Prepared by MERRILL CORPORATION
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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.   )

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/x/   Definitive Proxy Statement
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/ /   Soliciting Material Pursuant to §240.14a-12

FINISAR CORPORATION
(Name of Registrant as Specified In Its Charter)

                   
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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LOGO

1308 Moffett Park Drive
Sunnyvale, California 94089

    May 14, 2001

Dear Stockholder:

    A meeting of the stockholders of Finisar will be held on Tuesday, June 19, 2001, at 10:00 a.m. local time, at the Wyndham Garden Hotel, 1300 Chesapeake Terrace, Sunnyvale, CA. You are cordially invited to attend.

    The Notice of Meeting of Stockholders and a proxy statement, which describe the formal business to be conducted at the meeting, follow this letter.

    You will note that the accompanying proxy statement is substantially more voluminous than is typical for annual stockholder meetings. The additional volume of information relates to several recently completed acquisitions and one pending acquisition. Although none of these acquisitions require stockholder approval, we are asking you to approve an increase in the authorized number of shares of our common stock. Since a portion of these newly authorized shares will be issued in connection with the one pending acquisition and in exchange for shares of our preferred stock issued in two of the completed acquisitions, SEC rules require us to include in the proxy statement most of the information that would be required if we were actually seeking stockholder approval of the three acquisitions.

    Moreover, completing the details of the various acquisition transactions delayed the preparation of the required disclosure for the proxy statement. As a result, the stockholders meeting also has been delayed substantially. We hope to return to more conventional timing and disclosure for our 2001 stockholders meeting which we plan to hold in the fall.

    After reading the proxy statement, please promptly mark, sign and return the enclosed proxy card in the prepaid envelope to assure that your shares will be represented. Your shares cannot be voted unless you date, sign, and return the enclosed proxy card or attend the annual meeting in person. Regardless of the number of shares you own, your careful consideration of, and vote on, the matters before our stockholders is important.

    A copy of our Annual Report to Stockholders is also enclosed for your information. At the meeting we will review our activities over the past year and our plans for the future. The Board of Directors and Management look forward to seeing you at the meeting.


NOTICE OF MEETING OF STOCKHOLDERS

To Be Held June 19, 2001

TO THE STOCKHOLDERS:

    Please take notice that the annual meeting of the stockholders of Finisar Corporation, a Delaware corporation, will be held on Tuesday, June 19, 2001, at 10:00 a.m. local time, at the Wyndham Garden Hotel, 1300 Chesapeake Terrace, Sunnyvale, CA, for the following purposes:

    1.  To elect three Class I directors to hold office for a three-year term and until their respective successors are elected and qualified;

    2.  To consider, approve and ratify an amendment to our Certificate of Incorporation to increase the number of authorized shares of common stock from 200,000,000 to 500,000,000;

    3.  To consider, approve and ratify the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending April 30, 2001; and

    4.  To transact such other business as may properly come before the meeting.

    Stockholders of record at the close of business on April 27, 2001 are entitled to notice of, and to vote at, the meeting and any adjournment or postponement of the meeting. For ten days prior to the meeting, a complete list of stockholders entitled to vote at the meeting will be available for examination by any stockholder, for any purpose relating to the meeting, during ordinary business hours at our principal offices located at 1308 Moffett Park Drive, Sunnyvale, California 94089.

Sunnyvale, California
May 14, 2001

IMPORTANT: Please fill in, date, sign and promptly mail the enclosed proxy card in the accompanying postage-paid envelope to assure that your shares are represented at the meeting. If you attend the meeting, you may choose to vote in person even if you have previously sent in your proxy card.


TABLE OF CONTENTS

 
   Page
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS   1
SOLICITATION AND VOTING OF PROXIES   1
INFORMATION ABOUT FINISAR CORPORATION   2
  Stock Ownership of Certain Beneficial Owners and Management   2
  Management   4
REPORT OF THE AUDIT COMMITTEE   6
EXECUTIVE COMPENSATION AND OTHER MATTERS   7
  Executive Compensation   7
  Stock Options Granted in Fiscal 2000   7
  Option Exercises and Fiscal 2000 Year-End Values   7
  Employment Contracts and Termination of Employment and Change-in-Control Arrangements   8
  Compensation of Directors   8
  Compensation Committee Interlocks and Insider Participation in Compensation Decisions   8
  Certain Relationships and Related Transactions   8
  Section 16(a) Beneficial Ownership Reporting Compliance   9
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION   9
COMPARISON OF STOCKHOLDER RETURN   11
ELECTION OF DIRECTORS   12
APPROVAL OF AMENDMENT TO OUR CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK   13
  Background   13
  Completed Acquisitions   14
  Purpose and Effect of the Charter Amendment   16
  Summary of Acquisitions Requiring Additional Shares of Common Stock   17
  Acquisition of Shomiti Systems, Inc.   18
  Acquisition of Transwave Fiber, Inc.   33
  Acquisition of Marlow Industries, Inc.   44
  Finisar Selected Financial Data   61
  Shomiti Selected Financial Data   63
  Transwave Selected Financial Data   64
  Marlow Selected Financial Data   65
  Finisar Corporation, Shomiti Systems, Inc., Transwave Fiber, Inc. and Marlow Industries, Inc. Introduction to Pro Forma Financial Information   66
  Risk Factors Related to the Acquisitions   77
  Quantitative and Qualitative Disclosures About Market Risk   80
  Vote Required and Board of Directors' Recommendation   80
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS   80
  Audit Fees   80
  All Other Fees   80
  Vote Required and Board of Directors' Recommendation   81
STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING   82
WHERE YOU CAN FIND MORE INFORMATION   82
TRANSACTION OF OTHER BUSINESS   83
INDEX TO FINANCIAL STATEMENTS   F-1
Annex A—Audit Committee Charter   A-1
Annex B—Shomiti Reorganization Agreement   B-1
Annex C—Transwave Reorganization Agreement   C-1
Annex D—Marlow Reorganization Agreement   D-1

i


PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS

    The accompanying proxy is solicited by the Board of Directors of Finisar Corporation, a Delaware corporation, for use at its annual meeting of stockholders to be held on June 19, 2001, or any adjournment or postponement of the meeting, for the purposes set forth in the accompanying Notice of Annual Meeting of Stockholders. The date of this proxy statement is May 14, 2001, the approximate date on which this proxy statement and the accompanying form of proxy were first sent or given to stockholders.


SOLICITATION AND VOTING OF PROXIES

    Finisar will bear the cost of soliciting proxies. In addition to soliciting stockholders by mail, we will request banks and brokers, and other custodians, nominees and fiduciaries, to solicit their customers who hold our stock registered in the names of such persons and will reimburse them for their reasonable, out-of-pocket costs. We may use the services of our officers, directors and others to solicit proxies, personally or by telephone, without additional compensation.

    On April 27, 2001, we had outstanding 184,175,794 shares of common stock, par value $.001 per share, and 1,120,984 shares of Series A Preferred Stock, par value $.001 per share, all of which are entitled to vote with respect to all matters to be acted upon at the annual meeting. Each holder of common stock of record as of that date is entitled to one vote for each share of common stock held by him or her and each holder of Series A Preferred Stock of record as of that date is entitled to three votes for each share of Series A Preferred Stock held by him or her. Our Bylaws provide that a majority of all of the shares of the stock entitled to vote, whether present in person or represented by proxy, shall constitute a quorum for the transaction of business at the meeting. Votes for and against, abstentions and "broker non-votes" will each be counted as present for purposes of determining the presence of a quorum.

    All valid proxies received before the meeting will be exercised. All shares represented by a proxy will be voted, and where a stockholder specifies by means of his or her proxy a choice with respect to any matter to be acted upon, the shares will be voted in accordance with the specification so made. If no choice is indicated on the proxy, the shares will be voted in favor of the proposal. A stockholder giving a proxy has the power to revoke his or her proxy at any time before the time it is exercised by delivering to our Secretary a written instrument revoking the proxy or a duly executed proxy with a later date, or by attending the meeting and voting in person.

1


INFORMATION ABOUT FINISAR CORPORATION

Stock Ownership of Certain Beneficial Owners and Management

    The following table sets forth, as of January 31, 2001, certain information with respect to the beneficial ownership of our common stock by:


Name of Beneficial Owner(1)
   Amount and Nature
of Beneficial
Ownership(1)
   Percent of
Common Stock
Outstanding(1)
  
5% Stockholders:          
Putnam Investments, LLC (2)   18,991,710   10.2 %
Margaret G. Rawls   9,998,753   5.4 %
Executive Officers and Directors:          
Frank H. Levinson(3)   41,142,497   22.2 %
Jerry S. Rawls(4)   9,612,381   5.2 %
Gregory H. Olsen(5)   6,926,038   3.7 %
Mark J. Farley(6)   4,328,975   2.3 %
Jan Lipson(7)   602,312   *  
Stephen K. Workman(8)   530,238   *  
Roger C. Ferguson(9)   90,000   *  
Michael C. Child   62,836   *  
Richard B. Lieb(10)   16,000   *  
Larry D. Mitchell(11)   22,500   *  
All executive officers and directors as a group (10 persons)(12)   63,333,777   33.8 %
*
Less than 1%.

