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 or any 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 consolidating balance sheet as of May 3, 2014 (in thousands):



	Brocade Communications Systems, Inc.		Subsidiary Guarantors		Non-Guarantor Subsidiaries			Consolidating Adjustments			Total
Assets
Current assets:
Cash and cash equivalents	$	431,158	$	8,403	$	698,052		$	—		$	1,137,613
Accounts receivable, net	115,769		12		78,023			—			193,804
Inventories	43,088		—		(2,315		)	—			40,773
Intercompany receivables	—		476,800		—			(476,800		)	—
Other current assets	152,246		112		11,595			291			164,244
Total current assets	742,261		485,327		785,355			(476,509		)	1,536,434
Property and equipment, net	438,747		325		13,650			—			452,722
Investment in subsidiaries	1,116,621		—		—			(1,116,621		)	—
Other non-current assets	1,534,165		82,020		3,568			—			1,619,753
Total assets	$	3,831,794	$	567,672	$	802,573		$	(1,593,130	)	$	3,608,909
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	62,749	$	—	$	17,203		$	—		$	79,952
Current portion of long-term debt	2,277		—		—			—			2,277
Intercompany payables	412,299		—		64,501			(476,800		)	—
Other current liabilities	312,899		4,550		122,220			291			439,960
Total current liabilities	790,224		4,550		203,924			(476,509		)	522,189
Long-term debt, net of current portion	595,452		—		—			—			595,452
Other non-current liabilities	110,371		—		45,150			—			155,521
Total liabilities	1,496,047		4,550		249,074			(476,509		)	1,273,162
Total stockholders’ equity	2,335,747		563,122		553,499			(1,116,621		)	2,335,747
Total liabilities and stockholders’ equity	$	3,831,794	$	567,672	$	802,573		$	(1,593,130	)	$	3,608,909

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



	Brocade Communications Systems, Inc.		Subsidiary Guarantors		Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Assets
Current assets:
Cash and cash equivalents	$	396,710	$	9,301	$	580,986	$	—		$	986,997
Accounts receivable, net	159,436		328		89,834		—			249,598
Inventories	40,072		—		5,272		—			45,344
Intercompany receivables	—		464,443		—		(464,443		)	—
Other current assets	127,709		7		11,395		1,753			140,864
Total current assets	723,927		474,079		687,487		(462,690		)	1,422,803
Property and equipment, net	457,054		567		15,319		—			472,940
Investment in subsidiaries	1,026,247		—		—		(1,026,247		)	—
Other non-current assets	1,626,031		95,624		3,993		—			1,725,648
Total assets	$	3,833,259	$	570,270	$	706,799	$	(1,488,937	)	$	3,621,391
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	68,190	$	28	$	20,000	$	—		$	88,218
Current portion of long-term debt	2,996		—		—		—			2,996
Intercompany payables	409,590		—		54,853		(464,443		)	—
Other current liabilities	335,261		7,075		125,360		1,753			469,449
Total current liabilities	816,037		7,103		200,213		(462,690		)	560,663
Long-term debt, net of current portion	596,208		—		—		—			596,208
Other non-current liabilities	74,201		—		43,506		—			117,707
Total liabilities	1,486,446		7,103		243,719		(462,690		)	1,274,578
Total stockholders’ equity	2,346,813		563,167		463,080		(1,026,247		)	2,346,813
Total liabilities and stockholders’ equity	$	3,833,259	$	570,270	$	706,799	$	(1,488,937	)	$	3,621,391

The following is the condensed consolidating statement of operations for the three months ended May 3, 2014 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Revenues	$	313,634		$	582		$	222,694	$	—		$	536,910
Intercompany revenues	7,422			—			3,136		(10,558		)	—
Total net revenues	321,056			582			225,830		(10,558		)	536,910
Cost of revenues	121,481			2,206			57,400		1,531			182,618
Intercompany (income) cost of revenues	(14,985		)	—			25,543		(10,558		)	—
Total cost of revenues	106,496			2,206			82,943		(9,027		)	182,618
Gross margin (loss)	214,560			(1,624		)	142,887		(1,531		)	354,292
Operating expenses	287,601			261			47,766		(1,531		)	334,097
Intercompany operating expenses (income)	(46,576		)	(7,356		)	53,932		—			—
Total operating expenses	241,025			(7,095		)	101,698		(1,531		)	334,097
Income (loss) from operations	(26,465		)	5,471			41,189		—			20,195
Other income (expense)	(9,445		)	(8		)	199		—			(9,254		)
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	(35,910		)	5,463			41,388		—			10,941
Income tax expense	22,853			—			1,772		—			24,625
Equity in net earnings (losses) of subsidiaries	45,078			—			—		(45,078		)	—
Net income (loss)	$	(13,685	)	$	5,463		$	39,616	$	(45,078	)	$	(13,684	)

