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 July 27, 2013 (in thousands):



	Brocade Communications Systems, Inc.		Subsidiary Guarantors		Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Assets
Current assets:
Cash and cash equivalents	$	270,192	$	3,643	$	516,258	$	—		$	790,093
Accounts receivable, net	129,224		360		88,878		—			218,462
Inventories	42,517		—		8,084		—			50,601
Intercompany receivables	—		487,040		—		(487,040		)	—
Other current assets	151,710		235		11,854		1,632			165,431
Total current assets	593,643		491,278		625,074		(485,408		)	1,224,587
Property and equipment, net	471,893		534		15,517		—			487,944
Investment in subsidiaries	997,365		—		—		(997,365		)	—
Other non-current assets	1,718,120		87,244		3,836		—			1,809,200
Total assets	$	3,781,021	$	579,056	$	644,427	$	(1,482,773	)	$	3,521,731
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	72,048	$	17	$	23,871	$	—		$	95,936
Current portion of long-term debt	2,367		—		—		—			2,367
Intercompany payables	456,806		—		30,234		(487,040		)	—
Other current liabilities	276,789		6,710		119,204		1,632			404,335
Total current liabilities	808,010		6,727		173,309		(485,408		)	502,638
Long-term debt, net of current portion	596,524		—		—		—			596,524
Other non-current liabilities	69,258		2,428		43,654		—			115,340
Total liabilities	1,473,792		9,155		216,963		(485,408		)	1,214,502
Total stockholders’ equity	2,307,229		569,901		427,464		(997,365		)	2,307,229
Total liabilities and stockholders’ equity	$	3,781,021	$	579,056	$	644,427	$	(1,482,773	)	$	3,521,731

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 July 27, 2013 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	327,422		$	1,053		$	208,076		$	—		$	536,551
Intercompany revenues	5,647			—			7,855			(13,502		)	—
Total net revenues	333,069			1,053			215,931			(13,502		)	536,551
Cost of revenues	137,260			6,891			52,453			1,745			198,349
Intercompany cost of revenues	(14,489		)	—			27,991			(13,502		)	—
Total cost of revenues	122,771			6,891			80,444			(11,757		)	198,349
Gross margin (loss)	210,298			(5,838		)	135,487			(1,745		)	338,202
Operating expenses	198,119			9,888			57,577			(1,745		)	263,839
Intercompany operating expenses (income)	(14,763		)	(11		)	14,774			—			—
Total operating expenses	183,356			9,877			72,351			(1,745		)	263,839
Income (loss) from operations	26,942			(15,715		)	63,136			—			74,363
Other income (expense)	67,657			350			(570		)	—			67,437
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	94,599			(15,365		)	62,566			—			141,800
Income tax expense (benefit)	26,079			—			(2,975		)	—			23,104
Equity in net earnings (losses) of subsidiaries	50,176			—			—			(50,176		)	—
Net income (loss)	$	118,696		$	(15,365	)	$	65,541		$	(50,176	)	$	118,696

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



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	353,594		$	1,038		$	200,700		$	—		$	555,332
Intercompany revenues	11,442			—			5,239			(16,681		)	—
Total net revenues	365,036			1,038			205,939			(16,681		)	555,332
Cost of revenues	145,292			10,291			56,246			3,025			214,854
Intercompany cost of revenues	(8,078		)	—			24,759			(16,681		)	—
Total cost of revenues	137,214			10,291			81,005			(13,656		)	214,854
Gross margin (loss)	227,822			(9,253		)	124,934			(3,025		)	340,478
Operating expenses	204,948			12,893			55,441			(3,025		)	270,257
Intercompany operating expenses (income)	(38,781		)	(7,971		)	46,752			—			—
Total operating expenses	166,167			4,922			102,193			(3,025		)	270,257
Income (loss) from operations	61,655			(14,175		)	22,741			—			70,221
Other income (expense)	(11,495		)	45			(476		)	—			(11,926		)
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	50,160			(14,130		)	22,265			—			58,295
Income tax expense	13,032			—			1,963			—			14,995
Equity in net earnings (losses) of subsidiaries	6,172			—			—			(6,172		)	—
Net income (loss)	$	43,300		$	(14,130	)	$	20,302		$	(6,172	)	$	43,300