(1)
Unless otherwise indicated, the address of each of the named individuals is: c/o Finisar Corporation, 1308 Moffett Park Drive, Sunnyvale, CA 94089. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. All shares of common stock subject to options exercisable within 60 days following January 31, 2001 are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the number of shares beneficially owned and the percentage of ownership of that person. They are not, however, deemed to be outstanding and beneficially owned for the purpose of computing the percentage ownership of any other person. Accordingly, percent ownership is based on 185,592,498 shares of common stock outstanding as of January 31, 2001 plus any shares issuable pursuant to options held by the person or group in question which may be exercised within 60 days following January 31, 2001. Except as indicated in the other footnotes to the table and subject to applicable community property laws, based on information provided by the persons named in the table, these persons have sole voting and investment power with respect to all shares of the common stock shown as beneficially owned by them.

2

(2)
Based on information contained in a Schedule 13G dated February 14, 2001, filed with the Securities and Exchange Commission. Includes 16,593,460 shares held by Putnam Investment Management, LLC and 2,398,250 shares held by The Putnam Advisory Company, LLC. Putnam Investment Management, LLC and The Putnam Advisory Company, LLC are both wholly-owned subsidiaries of Putnam Investments, LLC. Both subsidiaries have dispository power over the shares as investment managers, but each of the mutual fund's trustees have voting power over the shares held by each fund, and The Putnam Advisory Company, LLC has shared voting power over the shares held by the institutional clients. Putnam Investment Management, LLC, which is the investment adviser to the Putnam family of mutual funds, and The Putnam Advisory Company, LLC, which is the investment adviser to Putnam's institutional clients, are both registered investment advisors. Putnam Investments, LLC is a wholly-owned subsidiary of Marsh & McLennan Companies, Inc. The address of Marsh & McLennan Companies, Inc. is 1166 Avenue of the Americas, New York, New York 10036 and the address of Putnam Investments, LLC is One Post Office Square, Boston, Massachusetts 02109.

(3)
Includes 32,797,879 shares held by the Frank H. & Wynnette Levinson 1998 Revocable Trust, 2,654,618 shares held by the Frank H. & Wynnette Levinson 1999 Revocable Trust, 1,715,000 shares held by Seti Trading Co., Inc., an investment company owned by Frank and Wynnette Levinson, 1,325,000 shares held by the Rose Wynnette Levinson 1998 Gift Trust, 1,325,000 shares held by the Alana Marie Levinson 1998 Gift Trust and 1,325,000 shares held by the Frank Henry Levinson 1998 Gift Trust.

(4)
Includes 3,791,593 shares held by the Rawls Family, L.P. Mr. Rawls is the president of the Rawls Management Corporation, the general partner of the Rawls Family, L.P.

(5)
Includes 4,957,500 shares held in escrow in connection with our acquisition of Sensors Unlimited, Inc. One third of such amount will be released to Mr. Olsen on each of the first three anniversaries of October 17, 2000, subject to the achievement of certain development milestones set forth in the acquisition agreement. Any shares not qualifying for such release will be cancelled and returned to Finisar.

(6)
Includes 1,749,620 shares issuable upon exercise of options exercisable within 60 days following January 31, 2001, 1,679,355 shares held by the Farley Family Trust and 900,000 shares held by an irrevocable trust for the benefit of Mr. Farley's child.

(7)
Includes 540,000 shares subject to a right of repurchase in favor of Finisar which lapses over time.

(8)
Includes 480,000 shares subject to a right of repurchase in favor of Finisar which lapses over time.

(9)
Includes 72,000 shares subject to a right of repurchase in favor of Finisar which lapses over time.

(10)
Includes 500 shares held by Mr. Lieb's spouse, 300 shares held by Mr. Lieb's children and 9,200 shares issuable upon exercise of an option exercisable within 60 days following January 31, 2001.

(11)
Includes 22,500 shares issuable upon exercise of an option exercisable within 60 days following January 31, 2001.

(12)
Includes 1,092,000 shares subject to a right or repurchase in favor of Finisar, 1,781,320 shares issuable upon exercise of options exercisable within 60 days following January 31, 2001 and 4,957,500 shares held in escrow in connection with our acquisition of Sensors Unlimited, Inc. See Note 5.

3

Management

    Directors.  This section sets forth for the current directors, including the Class I nominees to be elected at this meeting, information concerning their age and background.

Name
   Position With Finisar
   Age
   Director Since
Class I directors nominated for election at the Annual Meeting of Stockholders:
Roger C. Ferguson   Director   58   1999
Larry D. Mitchell   Director   58   1999
Gregory H. Olsen   Director and Executive Vice President   56   2000
Class II directors whose terms expire at the 2001 Annual Meeting of Stockholders:
Frank H. Levinson   Chairman of the Board and Chief Technical Officer   48   1988
Richard B. Lieb   Director   53   1999
Class III directors whose terms expire at the 2002 Annual Meeting of Stockholders:
Michael C. Child   Director   46   1998
Jerry S. Rawls   Director, President and Chief Executive Officer   56   1989

    Roger C. Ferguson has served as Chief Executive Officer of Semio Inc., an early stage software company, since July 1999 and as a principal in VenCraft, LLC, a venture capital partnership, since July 1997. From 1993 to 1997, Mr. Ferguson was Chief Executive Officer of DataTools, Inc., a database software company. From 1987 to 1993, Mr. Ferguson served as Chief Operating Officer for Network General Inc., a network analysis company. Mr. Ferguson also serves on the Boards of Directors of Microtest, Inc. and several private companies. Mr. Ferguson holds a B.A. in Psychology from Dartmouth College and an M.B.A. from the Amos Tuck School at Dartmouth.

    Larry D. Mitchell has been retired since October 1997. From October 1994 to October 1997, he served as a site General Manager in Roseville, California for Hewlett-Packard. Mr. Mitchell also serves on the Board of Directors of California Community Bankshares, Sacramento Commercial Bank and Placer Sierra Bank, each a registered investment company. Mr. Mitchell holds a B.A. in Engineering Science from Dartmouth College and an M.B.A. from the Stanford Graduate School of Business.

    Gregory H. Olsen has served on our Board of Directors, as our Executive Vice President and President and Chief Executive Officer of Sensors Unlimited, Inc. ("Sensors"), a wholly-owned subsidiary of Finisar, since our acquisition of Sensors in October 2000. Dr. Olsen founded Sensors, a fiber optic component company, in 1991 and served as its President and Chief Executive Officer from its inception. In 1984 Dr. Olsen founded EPITAXX, Inc., and served as its President and Chief Executive Officer from its inception until 1990 when EPITAXX was acquired by Nippon Sheet Glass. Dr. Olsen holds a B.S. in Physics, a B.S.E.E. and M.S. in Physics (magna cum laude) from Fairleigh Dickenson University and a Ph.D. in Material Science from the University of Virginia.

    Frank H. Levinson founded Finisar in April 1987 and has served as a member of our Board of Directors since February 1988 and as our Chairman of the Board and Chief Technical Officer since August 1999. Mr. Levinson also served as our Chief Executive Officer from February 1988 to August 1999. From September 1980 to December 1983, Mr. Levinson was a member of Technical Staff at AT&T Bell Laboratories. From January 1984 to July 1984, he was a Member of Technical Staff at Bellcore, a provider of services and products to the communications industry. From April 1985 to December 1985, Mr. Levinson was the principal optical scientist at Raychem Corporation, and from January 1986 to February 1988, he was Optical Department Manager at Raynet, Inc., a fiber optic systems company. Mr. Levinson holds a B.S. in Mathematics/Physics from Butler University and an M.S. and Ph.D. in Astronomy from the University of Virginia.

4

    Richard B. Lieb has served as Executive President of SEI Investments, an investment and investment processing business solutions company since November 1990. He also serves on the Board of Directors of OAO Technology Solutions, Inc., an IT outsourcing company. He is on the Advisory Board of Cross Atlantic Technology Fund, a technology venture capital fund in Radnor, Pennsylvania. Mr. Lieb holds a B.A. in History from Duke University and an M.P.A. in Finance from the Wharton School of Business at the University of Pennsylvania.

    Michael C. Child has been employed by TA Associates, Inc., a venture capital investment firm, since July 1982 where he currently serves as a Managing Director. Mr. Child also serves on the Board of Directors of Fargo Electronics. Mr. Child holds a B.S. in Electrical Engineering from the University of California at Davis and an M.B.A. from the Stanford Graduate School of Business.

    Jerry S. Rawls has served as a member of our Board of Directors since March 1989, as our President since April 1989 and as our Chief Executive Officer since August 1999. From September 1968 to February 1989, Mr. Rawls was employed by Raychem Corporation, a materials science and engineering company, where he held various management positions including Division General Manager of the Aerospace Products Division and Interconnection Systems Division. Mr. Rawls holds a B.S. in Mechanical Engineering from Texas Tech University and an M.S. in Industrial Administration from Purdue University.

    Meetings of the Board of Directors.  During the fiscal year ended April 30, 2000, our Board of Directors held four meetings. During that period the Audit Committee of the Board held four meetings and the Compensation Committee of the Board held four meetings. Attendance at Board and committee meetings was at least 75 percent for each director. We have no standing nominating committee of the Board.

    The members of the Audit Committee during fiscal 2000 were Messrs. Child and Ferguson. The Audit Committee currently consists of Messrs. Child, Ferguson and Mitchell. The Board of Directors and the Audit Committee believe that the Audit Committee's current member composition satisfies the standards of the National Association of Securities Dealers ("NASD") that governs audit committee composition, including the requirement that the members of the Audit Committee be "independent" within the meaning of the NASD's listing standards. The Audit Committee of our Board of Directors recommends the appointment of our independent auditors, reviews our internal accounting procedures and financial statements and consults with and reviews the services provided by our independent auditors, including the results and scope of their audit. The Audit Committee has adopted a charter, which is attached to this proxy statement as Annex A. For additional information about the Audit Committee, see "Report of the Audit Committee" below.