The following is the condensed consolidating 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 (income) 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 consolidating statement of operations for the six months ended May 3, 2014 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Revenues	$	636,750		$	1,381		$	463,314	$	—		$	1,101,445
Intercompany revenues	13,815			—			6,677		(20,492		)	—
Total net revenues	650,565			1,381			469,991		(20,492		)	1,101,445
Cost of revenues	242,113			8,822			120,523		3,025			374,483
Intercompany (income) cost of revenues	(30,159		)	—			50,651		(20,492		)	—
Total cost of revenues	211,954			8,822			171,174		(17,467		)	374,483
Gross margin (loss)	438,611			(7,441		)	298,817		(3,025		)	726,962
Operating expenses	479,797			6,919			101,586		(3,025		)	585,277
Intercompany operating expenses (income)	(89,740		)	(14,448		)	104,188		—			—
Total operating expenses	390,057			(7,529		)	205,774		(3,025		)	585,277
Income (loss) from operations	48,554			88			93,043		—			141,685
Other income (expense)	(19,837		)	(134		)	185		—			(19,786		)
Income (loss) before income tax provision and equity in net earnings (losses) of subsidiaries	28,717			(46		)	93,228		—			121,899
Income tax expense	51,284			—			3,415		—			54,699
Equity in net earnings (losses) of subsidiaries	89,767			—			—		(89,767		)	—
Net income (loss)	$	67,200		$	(46	)	$	89,813	$	(89,767	)	$	67,200

The following is the condensed consolidating 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 (income) 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 consolidating statement of comprehensive income (loss) for the three months ended May 3, 2014 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors		Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Net income (loss)	$	(13,685	)	$	5,463	$	39,616	$	(45,078	)	$	(13,684	)
Other comprehensive income (loss), net of tax:
Unrealized gains on cash flow hedges:
Change in unrealized gains and losses	—			—		1,094		—			1,094
Net gains reclassified into earnings	—			—		32		—			32
Net unrealized gains on cash flow hedges	—			—		1,126		—			1,126
Foreign currency translation adjustments	(68		)	—		1,366		—			1,298
Total other comprehensive income (loss)	(68		)	—		2,492		—			2,424
Total comprehensive income (loss)	$	(13,753	)	$	5,463	$	42,108	$	(45,078	)	$	(11,260	)

The following is the condensed consolidating 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 consolidating statement of comprehensive income (loss) for the six months ended May 3, 2014 (in thousands):



	Brocade Communications Systems, Inc.		Subsidiary Guarantors			Non-Guarantor Subsidiaries		Consolidating Adjustments			Total
Net income (loss)	$	67,200	$	(46	)	$	89,813	$	(89,767	)	$	67,200
Other comprehensive income (loss), net of tax:
Unrealized gains on cash flow hedges:
Change in unrealized gains and losses	—		—			170		—			170
Net gains reclassified into earnings	—		—			1		—			1
Net unrealized gains on cash flow hedges	—		—			171		—			171
Foreign currency translation adjustments	40		—			435		—			475
Total other comprehensive income (loss)	40		—			606		—			646
Total comprehensive income (loss)	$	67,240	$	(46	)	$	90,419	$	(89,767	)	$	67,846

The following is the condensed consolidating 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	498		—			(2,640		)	—			(2,142		)
Total other comprehensive income (loss)	498		—			(4,842		)	—			(4,344		)
Total comprehensive income (loss)	$	26,582	$	(27,776	)	$	48,634		$	(26,090	)	$	21,350

The following is the condensed consolidating statement of cash flows for the six months ended May 3, 2014 (in thousands):



	Brocade Communications Systems, Inc.			Subsidiary Guarantors			Non-Guarantor Subsidiaries			Consolidating Adjustments		Total
Net cash provided by (used in) operating activities	$	165,349		$	(898	)	$	113,262		$	—	$	277,713
Cash flows from investing activities:
Purchases of property and equipment	(23,773		)	—			(3,622		)	—		(27,395		)
Purchases of non-marketable minority equity investments	(223		)	—			—			—		(223		)
Proceeds from sale of network adapter business	3,081			—			6,914			—		9,995
Proceeds from collection of note receivable	250			—			—			—		250
Net cash provided by (used in) investing activities	(20,665		)	—			3,292			—		(17,373		)
Cash flows from financing activities:
Payment of principal related to capital leases	(1,749		)	—			—			—		(1,749		)
Common stock repurchases	(190,432		)	—			—			—		(190,432		)
Proceeds from issuance of common stock	54,530			—			—			—		54,530
Excess tax benefits from stock-based compensation	27,415			—			—			—		27,415
Net cash used in financing activities	(110,236		)	—			—			—		(110,236		)
Effect of exchange rate fluctuations on cash and cash equivalents	—			—			512			—		512
Net increase (decrease) in cash and cash equivalents	34,448			(898		)	117,066			—		150,616
Cash and cash equivalents, beginning of period	396,710			9,301			580,986			—		986,997
Cash and cash equivalents, end of period	$	431,158		$	8,403		$	698,052		$	—	$	1,137,613

The following is the condensed consolidating 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