Guarantor and Non-Guarantor Subsidiaries

On January 20, 2010, the Company issued $600.0 million aggregate principal amount of the 2018 Notes and 2020 Notes. In addition, on January 22, 2013, the Company issued $300.0 million aggregate principal amount of the 2023 Notes. The Company’s obligations under the 2023 Notes and the 2020 Notes are, and prior to January 22, 2013, the Company’s obligations under the 2018 Notes were, guaranteed by certain of the Company’s domestic subsidiaries (the “Subsidiary Guarantors”). Each of the Subsidiary Guarantors is 100% owned by the Company and all guarantees are joint and several. The senior secured notes are not guaranteed by certain of the Company’s domestic subsidiaries and all of the Company’s foreign subsidiaries (the “Non-Guarantor Subsidiaries”).

Pursuant to the terms of the Indentures governing Senior Secured Notes, the guarantees are full and unconditional, but are subject to release under the following circumstances:


•	upon the sale of the subsidiary or all or substantially all of its assets;


•	upon the discharge of the guarantees under the credit facility and any other debt guaranteed by the applicable subsidiary provided that the credit facility has been paid in full and the applicable series of senior secured notes have an investment grade rating from both Standard & Poor’s and Moody’s;


•	upon designation of the subsidiary as an “unrestricted subsidiary” under the applicable Indenture;


•	upon the merger, consolidation or liquidation of the subsidiary into the Company or another subsidiary guarantor; and


•	upon legal or covenant defeasance or the discharge of the Company’s obligations under the applicable indenture.

The guarantees of the 2018 Notes were released on January 22, 2013 upon the discharge of the 2018 Indenture.

Pursuant to the terms of the Indenture governing the 2023 Notes, the guarantees are full and unconditional, but are subject to release under the following circumstances:


•	upon the sale of the subsidiary or all or substantially all of its assets;


•	upon the discharge of the guarantees under the Senior Secured Credit Facility, the 2020 Notes and any other debt guaranteed by the applicable subsidiary;


•	upon the merger, consolidation or liquidation of the subsidiary into the Company or another subsidiary guarantor; and


•	upon legal or covenant defeasance or the discharge of the Company’s obligations under the applicable indenture.

Because the guarantees are subject to release under the above described circumstances, they would not be deemed “full and unconditional” for purposes of Rule 3-10 of Regulation S-X. However, as these circumstances are customary, the Company concluded that it may rely on Rule 3-10 of Regulation S-X, as the other requirements of Rule 3-10 have been met.

The following tables present condensed consolidated financial statements for the parent company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries, respectively.

The following is the condensed consolidated balance sheet as of January 26, 2013 (in thousands):



	Brocade Communications Systems, Inc.		Subsidiary Guarantors		Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Assets
Current assets:
Cash and cash equivalents	$	208,609	$	3,293	$	471,714	$	—		$	683,616
Restricted cash	311,926		—		—		—			311,926
Accounts receivable, net	127,656		535		88,515		—			216,706
Inventories	49,802		—		10,089		—			59,891
Intercompany receivables	—		479,426		—		(479,426		)	—
Other current assets	102,723		777		14,344		976			118,820
Total current assets	800,716		484,031		584,662		(478,450		)	1,390,959
Property and equipment, net	492,699		824		16,759		—			510,282
Investment in subsidiaries	953,755		—		—		(953,755		)	—
Other non-current assets	1,744,376		125,401		1,164		—			1,870,941
Total assets	$	3,991,546	$	610,256	$	602,585	$	(1,432,205	)	$	3,772,182
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	80,357	$	132	$	21,319	$	—		$	101,808
Current portion of long-term debt	302,198		—		—		—			302,198
Intercompany payables	424,868		—		54,558		(479,426		)	—
Other current liabilities	286,819		9,092		127,273		976			424,160
Total current liabilities	1,094,242		9,224		203,150		(478,450		)	828,166
Long-term debt, net of current portion	597,440		—		—		—			597,440
Other non-current liabilities	91,581		2,428		44,284		—			138,293
Total liabilities	1,783,263		11,652		247,434		(478,450		)	1,563,899
Total stockholders’ equity	2,208,283		598,604		355,151		(953,755		)	2,208,283
Total liabilities and stockholders’ equity	$	3,991,546	$	610,256	$	602,585	$	(1,432,205	)	$	3,772,182