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



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	1,004,002		$	3,176		$	656,886		$	—		$	1,664,064
Intercompany revenues	21,881			—			17,680			(39,561		)	—
Total net revenues	1,025,883			3,176			674,566			(39,561		)	1,664,064
Cost of revenues	405,005			29,104			177,744			5,972			617,825
Intercompany cost of revenues	(41,711		)	—			81,272			(39,561		)	—
Total cost of revenues	363,294			29,104			259,016			(33,589		)	617,825
Gross margin (loss)	662,589			(25,928		)	415,550			(5,972		)	1,046,239
Operating expenses	608,523			30,941			187,914			(5,972		)	821,406
Intercompany operating expenses (income)	(89,648		)	(14,288		)	103,936			—			—
Total operating expenses	518,875			16,653			291,850			(5,972		)	821,406
Income (loss) from operations	143,714			(42,581		)	123,700			—			224,833
Other income (expense)	34,305			306			(3,486		)	(391		)	30,734
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	178,019			(42,275		)	120,214			(391		)	255,567
Income tax expense	109,114			866			1,197			—			111,177
Equity in net earnings (losses) of subsidiaries	75,875			—			—			(75,875		)	—
Net income (loss)	$	144,780		$	(43,141	)	$	119,017		$	(76,266	)	$	144,390

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



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Revenues	$	1,046,498		$	3,777		$	609,138		$	—		$	1,659,413
Intercompany revenues	36,049			—			19,308			(55,357		)	—
Total net revenues	1,082,547			3,777			628,446			(55,357		)	1,659,413
Cost of revenues	417,480			38,279			173,170			8,155			637,084
Intercompany cost of revenues	(23,244		)	—			78,601			(55,357		)	—
Total cost of revenues	394,236			38,279			251,771			(47,202		)	637,084
Gross margin (loss)	688,311			(34,502		)	376,675			(8,155		)	1,022,329
Operating expenses	620,073			43,382			175,620			(8,155		)	830,920
Intercompany operating expenses (income)	(105,706		)	(20,532		)	126,238			—			—
Total operating expenses	514,367			22,850			301,858			(8,155		)	830,920
Income (loss) from operations	173,944			(57,352		)	74,817			—			191,409
Other expense	(34,692		)	(61		)	(4,396		)	—			(39,149		)
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	139,252			(57,413		)	70,421			—			152,260
Income tax expense	4,910			—			6,170			—			11,080
Equity in net earnings (losses) of subsidiaries	6,838			—			—			(6,838		)	—
Net income (loss)	$	141,180		$	(57,413	)	$	64,251		$	(6,838	)	$	141,180

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



	Brocade Communications Systems, Inc.		Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	118,696	$	(15,365	)	$	65,541		$	(50,176	)	$	118,696
Other comprehensive income (loss), net of tax:
Unrealized losses on cash flow hedges:
Change in unrealized gains and losses	—		—			(1,000		)	—			(1,000		)
Net gains reclassified into earnings	—		—			(10		)	—			(10		)
Net unrealized losses on cash flow hedges	—		—			(1,010		)	—			(1,010		)
Foreign currency translation adjustments	23		—			(1,493		)	—			(1,470		)
Total other comprehensive income (loss)	23		—			(2,503		)	—			(2,480		)
Total comprehensive income (loss)	$	118,719	$	(15,365	)	$	63,038		$	(50,176	)	$	116,216

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



	Brocade Communications Systems, Inc.		Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	43,300	$	(14,130	)	$	20,302		$	(6,172	)	$	43,300
Other comprehensive income (loss), net of tax:
Unrealized losses on cash flow hedges:
Change in unrealized gains and losses	—		—			(3,518		)	—			(3,518		)
Net losses reclassified into earnings	—		—			2,099			—			2,099
Net unrealized losses on cash flow hedges	—		—			(1,419		)	—			(1,419		)
Foreign currency translation adjustments	162		—			(3,113		)	—			(2,951		)
Total other comprehensive income (loss)	162		—			(4,532		)	—			(4,370		)
Total comprehensive income (loss)	$	43,462	$	(14,130	)	$	15,770		$	(6,172	)	$	38,930

