumstances, the Company must offer to repurchase the Senior Secured Notes at a repurchase price equal to 100% of the principal amount of the Senior Secured Notes repurchased, plus accrued and unpaid interest and special interest, if any, to the applicable repurchase date.

Each of the Indentures contains covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to:

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pay dividends, make investments or make other restricted payments;

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incur additional indebtedness;

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sell assets;

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enter into transactions with affiliates;

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incur liens;

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permit consensual encumbrances or restrictions on the Company's restricted subsidiaries' ability to pay dividends or make certain other payments to the Company;

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consolidate, merge, sell or otherwise dispose of all or substantially all of the Company's or its restricted subsidiaries' assets; and

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designate subsidiaries as unrestricted.

These covenants are subject to a number of other limitations and exceptions set forth in the Indentures. The Company was in compliance with all applicable covenants as of July 30, 2011 and October 30, 2010.

Each of the Indentures provides for customary events of default, including, but not limited to, cross defaults to specified other debt of the Company and its subsidiaries. In the case of an event of default arising from specified events of bankruptcy or insolvency, all outstanding Senior Secured Notes will become due and payable immediately without further action or notice. If any other event of default under either indenture occurs or is continuing, the applicable trustee or holders of at least 25% in aggregate principal amount of the then outstanding 2018 Notes or 2020 Notes, as applicable, may declare all of the 2018 Notes or 2020 Notes, respectively, to be due and payable immediately.

In connection with the issuance of the Senior Secured Notes, the Company and the Subsidiary Guarantors also entered into registration rights agreements with the initial purchasers relating to each series of the Senior Secured Notes. On June 18, 2010, the Company and the Subsidiary Guarantors filed a registration statement on Form S-4 with respect to each series of the Senior Secured Notes relating to an offer to exchange the applicable series of notes for an issue of SEC-registered notes, with terms identical to the applicable series of the Senior Secured Notes (except that the Exchange Notes will not be subject to restrictions on transfer or to any increase in annual interest rate). The registration statement was declared effective by the SEC on August 24, 2010, and both exchange offers were consummated on October 1, 2010. On May 20, 2011, a post-effective amendment to the registration statement was filed to remove from registration $0.5 million of the 2018 Notes that were not issued during the exchange offer.

Senior Secured Credit Facility

On October 7, 2008, the Company entered into a credit agreement with Bank of America, N.A., Morgan Stanley Senior Funding, Inc., HSBC Bank USA National Association, Keybank National Association and the other lenders party thereto. The credit agreement provided for (i) a five-year $1,100.0 million term loan facility and (ii) a five-year $125.0 million revolving credit facility, which includes a $25.0 million swing line loan sub-facility and a $25.0 million letter of credit sub-facility. The net proceeds of the term loan facility were used to finance a portion of the Company's acquisition of Foundry Networks, Inc. ("Foundry"). Debt issuance costs totaling $31.6 million associated with financing the acquisition was capitalized as deferred financing costs. In addition to the term loan facility, during the year ended October 31, 2009, the Company drew $14.1 million from the $125.0 million revolving credit facility to finance a small portion of the merger. The Company may draw additional proceeds from the revolving credit facility in the future for ongoing working capital and other general corporate purposes. The term loan facility and revolving credit facility are referred to together as the "Senior Secured Credit Facility."

On January 8, 2010, the Company entered into an amendment and waiver to the credit agreement, among other things, (i) increase flexibility under certain financial and other covenants, (ii) permit the Company to issue additional senior indebtedness in aggregate principal amount outstanding at any time of up to $600.0 million, (iii) permit the Company to issue additional subordinated indebtedness in aggregate principal amount outstanding at any time of up to $600.0 million, and (iv) permit the Company to sell its accounts receivable and lease receivables for fair market value with the aggregate amount paid for such receivables, net of collections, not at any time exceeding $125.0 million. On January 20, 2010, the Company closed its offering of its 2018 Notes and its 2020 Notes as described above. The Company applied approximately $435.0 million of the proceeds of this offering to prepay the term loan, whereupon the amendment and waiver to credit agreement became effective.

On April 30, 2010, the Company fully paid off the principal of the revolving credit facility for an approximate total amount of $14.1 million. There were no amounts outstanding under the terms of the revolving credit facility as of July 30, 2011 and October 30, 2010.

On June 10, 2011, the Company entered into a second amendment to the credit agreement ("Amendment No. 2") to refinance all of the outstanding term loan with a replacement term loan that reduced interest rates on the term loan facility, and to amend certain other provisions of the Credit Agreement to provide the Company with greater operating flexibility, including extending the maturity date of the term loan facility to October 31, 2014 and removing certain restrictions on the repurchase of the Company shares, provided the consolidated senior secured leverage ratio is under 2.00. In accordance with the applicable accounting guidance for debt modification and extinguishment, $51.1 million and $198.9 million of the $250.0 million refinanced was accounted as debt modification and debt extinguishment, respectively. The Company expensed $25.5 million of debt issuance cost and original issue discount relating to the portion of the term loan that was extinguished, which was reported within "Interest Expense" on the Condensed Consolidated Statements of Income. Additionally, debt issuance costs totaling $1.2 million associated with the refinancing was capitalized as deferred financing costs.