The following is the condensed consolidated balance sheet as of October 27, 2012 (in thousands):



	Brocade Communications Systems, Inc.		Subsidiary Guarantors			Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Assets
Current assets:
Cash and cash equivalents	$	284,466	$	680		$	428,080	$	—		$	713,226
Accounts receivable, net	150,367		(1,847		)	84,619		—			233,139
Inventories	55,084		—			13,095		—			68,179
Intercompany receivables	—		478,133			—		(478,133		)	—
Other current assets	124,690		514			15,606		225			141,035
Total current assets	614,607		477,480			541,400		(477,908		)	1,155,579
Property and equipment, net	500,530		213			18,197		—			518,940
Investment in subsidiaries	871,157		—			—		(871,157		)	—
Other non-current assets	1,814,729		90,766			1,247		—			1,906,742
Total assets	$	3,801,023	$	568,459		$	560,844	$	(1,349,065	)	$	3,581,261
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	92,661	$	—		$	24,689	$	—		$	117,350
Current portion of long-term debt	2,226		(249		)	—		—			1,977
Intercompany payables	434,981		—			43,152		(478,133		)	—
Other current liabilities	346,959		7,628			136,329		225			491,141
Total current liabilities	876,827		7,379			204,170		(477,908		)	610,468
Long-term debt, net of current portion	599,203		—			—		—			599,203
Other non-current liabilities	89,173		2,429			44,168		—			135,770
Total liabilities	1,565,203		9,808			248,338		(477,908		)	1,345,441
Total stockholders’ equity	2,235,820		558,651			312,506		(871,157		)	2,235,820
Total liabilities and stockholders’ equity	$	3,801,023	$	568,459		$	560,844	$	(1,349,065	)	$	3,581,261

The following is the condensed consolidated statement of income for the three months ended January 26, 2013 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Revenues	$	363,055		$	1,067		$	224,607	$	—		$	588,729
Intercompany revenues	9,781			—			3,355		(13,136		)	—
Total net revenues	372,836			1,067			227,962		(13,136		)	588,729
Cost of revenues	136,622			10,564			65,565		2,053			214,804
Intercompany cost of revenues	(9,119		)	—			22,255		(13,136		)	—
Total cost of revenues	127,503			10,564			87,820		(11,083		)	214,804
Gross margin (loss)	245,333			(9,497		)	140,142		(2,053		)	373,925
Operating expenses	213,763			10,821			58,103		(2,053		)	280,634
Intercompany operating expenses (income)	(32,604		)	(6,831		)	39,435		—			—
Total operating expenses	181,159			3,990			97,538		(2,053		)	280,634
Income (loss) from operations	64,174			(13,487		)	42,604		—			93,291
Other income (expense)	(25,931		)	(94		)	114		(391		)	(26,302		)
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	38,243			(13,581		)	42,718		(391		)	66,989
Income tax expense	85,852			—			2,392		—			88,244
Equity in net earnings (losses) of subsidiaries	26,744			—			—		(26,744		)	—
Net income (loss)	$	(20,865	)	$	(13,581	)	$	40,326	$	(27,135	)	$	(21,255	)

