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 the 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 April 27, 2013 (in thousands):



	Brocade Communications Systems, Inc.		Subsidiary Guarantors		Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Assets
Current assets:
Cash and cash equivalents	$	258,692	$	3,318	$	502,288	$	—		$	764,298
Accounts receivable, net	150,993		347		87,971		—			239,311
Inventories	42,637		—		10,274		—			52,911
Intercompany receivables	—		483,744		—		(483,744		)	—
Other current assets	93,396		371		13,265		943			107,975
Total current assets	545,718		487,780		613,798		(482,801		)	1,164,495
Property and equipment, net	483,495		697		15,776		—			499,968
Investment in subsidiaries	949,737		—		—		(949,737		)	—
Other non-current assets	1,738,214		106,730		1,416		—			1,846,360
Total assets	$	3,717,164	$	595,207	$	630,990	$	(1,432,538	)	$	3,510,823
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	77,885	$	71	$	23,310	$	—		$	101,266
Current portion of long-term debt	2,306		—		—		—			2,306
Intercompany payables	414,746		—		68,998		(483,744		)	—
Other current liabilities	307,135		7,453		130,119		943			445,650
Total current liabilities	802,072		7,524		222,427		(482,801		)	549,222
Long-term debt, net of current portion	596,971		—		—		—			596,971
Other non-current liabilities	71,528		2,428		44,081		—			118,037
Total liabilities	1,470,571		9,952		266,508		(482,801		)	1,264,230
Total stockholders’ equity	2,246,593		585,255		364,482		(949,737		)	2,246,593
Total liabilities and stockholders’ equity	$	3,717,164	$	595,207	$	630,990	$	(1,432,538	)	$	3,510,823

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 operations for the three months ended April 27, 2013 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	313,525		$	1,056		$	224,203		$	—		$	538,784
Intercompany revenues	6,453			—			6,470			(12,923		)	—
Total net revenues	319,978			1,056			230,673			(12,923		)	538,784
Cost of revenues	131,123			11,649			59,726			2,174			204,672
Intercompany cost of revenues	(18,103		)	—			31,026			(12,923		)	—
Total cost of revenues	113,020			11,649			90,752			(10,749		)	204,672
Gross margin (loss)	206,958			(10,593		)	139,921			(2,174		)	334,112
Operating expenses	196,641			10,232			72,234			(2,174		)	276,933
Intercompany operating expenses (income)	(42,281		)	(7,446		)	49,727			—			—
Total operating expenses	154,360			2,786			121,961			(2,174		)	276,933
Income (loss) from operations	52,598			(13,379		)	17,960			—			57,179
Other income (expense)	(7,421		)	50			(3,030		)	—			(10,401		)
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	45,177			(13,329		)	14,930			—			46,778
Income tax expense (benefit)	(2,817		)	866			1,780			—			(171		)
Equity in net earnings (losses) of subsidiaries	(1,045		)	—			—			1,045			—
Net income (loss)	$	46,949		$	(14,195	)	$	13,150		$	1,045		$	46,949

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



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	352,760		$	1,250		$	189,429		$	—		$	543,439
Intercompany revenues	13,947			—			7,349			(21,296		)	—
Total net revenues	366,707			1,250			196,778			(21,296		)	543,439
Cost of revenues	141,052			10,852			51,546			2,907			206,357
Intercompany cost of revenues	(6,792		)	—			28,088			(21,296		)	—
Total cost of revenues	134,260			10,852			79,634			(18,389		)	206,357
Gross margin (loss)	232,447			(9,602		)	117,144			(2,907		)	337,082
Operating expenses	216,870			15,162			56,188			(2,907		)	285,313
Intercompany operating expenses (income)	(30,169		)	(6,539		)	36,708			—			—
Total operating expenses	186,701			8,623			92,896			(2,907		)	285,313
Income (loss) from operations	45,746			(18,225		)	24,248			—			51,769
Other expense	(12,915		)	(111		)	(155		)	—			(13,181		)
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	32,831			(18,336		)	24,093			—			38,588
Income tax expense (benefit)	(2,565		)	—			1,857			—			(708		)
Equity in net earnings (losses) of subsidiaries	3,900			—			—			(3,900		)	—
Net income (loss)	$	39,296		$	(18,336	)	$	22,236		$	(3,900	)	$	39,296