Prior to Amendment No. 2, loans under the Senior Secured Credit Facility bore interest, at the Company's option, at a rate equal to either the London Interbank Offered Rate ("LIBOR") rate, plus an applicable margin equal to 4.0% per annum or the prime lending rate, plus an applicable margin equal to 3.0% per annum. The applicable margin with respect to revolving loans was subject to adjustment based on the Company's consolidated senior secured leverage ratio, as defined in the credit agreement. The LIBOR rate "floor" was 3.0% per annum and the prime lending rate "floor" was 4.0% per annum, in each case, for the life of the Senior Secured Credit Facility. Amendment No. 2 reduced the applicable margin on the term loan to a level not in excess of LIBOR plus 2.375% or the prime lending rate plus 1.375% and eliminated the minimum LIBOR rate "floor" and prime rate "floor" with respect to the term loan facility. For the nine months ended July 30, 2011, the weighted-average interest rate on the term loan was 6.26%. As of July 30, 2011, the weighted-average annualized interest rate on the term loan was 2.96%.

The Company is permitted to make voluntary prepayments at any time (without payment of a premium, other than in the case of a repricing transaction in respect of the term loan facility), and is required to make mandatory prepayments on the term loan (without payment of a premium) with (i) net cash proceeds from non-ordinary course asset sales (subject to reinvestment rights and other exceptions), (ii) net cash proceeds from issuances of debt (other than certain permitted debt), and (iii) casualty proceeds and condemnation awards (subject to reinvestment rights and other exceptions). Prior to Amendment No. 2, the Company was required to pay quarterly installments on the term loan equal to an aggregate annual amount of 5% of the original principal amount thereof in the first and second year, 10% in the third year, 20% in the fourth year and 60% in the fifth year, with any remaining balance payable on the final maturity date of the term loan. Upon a repricing of the term loan (including through a refinancing) that results in the weighted-average yield or applicable rate of such term loan immediately after such repricing to be lower than such yield or rate immediately prior to such repricing, a 2.0% premium was payable during the first year following the closing and a 1.0% premium was payable during the second year following the closing. Under Amendment No. 2, the Company is required to pay quarterly installments of $12.5 million on the term loan, as adjusted for any voluntary prepayments, with any remaining balance payable on the final maturity date of the term loan. In addition to the refinancing of the term loan facility, during the nine months ended July 30, 2011, the Company paid $110.9 million towards the principal of the term loan, $92.3 million of which were voluntary prepayments.

The deferred financing costs are being amortized using the effective interest method over the term of the debt. As of July 30, 2011 and October 30, 2010, deferred financing costs were $3.6 million and $17.3 million, respectively, and are reported within "Other assets" on the Condensed Consolidated Balance Sheets. As of July 30, 2011 and October 30, 2010, the approximate fair value of the Company's Senior Secured Credit Facility was $240.3 million and $354.5 million, respectively, estimated based on broker trading prices.

The obligations of the Company and its subsidiary guarantors under the Senior Secured Credit Facility and the related guarantees there under are secured, subject to customary permitted liens and other agreed upon exceptions, by (i) a first priority pledge of all of the equity interests of each of the Company's direct and indirect subsidiaries and (ii) a perfected first priority interest in and mortgages on all tangible and intangible assets of the Company and each subsidiary guarantor, except, in the case of a foreign subsidiary, to the extent such pledge would be prohibited by applicable law or would result in materially adverse tax consequences (limited, in the case of a first-tier foreign subsidiary, to 65% of the voting stock and 100% of the non-voting stock of such first-tier foreign subsidiary).

The credit agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on liens, indebtedness, investments, fundamental changes, dispositions, capital expenditures, prepayment of other indebtedness, redemption or repurchase of subordinated indebtedness, share repurchases, dividends and other distributions. The credit agreement contains financial covenants that require the Company to maintain a minimum consolidated fixed charge coverage ratio, a maximum consolidated leverage ratio and a maximum consolidated senior secured leverage ratio, each as defined in the credit agreement and described further below. The credit agreement also includes customary events of default, including cross-defaults on the Company's material indebtedness and change of control. The Company was in compliance with all applicable covenants as of July 30, 2011 and October 30, 2010.

Covenant Compliance

Under the Senior Secured Credit Facility, certain limitations, restrictions and defaults could occur if the Company is not able to satisfy and remain in compliance with specified financial ratios.