    The members of the Compensation Committee during fiscal 2000 were Messrs. Child and Ferguson. The current members of the Compensation Committee are Messrs. Child, Ferguson and Mitchell. The Compensation Committee of our Board of Directors reviews and recommends to the Board of Directors the compensation and benefits of all of our executive officers and establishes and reviews general policies relating to compensation and benefits of our employees. For additional information about the Compensation Committee, see "Report Of The Compensation Committee On Executive Compensation" and "Executive Compensation and Other Matters" below.

5


REPORT OF THE AUDIT COMMITTEE

    The following is the report of the Audit Committee with respect to our audited financial statements for the fiscal year ended April 30, 2000. Except for the final sentence of the second paragraph of this Audit Committee Report, the information contained in this report shall not be deemed to be "soliciting material" or to be "filed" with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the 1934 Securities Exchange Act, as amended, except to the extent that Finisar specifically incorporates it by reference in such filing.

    The Audit Committee has reviewed and discussed Finisar's audited financial statements with management. The Audit Committee has discussed with Ernst & Young LLP, Finisar's independent auditors, the matters required to be discussed by SAS 61 (Codification of Statements on Accounting Standards) which include, among other items, matters related to the conduct of the audit of Finisar's financial statements. The Audit Committee has also received written disclosures and the letter from Ernst & Young LLP required by the Independence Standards Board Standard No. 1 (which relates to the auditors' independence from Finisar and its related entities) and has discussed with Ernst & Young LLP their independence from Finisar. In addition, the Audit Committee has considered whether the provision of non-audit services by Ernst & Young LLP during Finisar's year ended April 30, 2000 is compatible with maintaining the independence of Ernst & Young LLP.

    Based on the review and discussions referred to above, the committee recommended to Finisar's Board of Directors that Finisar's audited financial statements be included in the company's Annual Report on Form 10-K for the fiscal year ended April 30, 2000.

6


EXECUTIVE COMPENSATION AND OTHER MATTERS

Executive Compensation

    The following table sets forth information concerning the compensation of our Chief Executive Officer and our four other most highly compensated executive officers, as of April 30, 2000, during the fiscal years ended April 30, 2000, 1999 and 1998.


SUMMARY COMPENSATION TABLE

 
    
    
    
    
   Long-term
Compensation
Awards
Securities
Underlying
Options
    
 
    
   Annual Compensation
    
Name and Principal Position
   Year
   Salary
   Bonus(1)
   Other Annual
Compensation
   All Other
Compensation
Jerry S. Rawls
President and Chief
Executive Officer		   2000
1999
1998		   $
$
$		 200,000
189,423
166,346		   $
$
$		 1,000
106,192
94,000		   $
$
 1,923
4,677
—		   —
—
—		  
—
—
—
Frank H. Levinson
Chief Technical Officer		   2000
1999
1998		   $
$
$		 200,000
189,423
166,385		   $
$
$		 1,000
106,192
94,000		   $
$
 2,308
3,581
—		   —
—
—		  
—
—
—
Mark J. Farley
Vice President, Digital
Systems Engineering		   2000
1999
1998		   $
$
$		 165,000
149,423
128,846		   $
$
$		 6,000
64,731
53,000		   $
$
 1,587
2,857
—		   —
—
—		  
——
—
Jan Lipson
Vice President,
Optical Engineering		   2000
1999
1998		   $
$
 150,000
142,308
—		   $
$
 6,000
44,077
—		   $
$
 1,731
162
—		   —
900,000
—
(2)
——
—
Stephen K. Workman
Vice President, Finance, Chief
Financial Officer and Secretary		   2000
1999
1998		   $
$
 150,000
17,308
—		   $
$
 6,000
3,500
—		   $

 1,298
—
—		   —
600,000
—
(2)
——
—
(1)
See "Report of the Compensation Committee on Executive Compensation."

(2)
This option is immediately exercisable, subject to a right of repurchase in favor of Finisar which lapses at a rate of 20% per year over a period of five years.

Stock Options Granted in Fiscal 2000

    No options were granted to the persons named in the Summary Compensation Table during the fiscal year ended April 30, 2000.

Option Exercises and Fiscal 2000 Year-End Values

    The following table provides the specified information concerning unexercised options held as of April 30, 2000 by the persons named in the Summary Compensation Table above. There were no exercises of options by any of such persons during the fiscal year ended April 30, 2000.

7


AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES

 
   Number of Securities
Underlying Unexercised
Options
At Fiscal Year End
    
    
 
   Value of Unexercised
In-the-Money Options
At Fiscal Year End(1)
Name
  Exercisable(2)
   Unexercisable
   Exercisable(2)
   Unexercisable
Jerry S. Rawls   —   —   $ —   $ —
Frank H. Levinson   —   —     —     —
Mark J. Farley   1,884,620   —   $ 70,320,826     —
Jan Lipson   —   —     —     —
Stephen K. Workman   —   —     —     —
(1)
Based on a fair market value of $37.313, the closing price of our common stock on April 28, 2000, as reported by The Nasdaq National Market.

(2)
Stock options granted under the 1999 stock option plan prior to our initial public offering of common stock in November 1999 are generally immediately exercisable at the date of grant, but shares received upon exercise of unvested options are subject to repurchase by Finisar. Options granted after this date under the 1999 stock option plan are generally not immediately exercisable at the date of grant.

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

    There are no employment contracts or change-in-control arrangements with any of the officers named in the Summary Compensation Table above.

Compensation of Directors

    Our directors do not receive cash compensation for their services as directors or members of committees of the Board of Directors. However, directors are eligible to receive stock options. We reimburse directors for their reasonable expenses incurred in attending meetings of the Board of Directors.

Compensation Committee Interlocks and Insider Participation in Compensation Decisions

    The Compensation Committee for fiscal year 2000 was composed of Michael C. Child and Roger C. Ferguson. No interlocking relationships exist between any member of our Compensation Committee and any member of any other company's board of directors or compensation committee. The Compensation Committee reviews and recommends to the Board of Directors the compensation and benefits of all of our officers, and establishes and reviews general policies relating to compensation and benefits of our employees.

Certain Relationships and Related Transactions

    Effective on the closing of our acquisition of Sensors on October 17, 2000, Gregory H. Olsen, the President and Chief Executive Officer of Sensors, was elected a director of Finisar and appointed to the position of Executive Vice President of Finisar. In connection with his continued employment with Finisar, Dr. Olsen entered into a three-year employment agreement that provides for an annual base salary of $200,000 and annual bonuses based on performance and the achievement of financial goals. Dr. Olsen was also granted an option to purchase 300,000 shares of Finisar's common stock under Finisar's 1999 stock option plan pursuant to Finisar's standard option agreement and vesting terms. If Dr. Olsen's employment is terminated other than by reason of death or disability or for cause, he will be entitled to receive severance payments equal to twelve months of his base salary and a pro-rated

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portion of the annual bonus, if any, for the prior fiscal year. The severance payments will be paid in equal, bi-weekly installments over the twelve-month period following the date of termination. In addition, Dr. Olsen entered into a noncompetition agreement under which he agreed, during the three-year period following the closing of the acquisition, not to engage, other than on behalf of Finisar, in any business that competes with the business of Sensors, accept employment with a customer of Sensors with the intent of depriving Sensors of business or request or advise customers or suppliers of Sensors to withdraw or curtail their business with Sensors. The terms of these agreements were negotiated at arm's length in connection with the negotiation of the terms of the acquisition of Sensors.

Section 16(a) Beneficial Ownership Reporting Compliance

    Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers, directors and persons who beneficially own more than 10% of our common stock to file initial reports of ownership and reports of changes in ownership with the Securities and Exchange Commission ("SEC"). Such persons are required by SEC regulations to furnish Finisar with copies of all Section 16(a) forms filed by such person.

    Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all filing requirements applicable to our executive officers, directors and more than 10% stockholders were complied with, except that three statements of changes in beneficial ownership involving three transactions were not timely filed for Jerry Rawls, Frank Levinson, and Mark Farley in conjunction with the sale of stock in a public offering of common stock in April 2000; and three statements of changes in beneficial ownership involving three transactions for Jan Lipson, Mark Farley, and Steve Workman for shares purchased pursuant to our employee stock purchase plan in May 2000 were not timely filed.


REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION

Compensation Philosophy

    The goals of our compensation policy are to attract, retain and reward executive officers who contribute to our overall success by offering compensation that is competitive in the networking industry, to motivate executives to achieve our business objectives and to align the interests of officers with the long-term interests of stockholders. We currently use salary, bonuses and stock options to meet these goals.

Form of Compensation

    We provide our executive officers with a compensation package consisting of base salary, incentive bonuses and participation in benefit plans generally available to other employees. In setting total compensation, the Compensation Committee considers individual and company performance, as well as market information regarding compensation paid by other companies in our industry.

    Base Salary.  Salaries for executive officers are initially set based on negotiation with individual executive officers at the time of their recruitment and with reference to salaries for comparable positions in the networking industry for individuals of similar education and background to the executive officers being recruited. We also give consideration to the individual's experience, reputation in his or her field and expected contributions to Finisar. Salaries are generally reviewed annually by the Compensation Committee and are subject to increases based on (i) the Compensation Committee's determination that the individual's level of contribution to Finisar has increased since his or her salary had last been reviewed and (ii) increases in competitive pay levels.

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    Bonuses.  It is our policy that a substantial component of each officer's potential annual compensation take the form of a performance-based bonus. Bonus payments to officers other than the Chief Executive Officer are determined by the Compensation Committee, in consultation with the Chief Executive Officer, based on our financial performance and the achievement of the officer's individual performance objectives. The Chief Executive Officer's bonus is determined by the Compensation Committee, without participation by the Chief Executive Officer, based on the same factors.