The following is the condensed consolidated statement of operations for the six months ended April 27, 2013 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	676,580		$	2,123		$	448,810		$	—		$	1,127,513
Intercompany revenues	16,234			—			9,825			(26,059		)	—
Total net revenues	692,814			2,123			458,635			(26,059		)	1,127,513
Cost of revenues	267,745			22,213			125,291			4,227			419,476
Intercompany cost of revenues	(27,222		)	—			53,281			(26,059		)	—
Total cost of revenues	240,523			22,213			178,572			(21,832		)	419,476
Gross margin (loss)	452,291			(20,090		)	280,063			(4,227		)	708,037
Operating expenses	410,404			21,053			130,337			(4,227		)	557,567
Intercompany operating expenses (income)	(74,885		)	(14,277		)	89,162			—			—
Total operating expenses	335,519			6,776			219,499			(4,227		)	557,567
Income (loss) from operations	116,772			(26,866		)	60,564			—			150,470
Other expense	(33,352		)	(44		)	(2,916		)	(391		)	(36,703		)
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	83,420			(26,910		)	57,648			(391		)	113,767
Income tax expense	83,035			866			4,172			—			88,073
Equity in net earnings (losses) of subsidiaries	25,699			—			—			(25,699		)	—
Net income (loss)	$	26,084		$	(27,776	)	$	53,476		$	(26,090	)	$	25,694

The following is the condensed consolidated statement of operations for the six months ended April 28, 2012 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	692,904		$	2,739		$	408,438		$	—		$	1,104,081
Intercompany revenues	24,607			—			14,069			(38,676		)	—
Total net revenues	717,511			2,739			422,507			(38,676		)	1,104,081
Cost of revenues	272,188			27,988			116,924			5,130			422,230
Intercompany cost of revenues	(15,166		)	—			53,842			(38,676		)	—
Total cost of revenues	257,022			27,988			170,766			(33,546		)	422,230
Gross margin (loss)	460,489			(25,249		)	251,741			(5,130		)	681,851
Operating expenses	415,125			30,489			120,179			(5,130		)	560,663
Intercompany operating expenses (income)	(66,925		)	(12,561		)	79,486			—			—
Total operating expenses	348,200			17,928			199,665			(5,130		)	560,663
Income (loss) from operations	112,289			(43,177		)	52,076			—			121,188
Other expense	(23,197		)	(106		)	(3,920		)	—			(27,223		)
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	89,092			(43,283		)	48,156			—			93,965
Income tax expense (benefit)	(8,122		)	—			4,207			—			(3,915		)
Equity in net earnings (losses) of subsidiaries	666			—			—			(666		)	—
Net income (loss)	$	97,880		$	(43,283	)	$	43,949		$	(666	)	$	97,880

The following is the condensed consolidated statement of comprehensive income (loss) for the three months ended April 27, 2013 (in thousands):



	Brocade Communications Systems, Inc.		Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments		Total
Net income (loss)	$	46,949	$	(14,195	)	$	13,150		$	1,045	$	46,949
Other comprehensive income (loss), net of tax:
Unrealized losses on cash flow hedges:
Change in unrealized gains and losses	—		—			(1,915		)	—		(1,915		)
Net gains reclassified into earnings	—		—			(32		)	—		(32		)
Net unrealized losses on cash flow hedges	—		—			(1,947		)	—		(1,947		)
Foreign currency translation adjustments	100		—			(1,862		)	—		(1,762		)
Total other comprehensive income (loss)	100		—			(3,809		)	—		(3,709		)
Total comprehensive income (loss)	$	47,049	$	(14,195	)	$	9,341		$	1,045	43,240

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



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	39,296		$	(18,336	)	$	22,236		$	(3,900	)	$	39,296
Other comprehensive income (loss), net of tax:
Unrealized gains on cash flow hedges:
Change in unrealized gains and losses	—			—			(113		)	—			(113		)
Net losses reclassified into earnings	—			—			1,599			—			1,599
Net unrealized gains on cash flow hedges	—			—			1,486			—			1,486
Foreign currency translation adjustments	(8		)	—			92			—			84
Total other comprehensive income (loss)	(8		)	—			1,578			—			1,570
Total comprehensive income (loss)	$	39,288		$	(18,336	)	$	23,814		$	(3,900	)	$	40,866

The following is the condensed consolidated statement of comprehensive income (loss) for the six months ended April 27, 2013 (in thousands):