Consolidated Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), as defined in the credit agreement, is used to determine the Company's compliance with certain covenants in the Senior Secured Credit Facility. Consolidated EBITDA is defined as:

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Consolidated net income

Plus:

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Consolidated interest charges;

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Provision for federal, state, local and foreign income taxes;

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Depreciation and amortization expense;

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Fees, costs and expenses incurred on or prior to the closing date in connection with the acquisition and the financing thereof;

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Any cash restructuring charges and integration costs in connection with the Foundry acquisition, in an aggregate amount not to exceed $75.0 million;

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Non-cash restructuring charges incurred in connection with the Foundry acquisition, all as approved by Banc of America Securities LLC and Morgan Stanley Senior Funding, Inc.;

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Other non-recurring expenses reducing consolidated net income which do not represent a cash item in such period or future periods;

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Any non-cash stock-based compensation expense; and

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Legal fees associated with the indemnification obligations for the benefit of former officers and directors in connection with Brocade's historical stock option litigation;

Minus:

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Federal, state, local and foreign income tax credits; and

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All non-cash items increasing consolidated net income.

In addition, the Company must comply with the following financial covenants as noted below:

Consolidated Fixed Charge Coverage Ratio

Consolidated fixed charge coverage ratio means, at any date of determination, the ratio of (a) (i) consolidated EBITDA (excluding interest expense, if any, attributable to the campus sale-leaseback), plus (ii) rentals payable under leases of real property, less (iii) the aggregate amount of all capital expenditures to (b) consolidated fixed charges; provided that, for purposes of calculating the consolidated fixed charge coverage ratio for any period ending prior to the first anniversary of the closing date, consolidated interest charges shall be an amount equal to actual consolidated interest charges from the closing date through the date of determination multiplied by a fraction the numerator of which is 365 and the denominator of which is the number of days from the closing date through the date of determination.

In accordance with the amendment and waiver to the credit agreement, the Company has agreed that it will not permit the consolidated fixed charge coverage ratio as of the end of any fiscal quarter during any period set forth below to be less than the ratio set forth below opposite such period:


Four Fiscal Quarters Ending During Period:		Minimum Consolidated Fixed Charge Coverage Ratio
November 1, 2009 through October 30, 2010		1.25:1.00
October 31, 2010 through October 29, 2011		1.50:1.00
October 30, 2011 through October 27, 2012		1.75:1.00
October 28, 2012 and thereafter		1.75:1.00

Consolidated Leverage Ratio

Consolidated leverage ratio means, as of any date of determination, the ratio of (a) consolidated funded indebtedness as of such date to (b) consolidated EBITDA for the measurement period ending on such date.

In accordance with the amendment and waiver to the credit agreement, the Company has agreed that it will not permit the consolidated leverage ratio at any time during any period set forth below to be greater than the ratio set forth below opposite such period:


Four Fiscal Quarters Ending During Period:		Maximum Consolidated Leverage Ratio
November 1, 2009 through October 30, 2010		3.75:1.00
October 31, 2010 through October 29, 2011		3.00:1.00
October 30, 2011 through October 27, 2012		2.75:1.00
October 28, 2012 and thereafter		2.75:1.00

Consolidated Senior Secured Leverage Ratio

Consolidated senior secured leverage ratio means, as of any date of determination, the ratio of (a) consolidated funded indebtedness as of such date, minus, without duplication, all unsecured senior subordinated or subordinated indebtedness of Brocade or its subsidiaries on a consolidated basis as of such date (including the McDATA convertible subordinated debt prior to being retired on February 16, 2010), to (b) consolidated EBITDA for the measurement period ending on such date.

In accordance with the amendment and waiver to the credit agreement, the Company has agreed that it will not permit the consolidated senior secured leverage ratio at any time during any period set forth below to be greater than the ratio set forth below opposite such period:


Four Fiscal Quarters Ending During Period:		Maximum Consolidated Senior Secured Leverage Ratio
November 1, 2009 through October 30, 2010		2.50:1.00
October 31, 2010 through October 29, 2011		2.50:1.00
October 30, 2011 through October 27, 2012		2.25:1.00
October 28, 2012 and thereafter		2.00:1.00

Convertible Subordinated Debt

The 2.25% Notes originally issued by McDATA paid a fixed rate of interest semiannually. The Company capitalized a portion of the interest associated with this debt during the nine months ended July 31, 2010. In addition, the effective interest rate for the 2.25% Notes was 8.63% for fiscal year 2010 for the period through February 15, 2010 when the convertible subordinated debt was due. The amount of interest cost recognized relating to both the contractual interest coupon and amortization of the discount on the liability component of the 2.25% Notes was as follows:


	Nine Months Ended
In thousands	July 30, 2011		July 31, 2010
Interest expense	$	—	$	4,305

On February 16, 2010, the Company fully paid off the principal of the 2.25% Notes for a total amount of $172.5 million. There were no interest expenses during the three months ended July 31, 2010.