    Long-term Incentives.  Longer term incentives are provided through the 1999 stock option plan, which rewards executives and other employees through the growth in value of our stock. The Compensation Committee believes that employee equity ownership is highly motivating, provides a major incentive for employees to build stockholder value and serves to align the interests of employees with those of stockholders. Grants of stock options to executive officers are based upon each officer's relative position, responsibilities, historical and expected contributions to Finisar, and the officer's existing stock ownership and previous option grants, with primary weight given to the executive officers' relative rank and responsibilities. Initial stock option grants designed to recruit an executive officer to join Finisar may be based on negotiations with the officer and with reference to historical option grants to existing officers. Stock options are granted at an exercise price equal to the market price of our common stock on the date of grant and will provide value to the executive officers only when the price of our common stock increases over the exercise price.

2000 Compensation

    Compensation for the Chief Executive Officer and other executive officers for 2000 was set according to our established compensation policy described above. At the end of fiscal 2000, we paid bonuses to our executive officers. These payments were based on our successes in 2000 in the execution of our operating and strategic plan, including substantial growth in revenue and operating income and the successful completion of the initial public offering of our common stock in November 1999, as well as the individual executives' contributions to these successes and the overall performance of Finisar and the individual officers' performance with respect to certain specific operational and strategic objectives.

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COMPARISON OF STOCKHOLDER RETURN

    Set forth below is a line graph comparing the annual percentage change in the cumulative total return on our common stock with the cumulative total returns of the CRSP Total Return Index for The Nasdaq National Market and the CRSP Index for Nasdaq Networking Stocks for the period commencing on November 12, 1999 and ending on April 28, 2000.(1)


Comparison of Cumulative Total Return From
November 12, 1999 through April 28, 2000(1):
Finisar, Nasdaq Index
and Networking Index

     LOGO

 
   November 12, 1999
   April 28, 2000
             
Finisar   $ 100.00   $ 589.00
Nasdaq Index   $ 100.00   $ 114.00
Networking Index   $ 100.00   $ 124.00
(1)
Assumes that $100.00 was invested on November 12, 1999, at the offering price on the date of our initial public offering, in our common stock and each index. No cash dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

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ELECTION OF DIRECTORS

    We have a classified Board of Directors consisting of three Class I directors (Roger C. Ferguson, Larry D. Mitchell and Gregory H. Olsen), two Class II directors (Frank H. Levinson and Richard B. Lieb), and two Class III directors (Michael C. Child and Jerry S. Rawls) who will serve until the annual meetings of stockholders for 2000, 2001 and 2002, respectively, and until their respective successors are duly elected and qualified. At each annual meeting of stockholders, directors are elected for a term of three years to succeed those directors whose terms expire at the annual meeting dates.

    The terms of the Class I directors will expire on the date of the upcoming annual meeting. Accordingly, three persons are to be elected to serve as Class I directors of the Board of Directors at the meeting. Management's nominees for election by the stockholders to those three positions are the current Class I members of the Board of Directors: Roger C. Ferguson, Larry D. Mitchell and Gregory H. Olsen. Please see "Information About Finisar Corporation—Management" above for information concerning the nominees. If elected, the nominees will serve as directors until our Annual Meeting of Stockholders for 2003 and until their successors are elected and qualified. If any of the nominees declines to serve or becomes unavailable for any reason, or if a vacancy occurs before the election (although we know of no reason to anticipate that this will occur), the proxies may be voted for such substitute nominees as we may designate.

    If a quorum is present and voting, the three nominees for Class I director receiving the highest number of votes will be elected as Class I directors. Abstentions and broker non-votes have no effect on the vote.

    The Board of Directors recommends a vote "FOR" the nominees named above.

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APPROVAL OF AMENDMENT TO OUR CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK

Background

    Under Delaware law, we may only issue shares of our capital stock to the extent such shares have been authorized for issuance under our Certificate of Incorporation (the "Certificate"). The Certificate currently authorizes the issuance of up to 200,000,000 shares of common stock, $0.001 par value. As of the record date, 184,175,794 shares of our common stock were issued and outstanding and 13,654,856 unissued shares of common stock were reserved for issuance under our equity compensation plans, leaving 2,169,350 shares of common stock unissued and unreserved. In order to ensure sufficient shares of common stock will be available for future corporate uses, the Board of Directors approved, subject to stockholder approval, an amendment to our Certificate of Incorporation (the "Charter Amendment") to increase the number of shares of common stock authorized for issuance from 200,000,000 to 500,000,000.

    The Certificate also authorizes the issuance of up to 5,000,000 shares of preferred stock, $0.001 par value. The preferred stock may be issued in one or more series having such rights, preferences and privileges as may be designated by our Board of Directors. Pursuant to such Board action, we filed a Certificate of Designation of Preferences and Rights of the Series A Preferred Stock (the "Certificate of Designation") with the Delaware Secretary of State to designate 4,500,000 shares of our preferred stock as Series A Preferred Stock. Each share of Series A Preferred Stock will automatically be converted into three shares of our common stock, subject to adjustment for stock splits, stock dividends, recapitalizations and similar events, upon the effectiveness of an increase in the authorized number of shares of our common stock to not less than the number of shares sufficient to allow the conversion of each share of the Series A Preferred Stock. Pending conversion of the Series A Preferred Stock, a holder of a share of Series A Preferred Stock will have the same rights as a holder of the number of shares of our common stock into which the share of Series A Preferred Stock is convertible with respect to the rights to vote, to receive dividends and to receive distributions on a liquidation or winding up of Finisar. Shares of Series A Preferred Stock were issued in connection with the acquisitions of Shomiti Systems, Inc. ("Shomiti") and Transwave Fiber, Inc. ("Transwave") described below. As of the record date, 1,120,984 shares of our Series A Preferred Stock were issued and outstanding. If the Charter Amendment is approved, outstanding shares of the Series A Preferred Stock will automatically be converted into common stock upon the filing of an amendment to our Certificate with the Delaware Secretary of State.

    The shortage in our authorized but unissued shares of common stock is primarily attributable to a three-for-one split of our common stock in April 2000. We issued two shares of our common stock as a stock dividend for each share of common stock outstanding on the record date of March 27, 2000 to effect the stock split. Following the stock dividend, approximately 153,800,000 shares of our common stock were outstanding.

    In addition, we recently acquired Sensors, Demeter Technologies, Inc. ("Demeter") and Medusa Technologies, Inc. ("Medusa") and, as described below, issued or reserved for issuance shares of our common stock in connection with those acquisitions. We also acquired Shomiti and Transwave and, as described below, issued our Series A Preferred Stock in connection with those acquisitions. We have also entered into an agreement to acquire Marlow Industries, Inc. ("Marlow") in exchange for shares of our common stock.

    In connection with the acquisitions of Sensors and Demeter, our Board agreed to limit the number of options that could be granted under our 1999 stock option plan in order to have a sufficient number of shares of common stock available for issuance in the acquisitions. Our Board also agreed to suspend the automatic annual 5% increase in shares reserved for issuance under the 1999 stock option plan until the number of shares of our common stock authorized for issuance has been increased. In

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connection with the acquisitions of Shomiti, Medusa and Transwave, our Board adopted the Finisar Corporation 2001 nonstatutory stock option plan which provides for the grant of nonstatutory options to purchase Series A Preferred Stock. An aggregate of 1,950,000 shares of Series A Preferred Stock are reserved for issuance under the 2001 option plan. The 2001 option plan will primarily be used for the grant of options to employees of Shomiti, Medusa and Transwave following the completion of the acquisitions of these companies. However, we may also grant options under the 2001 stock option plan to our employees if we do not have a sufficient number of shares of common stock available for grant under our 1999 stock option plan.

Completed Acquisitions

    Acquisition of Sensors Unlimited, Inc. We completed the acquisition of Sensors Unlimited, Inc. ("Sensors") on October 17, 2000. Sensors is headquartered in Princeton, New Jersey and is a leading supplier of optical components that monitor the performance of dense wavelength division multiplexing, or DWDM, systems. Its technology enables telecommunications companies to optimize the use of existing bandwidth in fiber optic networks.

    Pursuant to the merger, we issued 18,962,141 shares of our common stock in exchange for the outstanding shares of Sensors common stock. In addition, we assumed the outstanding options to purchase Sensors common stock and have reserved 381,417 shares of our common stock for issuance upon the exercise of the assumed options. At the closing of the transaction, the assumed Sensors options were converted into options to purchase our common stock and vested to the extent of the greater of (1) 25% of the total number of shares subject to the option or (2) the vested percentage of the Sensors option at the closing of the merger, up to a maximum of 50% of the total number of shares subject to the option. The unvested portion of each assumed option will vest in three approximately equal annual installments on each of the first three anniversaries of the date of closing of the merger, subject to the optionholder's continued service with Finisar or a subsidiary.

    At the closing of the merger, certificates representing 9,481,109 shares of our common stock were issued to the former stockholders of Sensors (the "Initial Consideration") and certificates representing 9,481,032 shares of our common stock, or approximately one-half of the shares issued pursuant to the merger, were deposited into escrow with U.S. Bank Trust, National Association (the "Deferred Consideration"). One-third of the shares deposited in escrow will be released on each of the first three anniversaries of October 17, 2000, subject to the achievement of certain development milestones. If the milestones are not achieved, the escrow shares will be cancelled and returned to the status of authorized but unissued shares. Further, one-third of the escrow shares that would otherwise be delivered to the principal stockholders of Sensors on the third anniversary of the closing of the merger will be subject to claims for indemnification by us under the reorganization agreement and the procedures specified in the escrow agreement. Those shares will remain in escrow until all pending claims for indemnification, if any, have been resolved.