	Brocade Communications Systems, Inc.		Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	26,084	$	(27,776	)	$	53,476		$	(26,090	)	$	25,694
Other comprehensive income (loss), net of tax:
Unrealized losses on cash flow hedges:
Change in unrealized gains and losses	—		—			(1,992		)	—			(1,992		)
Net gains reclassified into earnings	—		—			(210		)	—			(210		)
Net unrealized losses on cash flow hedges	—		—			(2,202		)	—			(2,202		)
Foreign currency translation adjustments	1,126		(628		)	(2,640		)	—			(2,142		)
Total other comprehensive income (loss)	1,126		(628		)	(4,842		)	—			(4,344		)
Total comprehensive income (loss)	$	27,210	$	(28,404	)	$	48,634		$	(26,090	)	$	21,350

The following is the condensed consolidated statement of comprehensive income (loss) for the six months ended April 28, 2012 (in thousands):



	Brocade Communications Systems, Inc.		Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	97,880	$	(43,283	)	$	43,949		$	(666	)	$	97,880
Other comprehensive income (loss), net of tax:
Unrealized losses on cash flow hedges:
Change in unrealized gains and losses	—		—			(4,282		)	—			(4,282		)
Net losses reclassified into earnings	—		—			2,923			—			2,923
Net unrealized losses on cash flow hedges	—		—			(1,359		)	—			(1,359		)
Foreign currency translation adjustments	134		—			(1,610		)	—			(1,476		)
Total other comprehensive income (loss)	134		—			(2,969		)	—			(2,835		)
Total comprehensive income (loss)	$	98,014	$	(43,283	)	$	40,980		$	(666	)	$	95,045

The following is the condensed consolidated statement of cash flows for the six months ended April 27, 2013 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments		Total
Net cash provided by operating activities	$	96,996		$	2,521		$	79,588		$	—	$	179,105
Cash flows from investing activities:
Purchases of property and equipment	(27,887		)	(23		)	(3,658		)	—		(31,568		)
Net cash acquired (paid) in connection with acquisition	(44,769		)	140			—			—		(44,629		)
Net cash provided by (used in) investing activities	(72,656		)	117			(3,658		)	—		(76,197		)
Cash flows from financing activities:
Proceeds from senior unsecured notes	296,250			—			—			—		296,250
Payment of debt issuance costs related to senior unsecured notes	(549		)	—			—			—		(549		)
Payment of principal related to senior secured notes	(300,000		)	—			—			—		(300,000		)
Payment of principal related to capital leases	(975		)	—			—			—		(975		)
Common stock repurchases	(86,179		)	—			—			—		(86,179		)
Proceeds from issuance of common stock	35,899			—			—			—		35,899
Excess tax benefits from stock-based compensation	5,440			—			—			—		5,440
Net cash used in financing activities	(50,114		)	—			—			—		(50,114		)
Effect of exchange rate fluctuations on cash and cash equivalents	—			—			(1,722		)	—		(1,722		)
Net increase (decrease) in cash and cash equivalents	(25,774		)	2,638			74,208			—		51,072
Cash and cash equivalents, beginning of period	284,466			680			428,080			—		713,226
Cash and cash equivalents, end of period	$	258,692		$	3,318		$	502,288		$	—	$	764,298

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



	Brocade Communications Systems, Inc.			Subsidiary Guarantors		Non-Guarantor Subsidiaries			Consolidating Adjustments		Total
Net cash provided by operating activities	$	215,395		$	1,260	$	50,664		$	—	$	267,319
Cash flows from investing activities:
Proceeds from sale of subsidiary	35			—		—			—		35
Purchases of property and equipment	(32,841		)	—		(5,428		)	—		(38,269		)
Net cash used in investing activities	(32,806		)	—		(5,428		)	—		(38,234		)
Cash flows from financing activities:
Payment of principal related to the term loan	(120,000		)	—		—			—		(120,000		)
Payment of principal related to capital leases	(920		)	—		—			—		(920		)
Common stock repurchases	(25,066		)	—		—			—		(25,066		)
Proceeds from issuance of common stock	47,261			—		—			—		47,261
Excess tax benefits from stock-based compensation	1,332			—		—			—		1,332
Net cash used in financing activities	(97,393		)	—		—			—		(97,393		)
Effect of exchange rate fluctuations on cash and cash equivalents	—			—		(1,555		)	—		(1,555		)
Net increase in cash and cash equivalents	85,196			1,260		43,681			—		130,137
Cash and cash equivalents, beginning of period	101,366			1,528		311,308			—		414,202
Cash and cash equivalents, end of period	$	186,562		$	2,788	$	354,989		$	—	$	544,339