The following is the condensed consolidated statement of income for the three months ended January 28, 2012 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	340,144		$	1,489		$	219,009		$	—		$	560,642
Intercompany revenues	10,660			—			6,720			(17,380		)	—
Total net revenues	350,804			1,489			225,729			(17,380		)	560,642
Cost of revenues	131,136			17,136			65,378			2,223			215,873
Intercompany cost of revenues	(8,374		)	—			25,754			(17,380		)	—
Total cost of revenues	122,762			17,136			91,132			(15,157		)	215,873
Gross margin (loss)	228,042			(15,647		)	134,597			(2,223		)	344,769
Operating expenses	198,255			15,327			63,991			(2,223		)	275,350
Intercompany operating expenses (income)	(36,756		)	(6,022		)	42,778			—			—
Total operating expenses	161,499			9,305			106,769			(2,223		)	275,350
Income (loss) from operations	66,543			(24,952		)	27,828			—			69,419
Other income (expense)	(10,282		)	5			(3,765		)	—			(14,042		)
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	56,261			(24,947		)	24,063			—			55,377
Income tax expense (benefit)	(5,557		)	—			2,350			—			(3,207		)
Equity in net earnings (losses) of subsidiaries	(3,234		)	—			—			3,234			—
Net income (loss)	$	58,584		$	(24,947	)	$	21,713		$	3,234		$	58,584

The following is the condensed consolidated statement of cash flows for the three months ended January 26, 2013 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments		Total
Net cash provided by operating activities	$	12,204		$	2,496		$	44,790		$	—	$	59,490
Cash flows from investing activities:
Purchases of property and equipment	(17,532		)	(23		)	(931		)	—		(18,486		)
Net cash acquired (paid) in connection with acquisition	(44,769		)	140			—			—		(44,629		)
Net cash provided by (used in) investing activities	(62,301		)	117			(931		)	—		(63,115		)
Cash flows from financing activities:
Proceeds from senior unsecured notes	296,250			—			—			—		296,250
Payment of principal related to capital leases	(484		)	—			—			—		(484		)
Common stock repurchases	(47,530		)	—			—			—		(47,530		)
Proceeds from issuance of common stock	23,812			—			—			—		23,812
Excess tax benefits from stock-based compensation	2,192			—			—			—		2,192
Increase in restricted cash	(300,000		)	—			—			—		(300,000		)
Net cash used in financing activities	(25,760		)	—			—			—		(25,760		)
Effect of exchange rate fluctuations on cash and cash equivalents	—			—			(225		)	—		(225		)
Net increase (decrease) in cash and cash equivalents	(75,857		)	2,613			43,634			—		(29,610		)
Cash and cash equivalents, beginning of period	284,466			680			428,080			—		713,226
Cash and cash equivalents, end of period	$	208,609		$	3,293		$	471,714		$	—	$	683,616

The following is the condensed consolidated statement of cash flows for the three months ended January 28, 2012 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments		Total
Net cash provided by (used in) operating activities	$	116,939		$	(113	)	$	10,225		$	—	$	127,051
Cash flows from investing activities:
Proceeds from sale of subsidiary	(215		)	—			—			—		(215		)
Purchases of property and equipment	(15,241		)	—			(2,315		)	—		(17,556		)
Net cash used in investing activities	(15,456		)	—			(2,315		)	—		(17,771		)
Cash flows from financing activities:
Payment of principal related to the term loan	(70,000		)	—			—			—		(70,000		)
Payment of principal related to capital leases	(456		)	—			—			—		(456		)
Proceeds from issuance of common stock	31,941			—			—			—		31,941
Excess tax benefits from stock-based compensation	1,147			—			—			—		1,147
Net cash used in financing activities	(37,368		)	—			—			—		(37,368		)
Effect of exchange rate fluctuations on cash and cash equivalents	—			—			(1,875		)	—		(1,875		)
Net increase (decrease) in cash and cash equivalents	64,115			(113		)	6,035			—		70,037
Cash and cash equivalents, beginning of period	101,366			1,528			311,308			—		414,202
Cash and cash equivalents, end of period	$	165,481		$	1,415		$	317,343		$	—	$	484,239