    In addition to the Initial Consideration and the Deferred Consideration, on each of the first three anniversaries of the closing of the merger, we will issue and deliver to the former stockholders of Sensors, on a pro rata basis, additional shares of our common stock (the "Additional Consideration"). These shares will be valued on the basis of the average closing trading price per share of our common stock on The Nasdaq National Market for the ten trading days preceding the applicable payment date. These shares of our common stock, with an estimated value of $48 million, will be distributed as follows:

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    Effective on the closing of the merger, Gregory H. Olsen, the President and Chief Executive Officer of Sensors, was elected as a director of Finisar and appointed to the position of Executive Vice President of Finisar. In connection with the merger and his continued employment with us, Mr. Olsen entered into a three-year employment agreement and noncompetition agreement.

    The acquisition of Sensors was structured as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and has been accounted for under the purchase method of accounting.

    Acquisition of Demeter Technologies, Inc.  We completed the acquisition of Demeter Technologies, Inc. ("Demeter"), a privately-held company located in El Monte, California, on November 21, 2000. Demeter was founded in June 2000 and is focused on the development of long wavelength Fabry Perot and distributed feedback lasers for data communications and telecommunications applications.

    Pursuant to the merger, we issued 6,020,012 shares of our common stock in exchange for the outstanding shares of Demeter capital stock. In addition, we assumed the outstanding options to purchase Demeter's common stock and have reserved 566,573 shares of our common stock for issuance upon the exercise of the assumed options. The Demeter options were converted into options to purchase our common stock and generally vest to the extent of 25% of the total number of shares subject to the option at the end of one year after the date of grant, with the remainder vesting in 36 equal monthly installments, subject to the optionholder's continued service with Finisar or a subsidiary.

    At the closing of the merger, certificates representing 601,993 shares of our common stock were deposited into an escrow with U.S. Bank Trust, National Association. The escrow shares will be subject to claims for indemnification by us under the reorganization agreement and the procedures specified in the escrow agreement. These shares will remain in escrow until the later of the first anniversary of the closing of the merger or the date on which all pending claims for indemnification, if any, have been resolved.

    The acquisition of Demeter was structured as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and has been accounted for under the purchase method of accounting.

    Acquisition of Medusa Technologies, Inc.  We completed the acquisition of Medusa Technologies, Inc. ("Medusa"), a privately-held company located near Austin, Texas, on March 2, 2001. Medusa was established in June 1997 and provides training and testing services focussing on Fibre Channel and other networking technologies. Medusa also provides training services and develops proprietary test and analysis tools and software for internal and third-party use.

    Pursuant to the acquisition, we paid approximately $6.77 million in cash for all outstanding shares of Medusa and assumed the outstanding options to purchase Medusa's common stock. We have reserved 8,012 shares of our common stock for issuance upon the exercise of the assumed options. The assumed options vest monthly at the rate of 1/48 of the total number of shares originally subject to the assumed option.

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    At the closing of the acquisition, approximately $616,000 in cash was deposited into an escrow with U.S. Bank Trust, National Association, and will be subject to claims for indemnification by us under the reorganization agreement and the procedures specified in the escrow agreement. The funds deposited in escrow will remain in escrow until the later of the first anniversary of the closing of the merger or the date on which all pending claims for indemnification, if any, have been resolved.

    The acquisition of Medusa has been accounted for under the purchase method of accounting.

Purpose and Effect of the Charter Amendment

    The purpose of the proposed Charter Amendment is to authorize additional shares of common stock that will enable the automatic conversion of our Series A Preferred Stock into common stock and that will be available for future issuance in the event the Board of Directors determines that it is necessary or appropriate to declare future stock dividends, stock splits, to raise additional capital through the sale of equity securities, to acquire other companies or their assets, to establish strategic relationships with corporate partners, to provide equity incentives to employees and officers or for other corporate purposes. The availability of additional shares of common stock is particularly important in the event that the Board of Directors needs to undertake any of the foregoing actions on an expedited basis and thus to avoid the time and expense of seeking stockholder approval in connection with the contemplated issuance of common stock. The Board of Directors has no current intention to split the outstanding common stock by declaring a stock dividend. A portion of the additional shares of common stock sought to be authorized by the Charter Amendment will be issued in the pending acquisition of Marlow and upon the conversion of the Series A Preferred Stock issued in the acquisitions of Shomiti and Transwave and upon the exercise of options granted under the 2001 option plan. A portion of the shares will also be used to restore the number of shares reserved under our 1999 stock option plan to the full amount originally reserved for issuance thereunder, including the 5% annual increase that was to have become effective on May 1, 2001. Except for the foregoing, the Board of Directors has no present agreement, arrangement or commitment to issue any of the shares for which approval is sought.

    The increase in authorized common stock will not have any immediate effect on the rights of existing stockholders. However, the Board will have the authority to issue authorized common stock without requiring future stockholder approval of such issuances, except as may be required by applicable law and the rules of The Nasdaq National Market. To the extent that additional authorized shares are issued in the future, they may decrease the existing stockholders' percentage equity ownership and, depending on the price at which they are issued, could be dilutive to the existing stockholders. The holders of common stock have no preemptive rights and the Board of Directors has no plans to grant such rights with respect to any such shares.

    The increase in the authorized number of shares of common stock and the subsequent issuance of such shares could have the effect of delaying or preventing a change in control without further action by the stockholders. Shares of authorized and unissued common stock could, within the limits imposed by applicable law, be issued in one or more transactions which would make a change in control of Finisar more difficult, and therefore less likely. Any such issuance of additional stock could have the effect of diluting the earnings per share and book value per share of outstanding shares of common stock and such additional shares could be used to dilute the stock ownership or voting rights of a person seeking to obtain control of our company.

    The Board of Directors is not currently aware of any attempt to take over or acquire our company. While it may be deemed to have potential anti-takeover effects, the proposed amendment to increase the number of authorized shares of common stock is not prompted by any specific effort or takeover threat currently perceived by management.

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    If the Charter Amendment is approved by the stockholders, Article Fourth, Subsection A of our Certificate will be amended to read as follows:

    The additional shares of common stock to be authorized pursuant to the proposed amendment will have a par value of $0.001 per share and be of the same class of common stock as is currently authorized under the Certificate.

Summary of Acquisitions Requiring Additional Shares of Common Stock

    We recently acquired Shomiti, based in San Jose, California, and Transwave, based in Fremont, California, and have entered into an agreement to acquire Marlow, a privately-held company based in Dallas, Texas. Under applicable law and the rules of the The Nasdaq National Market, none of the acquisitions require stockholder approval. Accordingly, you are not being asked to vote on or approve any of the acquisitions. However, you are being asked to vote on and approve the Charter Amendment to increase the number of authorized shares of our common stock, and shares of common stock authorized by the Charter Amendment will be issued in the acquisition of Marlow and upon the conversion of the Series A Preferred Stock issued in the acquisitions of Shomiti and Transwave. As described below, our solicitation of stockholder approval of the increase in the number of authorized shares of our common stock is required by the agreements covering the three acquisitions. The information about these acquisitions contained in this proxy statement is provided to enable you to evaluate the proposed uses of a portion of the additional authorized shares.

    This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To understand the acquisitions more fully, you should carefully review this entire proxy statement and the other available information referred to in "Where You Can Find More Information" on page 82 of this proxy statement. The reorganization agreements for the three acquisitions are attached to this proxy statement as Annexes B, C and D and are incorporated herein by reference. We encourage you to review each of the reorganization agreements, as they are the principal legal documents that govern the acquisitions.

Comparative Per Share Data

    Set forth below are net income and book value per common share data for Finisar on an historical basis and on a combined pro forma basis. The combined pro forma data were derived by combining historical consolidated financial information of Finisar, Sensors, Demeter, Medusa, Shomiti, Transwave and Marlow using the purchase method of accounting.

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    The information in the tables below should be read in conjunction with the respective audited and unaudited selected financial data included elsewhere in this proxy statement.

 
   Fiscal Year Ended
April 30, 2000
   Nine Months Ended
January 31, 2001
  
Historical—Finisar              
Net income (loss) per share:              
  Basic   $ 0.03   $ (0.27 )
  Diluted   $ 0.02   $ (0.27 )
Book value per share(1)   $ 2.20   $ 4.84  

 
   Fiscal Year Ended
April 30, 2000
   Nine Months Ended
January 31, 2001
  
Unaudited pro forma combined net loss per share (2)              
  Basic   $ (1.28 ) $ (0.87 )
  Diluted   $ (1.28 ) $ (0.87 )

 
   January 31,
2001
Unaudited pro forma combined book value per Finisar share (3)   $ 6.54

Acquisition of Shomiti Systems, Inc.

    On March 23, 2001, we acquired Shomiti Systems, Inc. ("Shomiti"), a privately-held company located in San Jose, California, by a merger of Shomiti with a wholly-owned subsidiary of Finisar pursuant to an agreement entered into on November 21, 2000 and amended on February 7, 2001. The following is a summary of the terms of the acquisition, which should be read in conjunction with the more detailed description of the acquisition that is set forth below.