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



	Brocade Communications Systems, Inc.		Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	144,780	$	(43,141	)	$	119,017		$	(76,266	)	$	144,390
Other comprehensive income (loss), net of tax:
Unrealized losses on cash flow hedges:
Change in unrealized gains and losses	—		—			(2,998		)	—			(2,998		)
Net gains reclassified into earnings	—		—			(214		)	—			(214		)
Net unrealized losses on cash flow hedges	—		—			(3,212		)	—			(3,212		)
Foreign currency translation adjustments	1,149		(628		)	(4,133		)	—			(3,612		)
Total other comprehensive income (loss)	1,149		(628		)	(7,345		)	—			(6,824		)
Total comprehensive income (loss)	$	145,929	$	(43,769	)	$	111,672		$	(76,266	)	$	137,566

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



	Brocade Communications Systems, Inc.		Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Net income (loss)	$	141,180	$	(57,413	)	$	64,251		$	(6,838	)	$	141,180
Other comprehensive income (loss), net of tax:
Unrealized losses on cash flow hedges:
Change in unrealized gains and losses	—		—			(7,800		)	—			(7,800		)
Net losses reclassified into earnings	—		—			5,022			—			5,022
Net unrealized losses on cash flow hedges	—		—			(2,778		)	—			(2,778		)
Foreign currency translation adjustments	296		—			(4,723		)	—			(4,427		)
Total other comprehensive income (loss)	296		—			(7,501		)	—			(7,205		)
Total comprehensive income (loss)	$	141,476	$	(57,413	)	$	56,750		$	(6,838	)	$	133,975

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



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments		Total
Net cash provided by operating activities	$	181,335		$	2,846		$	97,079		$	—	$	281,260
Cash flows from investing activities:
Purchases of property and equipment	(35,969		)	(23		)	(5,957		)	—		(41,949		)
Net cash acquired (paid) in connection with acquisition	(44,769		)	140			—			—		(44,629		)
Net cash provided by (used in) investing activities	(80,738		)	117			(5,957		)	—		(86,578		)
Cash flows from financing activities:
Proceeds from senior unsecured notes	296,250			—			—			—		296,250
Payment of debt issuance costs related to senior unsecured notes	(992		)	—			—			—		(992		)
Payment of principal related to senior secured notes	(300,000		)	—			—			—		(300,000		)
Payment of principal related to capital leases	(1,536		)	—			—			—		(1,536		)
Common stock repurchases	(187,360		)	—			—			—		(187,360		)
Proceeds from issuance of common stock	71,858			—			—			—		71,858
Excess tax benefits from stock-based compensation	6,909			—			—			—		6,909
Net cash used in financing activities	(114,871		)	—			—			—		(114,871		)
Effect of exchange rate fluctuations on cash and cash equivalents	—			—			(2,944		)	—		(2,944		)
Net increase (decrease) in cash and cash equivalents	(14,274		)	2,963			88,178			—		76,867
Cash and cash equivalents, beginning of period	284,466			680			428,080			—		713,226
Cash and cash equivalents, end of period	$	270,192		$	3,643		$	516,258		$	—	$	790,093

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



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments		Total
Net cash provided by operating activities	$	304,610		$	(716	)	$	76,484		$	—	$	380,378
Cash flows from investing activities:
Proceeds from sale of subsidiary	35			—			—			—		35
Purchases of property and equipment	(47,341		)	—			(8,664		)	—		(56,005		)
Net cash used in investing activities	(47,306		)	—			(8,664		)	—		(55,970		)
Cash flows from financing activities:
Payment of principal related to the term loan	(160,000		)	—			—			—		(160,000		)
Payment of principal related to capital leases	(1,389		)	—			—			—		(1,389		)
Common stock repurchases	(70,153		)	—			—			—		(70,153		)
Proceeds from issuance of common stock	76,472			—			—			—		76,472
Excess tax benefits from stock-based compensation	1,338			—			—			—		1,338
Net cash used in financing activities	(153,732		)	—			—			—		(153,732		)
Effect of exchange rate fluctuations on cash and cash equivalents	—			—			(4,252		)	—		(4,252		)
Net increase (decrease) in cash and cash equivalents	103,572			(716		)	63,568			—		166,424
Cash and cash equivalents, beginning of period	101,366			1,528			311,308			—		414,202
Cash and cash equivalents, end of period	$	204,938		$	812		$	374,876		$	—	$	580,626