The Merger   A wholly-owned subsidiary of Finisar merged into Shomiti. Shares of Shomiti were converted into shares of our Series A Preferred Stock, we assumed all outstanding options and warrants to purchase Shomiti capital stock and Shomiti became a wholly-owned subsidiary of Finisar. (See "Description of the Transaction")

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Finisar Series A Preferred Stock Issued in the Merger   1,260,975 shares of our Series A Preferred Stock were issued or reserved for issuance in exchange for:
• all of the outstanding shares of Shomiti stock,
• shares of Shomiti stock that would have been issued on the exercise of outstanding Shomiti options, and
• shares of Shomiti stock that would have been issued on the exercise of Shomiti warrants.
(See "Consideration Delivered to Shomiti Security Holders")
Terms of the Finisar Series A Preferred Stock   Each share of our Series A Preferred Stock will automatically convert into three shares of our common stock upon the effectiveness of an increase in the authorized number of shares of our common stock sufficient to allow for the conversion. Pending conversion, holders of Series A Preferred Stock issued in the merger have the following rights:
• the right to vote on an equal basis with holders of our common stock,
• the right to receive dividends on an equal basis with holders of our common stock, and
• equal rights with holders of our common stock on a liquidation of Finisar.
(See "Consideration Delivered to Shomiti Security Holders")
Indemnification Escrow   10% of the shares of our Series A Preferred Stock issued in the merger and any shares of our common stock issued upon the automatic conversion thereof will be held in escrow for one year following the closing of the merger. If any of the representations and warranties made by Shomiti are untrue, and we are damaged as a result, we may, subject to a deductible of $100,000, assert claims against the shares held in the escrow to compensate us for our damages. (See "Additional Terms of the Acquisition—Escrow, and —Indemnification")
Voting Agreement   Certain officers, directors and principal shareholders of Shomiti holding approximately 82% of Shomiti's outstanding capital stock entered into a voting agreement in which they agreed to vote for the merger and against the acquisition of Shomiti by a person other than us. (See "Vote Required for Approval of the Transaction")
Shomiti Shareholder Approval   The merger was required to be approved by the holders of at least 95% of Shomiti's outstanding shares. (See "Vote Required for Approval of the Transaction")
Required Regulatory Approvals   • The California Commissioner of Corporations (the "California Commissioner") must have issued a permit for the issuance of our securities in the merger following a public hearing with respect to the fairness of the transaction (a "Fairness Hearing"). (See "Regulatory Approvals for the Transaction—Fairness Hearing")
• The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act must have been terminated or expired. (See "Regulatory Approvals for the Transaction—Hart-Scott-Rodino")

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Tax Consequences   The merger was intended to be a tax-free reorganization under Section 368(a) of the Internal Revenue Code.
Accounting Treatment   The merger will be accounted for as a purchase. (See "Accounting Treatment of the Merger")
Employment of Certain Shomiti Employees   Prior to the closing of the merger:
• certain specified employees of Shomiti entered into employment and noncompetition agreements with us, including three employees who are also major shareholders of Shomiti, and
• we received satisfactory assurance that at least 90% of designated Shomiti employees will remain employed by the surviving corporation or us. (See "Additional Terms of the Transaction—Conditions to the Closing")

Information Concerning Shomiti

    Shomiti was a privately-held company located in San Jose, California that was established in 1995. Shomiti is a technology leader in designing products that measure the performance of Ethernet networks in order to enhance their quality of service, or QoS. Shomiti's line of products are currently being deployed for measuring and monitoring 10-100 megabit and Gigabit Ethernet local area networks (LANs) and e-commerce storage server farms. Its principal executive offices are located at 1800 Bering Drive, San Jose, California 95112. Its telephone number is (408) 437-3940. Shomiti has not paid any dividends on its capital stock.

Management's Discussion and Analysis of Financial Condition and Results of Operations of Shomiti

    The following discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors. The following discussion should be read together with Shomiti's financial statements and related notes thereto included elsewhere in this proxy statement.

    Overview.  Incorporated in mid 1995, Shomiti received three rounds of venture funding netting approximately $20 million after deduction of offering costs. Shomiti has spent approximately $19 million on research and development since its inception. Shomiti first shipped products in mid 1996. For the past two years, Shomiti principally financed its operations through internal cash flow and periodic bank borrowings.

    Sales to Shomiti's three largest customers accounted for 36.3% of its revenues for the fiscal year ended September 30, 2000 and 22.5% of its revenues for the three months ended December 31, 2000. Shomiti expects that significant customer concentration will continue for the foreseeable future. However, Shomiti anticipates that its significant customers will change periodically.

    Shomiti sells its products through its direct sales force, with the support of its manufacturers' representatives, directly to domestic customers, indirectly through reseller channels to domestic and international customers, and through its OEM partners. The evaluation and qualification cycle prior to the initial sale may span a year or more for OEM partners, while the sales cycle for most of Shomiti's products is usually considerably shorter.

    Revenue from hardware product sales is recognized upon transfer of title, which generally occurs upon shipment, provided no significant obligations remain and collectibility is probable. Shomiti provides to certain resellers limited rights of return when specific conditions exist. Revenues from annual maintenance contracts are recognized ratably over the term of the contract.

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    Software license revenues are recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collectibility is probable, and delivery and customer acceptance of the software products, if required under the terms of the contract, have occurred. When contracts contain multiple elements and vendor specific objective evidence exists for all undelivered elements, Shomiti accounts for the delivered elements in accordance with the "Residual Method". Maintenance revenues are recognized ratably over the term of the maintenance contract, which is generally twelve months. In instances where vendor obligations remain, revenues are deferred until the obligation has been satisfied.

    Shomiti's cost of revenues consists of materials, salaries and related expenses for manufacturing personnel, manufacturing overhead and warranty expense. Shomiti outsources the majority of its assembly operations, and conducts manufacturing engineering, supply chain management, quality assurance and documentation control at its facilities in San Jose, California. Accordingly, a significant portion of Shomiti's cost of revenues consists of payments to contract manufacturers.

    Gross margins are lower for hardware products than software products. Additionally, discounts to OEM partners and resellers adversely affect gross margins. As a result, Shomiti's overall gross margins have fluctuated from period to period as a result of shifts in product mix, the introduction of new products, decreases in average selling prices for older products and customer mix.

    Research and development expenses consist primarily of salaries and related expenses for design engineers and other technical personnel, the cost of developing prototypes and fees paid to consultants. Shomiti charges all research and development expenses to operations as incurred. Shomiti believes that continued investment in research and development is critical to its long-term success. Accordingly, Shomiti expects that research and development expenses will increase in future periods in absolute dollars, but decrease as a percentage of revenues.

    Sales and marketing expenses consist primarily of salaries and commissions paid to Shomiti's direct sales force, marketing and field support activities, commissions to manufacturers' representatives, salaries, and other costs associated with the promotion of its products and hiring and training sales personnel. Shomiti intends to pursue aggressive selling and marketing campaigns and to expand its direct sales organization. Shomiti therefore expects that sales and marketing expenses will increase in future periods in absolute dollars but decrease as a percentage of revenues.

    General and administrative expenses consist primarily of salaries and related expenses for administrative, finance and human resources personnel, professional fees and other corporate expenses. Shomiti expects that, in support of its continued growth, general and administrative expenses will continue to increase for the foreseeable future.

    Acquisition by Finisar.  In November 2000, Finisar entered into an agreement to acquire Shomiti. The transaction closed on March 23, 2001. Under the terms of the agreement, which was amended in February 2001, Shomiti stockholders received approximately 1.3 million shares of Finisar's Series A Preferred Stock (which are convertible into approximately 3.8 million shares of common stock), including shares issuable upon the exercise of options assumed in the transaction. The transaction will be accounted for under the purchase method of accounting.

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    Results of Operations.  The following table sets forth certain statement of operations data for Shomiti as a percentage of revenues for the periods indicated:

 
   Fiscal Year Ended September 30,
   Three Months Ended
December 31,
  
 
   1998
   1999
   2000
   1999
   2000
  
 
   (in thousands, except per share data)

  
Revenues   100 % 100 % 100 % 100 % 100 %
Cost of revenues   29   29   27   24   32  
   
 
 
 
 
 
Gross profit   71   71   73   76   68  
   
 
 
 
 
 
Operating expenses:                      
  Research and development   66   49   35   34   38  
  Selling and marketing   74   50   40   39   56  
  General and administrative   22   16   14   12   9  
   
 
 
 
 
 
Total operating expenses   162   115   89   85   103  
   
 
 
 
 
 
Loss from operations   (91 ) (44 ) (16 ) (9 ) (35 )
Interest income (expense), net   —   (1 ) (1 ) (2 ) (1 )
   
 
 
 
 
 
Net loss   (91 )% (45 )% (17 )% (11 )% (36 )%
   
 
 
 
 
 

    Revenues.  Revenues increased 13% from $3.0 million in the three months ended December 31, 1999 to $3.5 million in the three months ended December 31, 2000. The increase was attributed to customer acceptance of Shomiti's products, particularly Shomiti's Gigabit analyzer, introduced in October 1999.

    Gross Profit.  Gross profit increased 3% from $2.3 million in the three months ended December 31, 1999 to $2.4 million in the three months ended December 31, 2000. As a percentage of revenues, gross profit decreased from 76% in the three months ended December 31, 1999 to 68% in the three months ended December 31, 2000. This decrease was attributable to a shift in product mix to products with lower margins.

    Research and Development Expenses.  Research and development expenses increased 28% from $1.0 million in the three months ended December 31, 1999 to $1.3 million in the three months ended December 31, 2000. This increase was primarily related to higher compensation expense resulting from an increase in the number of employees and increased expenditures for materials purchased for product development programs. Research and development expenses as a percentage of revenues increased from 34% in the three months ended December 31, 1999 to 38% in the three months ended December 31, 2000.

    Sales and Marketing Expenses.  Sales and marketing expenses increased 66% from $1.2 million in the three months ended December 31, 1999 to $2.0 million in the three months ended December 31, 2000. This increase was primarily due to opening new domestic sales territories. Expenses increased in payroll, commissions to direct sales staff as a result of increased sales, commissions to manufacturers representatives as a result of increased sales, and hiring costs associated with the increased staff. Sales and marketing expenses as a percent of revenues increased from 39% in the three months ended December 31, 1999 to 56% in the three months ended December 31, 2000 as a result of staffing increases in anticipation of future sales opportunities.

    General and Administrative Expenses.  General and administrative expenses decreased 17% from $371,000 in the three months ended December 31, 1999 to $309,000 in the three months ended December 31, 2000. This decrease was related to allocation of hiring costs to research and development

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and sales and marketing functions. General and administrative expenses decreased as a percent of revenues from 12% in the three months ended December 31, 1999 to 9% in the three months ended December 31, 2000.

    Interest Income (Expense), Net.  Interest expense, net of interest income, of $24,000 in the three months ended December 31, 2000, compares to interest expense, net of interest income, of $44,000 in the three months ended December 31, 1999. The change was attributable to additional cash flow provided by operations.

    Revenues.  Revenues increased 56% from $8.7 million in fiscal 1999 to $13.6 million in fiscal 2000. The increase was primarily due the inclusion of a full year of OEM business and the introduction of Shomiti's Gigabit Explorer analyzer product.

    Gross Profit.  Gross profit increased from $6.2 million in fiscal 1999 to $9.9 million in fiscal 2000. As a percentage of revenues, gross profit increased from 71% in fiscal 1999 to 73% in fiscal 2000. The percentage increase was mainly attributed to a shift in product mix to products with greater margins.

    Research and Development Expenses.  Research and development expenses increased 9% from $4.3 million in fiscal 1999 to $4.7 million in fiscal 2000. This increase was primarily related to higher compensation expense resulting from higher manpower levels and increased expenditures for materials purchased for product development programs. Research and development expenses as a percentage of revenues decreased from 49% in fiscal 1999 to 35% in fiscal 2000.

    Sales and Marketing Expenses.  Sales and marketing expenses increased 26% from $4.4 million in fiscal 1999 to $5.5 million in fiscal 2000. This increase was primarily due to commissions paid to manufacturers' representatives as a result of increased sales and increases in the number of direct sales and marketing personnel. Sales and marketing expenses as a percent of revenues decreased from 50% in fiscal 1999 to 40% in fiscal 2000.

    General and Administrative Expenses.  General and administrative expenses increased 34% from $1.4 million in fiscal 1999 to $1.8 million in fiscal 2000. This increase was related to higher compensation expense resulting from higher manpower levels and increased expenses for professional services, primarily legal and accounting services. General and administrative expenses decreased as a percent of revenues from 16% in fiscal 1999 to 14% in fiscal 2000.

    Interest Income (Expense), Net.  Net interest expense of $185,000 in fiscal 2000 compares to net interest expense of $113,000 in the prior year. The increase in interest expense was the result of increased borrowings and reduction of cash balances.

    Revenues.  Revenues increased 45% from $6.0 million in fiscal 1998 to $8.7 million in fiscal 1999. The increase was primarily due to the increased use of Ethernet LAN systems creating more demand for Shomiti's products.

    Gross Profit.  Gross profit increased from $4.2 million in fiscal 1998 to $6.2 million in fiscal 1999. Gross profit as a percentage of total revenues remained constant at 71% for both years.

    Research and Development Expenses.  Research and development expenses increased slightly from $4.0 million in fiscal 1998 to $4.3 million in fiscal 1999. The 8% increase from fiscal 1998 to fiscal 1999 was primarily related to an increase in the number of research and development personnel and increased expenditures related to prototype development. Research and development expenses decreased as a percentage of revenues from 66% in fiscal 1998 to 49% in fiscal 1999.

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    Sales and Marketing Expenses.  Sales and marketing expenses decreased from $4,446,000 in fiscal 1998 to $4,357,000 in fiscal 1999. The 2% decrease was primarily due to decreases in direct sales personnel offset by increases in commissions paid to manufacturers' representatives as a result of increased sales. Sales and marketing expenses as a percentage of revenues decreased from 74% in fiscal 1998 to 50% in fiscal 1999.

    General and Administrative Expenses.  General and administrative expenses increased from $1,322,000 in fiscal 1998 to $1,366,000 in fiscal 1999. The 3% increase was primarily related to increased payroll expenses. General and administrative expenses decreased as a percentage of revenues from 22% in fiscal 1998 to 16% in fiscal 1999.

    Interest Income (Expense), Net.  Interest income of $26,000 in fiscal 1998 compared to interest expense of $113,000 in fiscal 1999. The additional interest expense is due to increased borrowings under a capital lease contract.

    Quarterly Results of Operations.  The following table presents unaudited quarterly statements of operations data for Shomiti for the nine fiscal quarters ended December 31, 2000, and such data expressed as a percentage of revenues. This information reflects all normal non-recurring adjustments that Shomiti considers necessary for a fair presentation of such information in accordance with accounting principles generally accepted in the United States. The results for any quarter are not necessarily indicative of results that may be expected for any future period.

 
   Three Months Ended
  
 
   Dec. 31,
1998
   Mar. 31,
1999
   June 30,
1999
   Sept. 30,
1999
   Dec. 31,
1999
   Mar. 31,
2000
   June 30,
2000
   Sept. 30,
2000
   Dec. 31,
2000
  
 
   (in thousands, except per share data)

  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues   $ 1,925   $ 1,241   $ 2,523   $ 3,036   $ 3,037   $ 3,334   $ 3,306   $ 3,956   $ 3,484  
Cost of revenues     558     357     758     866     733     825     902     1,237     1,120  
   
 
 
 
 
 
 
 
 
 
Gross profit     1,367     884     1,765     2,170     2,304     2,509     2,404     2,719     2,364  
   
 
 
 
 
 
 
 
 
 
Operating expenses:                                                        
  Research and development     996     1,209     1,004     1,091     1,036     1,208     1,258     1,206     1,322  
  Sales and marketing     1,158     1,173     1,014     1,012     1,175     1,052     1,612     1,646     1,954  
  General and administrative     391     412     255     308     371     363     410     697     309  
   
 
 
 
 
 
 
 
 
 
Total operating expenses     2,545     2,794     2,273     2,411     2,582     2,623     3,280     3,549     3,585  
   
 
 
 
 
 
 
 
 
 
Loss from operations     (1,178 )   (1,910 )   (508 )   (241 )   (278 )   (114 )   (876 )   (830 )   (1,221 )
Interest income (expense), net     20     4     (10 )   (127 )   (44 )   (45 )   (39 )   (57 )   (24 )
   
 
 
 
 
 
 
 
 
 
Net loss   $ (1,158 ) $ (1,906 ) $ (518 ) $ (368 ) $ (322 ) $ (159 ) $ (915 ) $ (887 ) $ (1,245 )
   
 
 
 
 
 
 
 
 
 
Basic and diluted net loss per share   $ (0.29 ) $ (0.47 ) $ (0.12 ) $ (0.09 ) $ (0.08 ) $ (0.04 ) $ (0.22 ) $ (0.21 ) $ (0.30 )
   
 
 
 
 
 
 
 
 
 
 
   Three Months Ended
  
 
   Dec. 31,
1998
   Mar. 31,
1999
   June 30,
1999
   Sept. 30,
1999
   Dec. 31,
1999
   Mar. 31,
2000
   June 30,
2000
   Sept. 30,
2000
   Dec. 31,
2000
  
 
   (as a percentage of revenue)

  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues   100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
Cost of revenues   29   29   30   29   24   25   27   31   32  
   
 
 
 
 
 
 
 
 
 
Gross profit   71   71   70   71   76   75   73   69   68  
   
 
 
 
 
 
 
 
 
 
Operating expenses:                                      
  Research and development   52   97   40   36   34   36   38   31   38  
  Sales and marketing   60   95   40   33   39   32   50   41   56  
  General and administrative   20   33   10   10   12   11   12   18   9  
   
 
 
 
 
 
 
 
 
 
Total operating expenses   132   225   90   79   85   79   100   90   103  
   
 
 
 
 
 
 
 
 
 
Loss from operations   (61 ) (154 ) (20 ) (8 ) (9 ) (4 ) (27 ) (21 ) (35 )
Interest income (expense), net   1   —   (1 ) (4 ) (2 ) (1 ) (1 ) (1 ) (1 )
   
 
 
 
 
 
 
 
 
 
Net loss   (60) % (154) % (21) % (12) % (11) % (5) % (28) % (22) % (36) %
   
 
 
 
 
 
 
 
 
 

    Revenues increased over the last seven quarters as a result of increased unit sales to an expanding customer base.

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    Gross profit margins remained relatively steady over the last nine quarters. Gross margin increases were generally the result of a greater percentage of software sales in the quarter.

    Quarterly increases in operating expenses reflected the continued expansion of Shomiti's operations throughout the nine-quarter period.

    A decline in net interest expense as capital lease schedules matured was offset by interest on borrowing to support expanded operations.

    Shomiti may experience a delay in generating or recognizing revenues for a number of reasons. Orders at the beginning of each quarter typically do not equal expected revenues for that quarter and are generally cancelable at any time. Accordingly, Shomiti depends on obtaining orders in a quarter for shipment in that quarter to achieve its revenue objectives. In addition, the timing of product releases, purchase orders and product availability could result in significant product shipments at the end of a quarter. Failure to ship these products by the end of a quarter may adversely affect Shomiti's operating results. Furthermore, Shomiti's OEM customer agreements typically provide that the customer may delay scheduled delivery dates and cancel orders within specified time frames without significant penalty.

    Most of Shomiti's expenses, such as employee compensation and lease payments for facilities and equipment are relatively fixed in the near term. In addition, Shomiti's expense levels are based in part on its expectations regarding future revenues. As a result, any shortfall in revenues relative to Shomiti's expectations could cause significant changes in its operating results from quarter to quarter. Shomiti's quarterly and annual operating results have fluctuated in the past and are likely to fluctuate significantly in the future due to a variety of factors, some of which are outside of Shomiti's control. Due to the foregoing factors, you should not rely on Shomiti's quarterly revenues and operating results to predict its future performance.

    Liquidity and Capital Resources.  From inception through November 1999, Shomiti financed its operations primarily from proceeds from sales of redeemable preferred stock and, to a lesser extent, from internal cash flow. In November 1999, Shomiti entered into a borrowing facility with Comerica Bank secured by substantially all of its assets. In December 2000, Shomiti and Finisar entered into a borrowing agreement wherein Finisar supplanted Comerica's position and became Shomiti's prime lender.

    As of December 31, 2000, Shomiti's principal sources of liquidity were $322,000 in cash and cash equivalents and proceeds from collection of accounts receivable balances.

    Net cash used in operating activities totaled $946,000 in the three month period ended December 31, 2000, and $395,000 in the three month period ended December 31, 1999. The use of cash in operating activities in both periods was primarily the result of continuing growth in revenues accompanied by an increase in working capital.

    Net cash used in operating activities was $4.9 million in fiscal 1998, $4.4 million in fiscal 1999, and $1.2 million in fiscal 2000. Cash used in operations during fiscal 1998, 1999 and 2000 was primarily a result of losses from operations coupled with growth in accounts receivable as a result of increased sales.

    Net cash used in investing activities totaled $109,000 in the three month period ended December 31, 2000, and consisted entirely of the purchase of property and equipment. Net cash used in investing activities totaled $183,000 in the three month period ended December 31, 1999, and consisted entirely of purchases of property and equipment.

    Net cash used in investing activities was $887,000 in fiscal 1998, $164,000 in fiscal 1999 and $625,000 in fiscal 2000. Net cash used in investing activities in fiscal 1998, fiscal 1999, and fiscal 2000 consisted entirely of purchases of equipment.

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    Net cash provided by financing activities totaled $1.0 million in the three month period ended December 31, 2000, and consisted primarily of net proceeds from notes payable to Finisar. Net cash provided by financing activities in the three month period ended December 31, 1999, totaled $850,000 and consisted of bank borrowings of $1.0 million offset primarily by payments on capital lease obligations.

    Net cash provided by financing activities was $7,535,000 in fiscal 1998 and consisted of proceeds from sales of redeemable convertible preferred stock and additions to principal on capital lease obligations. Net cash used in financing activities was $308,000 in fiscal 1999, which consisted primarily of payments on principal of capital lease obligations offset by proceeds from issuance of common stock on exercise of options. Net cash provided by financing activities of $1,007,000 in fiscal 2000 arose from proceeds of notes payable offset by payments to principal of capital lease obligations.

    Shomiti had no material commitments for capital expenditures at December 31, 2000.

    To date Shomiti's working capital requirements have been met through the sale of private equity and debt securities. Shomiti has sustained significant operating losses in every annual fiscal period since inception and expects to incur substantial quarterly losses at least through June 30, 2001 and possibly longer. Shomiti has insufficient cash to continue operations beyond June 30, 2001 at its projected level of operations. On March 23, 2001 Finisar acquired Shomiti.

Description of the Transaction

    On March 23, 2001, under the Amended and Restated Agreement and Plan of Reorganization (the "Shomiti Reorganization Agreement") dated February 7, 2001 among Finisar, Silver Acquisition Corp., our wholly-owned subsidiary ("Silver"), and Shomiti, Silver merged into Shomiti, with Shomiti remaining as the surviving corporation and becoming our wholly-owned subsidiary. The Shomiti Reorganization Agreement is attached as Annex B to this proxy statement. Shares of our Series A Preferred Stock were issued in exchange for all of the issued and outstanding capital stock of Shomiti. Also, we assumed all outstanding options and warrants to purchase capital stock of Shomiti. The merger was completed by filing an agreement of merger with the Secretary of the State of California in accordance with California law.

Consideration Delivered to Shomiti Security Holders

    The total number of shares of our Series A Preferred Stock issued in connection with the acquisition of Shomiti (including shares issued upon the exercise of options and warrants issued by Shomiti prior to the merger that were assumed by us) was determined by dividing the Shomiti Total Adjusted Merger Consideration by $86.11875. The "Shomiti Total Adjusted Merger Consideration" was equal to $108,800,000 less certain of Shomiti's expenses for the merger. The amount of such expenses was approximately $375,000. Based on that formula, 1,120,984 shares of our Series A Preferred Stock were issued in exchange for all outstanding capital stock of Shomiti and 139,991 shares of our Series A Preferred Stock have been reserved for issuance upon the exercise of assumed options and warrants. For a description of the Series A Preferred Stock see "Approval of Amendment to our Certificate of Incorporation to Increase the Number of Authorized Shares of Common Stock—Background," above.

Trading in Shares of Our Series A Preferred Stock and Our Common Stock by Shomiti Security Holders Following the Merger

    The shares of our Series A Preferred Stock issued in the merger and the shares of our common stock issuable on the conversion of such Series A Preferred Stock were not and will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on the exemptions from registration contained in Sections 3(a)(9) and 3(a)(10) of the Securities Act. See "Regulatory Approvals for the Transaction—Fairness Hearing". The shares of our Series A Preferred Stock and our common stock issuable on the conversion of such Series A Preferred Stock that are issued to persons

26

who are not affiliates of Shomiti or Finisar may be traded without restriction. The shares of our Series A Preferred Stock and our common stock issuable on the conversion of such Series A Preferred Stock that are issued to persons that are affiliates of Shomiti or Finisar may only be traded in compliance with the manner of sale, public information, and volume limitation requirements of Rule 144 promulgated under the Securities Act.

    The Series A Preferred Stock has no public market and will not be listed on The Nasdaq National Market or any national securities exchange. The shares of our common stock issuable on conversion of the Series A Preferred Stock will be listed on The Nasdaq National Market.

Reasons for the Transaction

    Our Board of Directors identified several potential benefits of the acquisition of Shomiti that it believes will contribute to the success of the combined company and facilitate our strategic objectives. These include:

Vote Required for Approval of the Transaction

    No vote was required of our stockholders to approve the merger. However, if our stockholders do not approve the Charter Amendment to increase the number of authorized shares of common stock, there will not be sufficient shares of common stock to permit the automatic conversion of Series A Preferred Stock into shares of our common stock. If that occurs, we are required by the Shomiti Reorganization Agreement to resolicit our stockholders to seek their approval of a smaller increase in the number of authorized shares of common stock. If the resolicitation fails we will be under a continuing obligation to resolicit our stockholders no less frequently than every three months until our stockholders have approved an increase in the number of authorized shares of our common stock sufficient to allow for the automatic conversion of all shares of our Series A Preferred Stock that were issued in the merger into our common stock.

    Under applicable law and Shomiti's charter and by-laws, the Shomiti Reorganization Agreement and the merger were required to be approved by the affirmative vote of the holders of a majority of the outstanding shares of Shomiti's common stock and the holders of at least 70% of the outstanding shares of Shomiti's preferred stock entitled to vote. However, under the terms of the Shomiti Reorganization Agreement, we were not obligated to consummate the merger unless it was approved by the affirmative vote of the holders of not less than 95% of the outstanding shares of Shomiti's capital stock. Certain officers, directors and principal shareholders of Shomiti holding approximately 82% of Shomiti's outstanding capital stock entered into a voting agreement in which they agreed to vote for the merger and against the acquisition of Shomiti by any person other than us. The merger was approved by the affirmative votes of the holders of approximately 98% of Shomiti's common stock on an as converted basis.

Past Transactions

    Shomiti purchased products in the aggregate amount of approximately $76,000 from us during the fiscal year ended April 30, 2000. Prior to the closing of the merger we made three loans to Shomiti in the principal amounts of $500,000, $2.0 million and $1.5 million. The $500,000 and $2.0 million loans bore interest at 6.5% per annum; the $1.5 million loan bore interest at 10% per annum. Each loan was payable on demand and was secured by all accounts receivable and inventory of Shomiti. Following the acquisition of Shomiti, the loans were cancelled.

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Accounting Treatment of the Merger

    We will treat the merger as a purchase of assets for accounting purposes.

Regulatory Approvals for the Transaction

    Fairness Hearing.  The shares of our Series A Preferred Stock issued in the merger and on the exercise of the Shomiti options and warrants we assumed were not and will not be registered under the Securities Act in reliance on the exemption from registration contained in Section 3(a)(10) of the Securities Act. The Section 3(a)(10) exemption is available because the California Commissioner issued a permit for the issuance of the shares of our Series A Preferred Stock in connection with the merger following a public hearing (a "Fairness Hearing") on the terms and conditions of the merger held on March 9, 2001.

    Hart-Scott-Rodino.  In order for the merger to be consummated, the waiting period applicable to the merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "Hart Scott Rodino Act"), must have terminated or expired. The parties were notified that early termination of the waiting period was granted.

Additional Terms of the Acquisition

    In addition to the terms and conditions of the merger described elsewhere in this section, the Shomiti Reorganization Agreement contains the following additional terms and conditions for the merger:

    Fractional Shares.  The Shomiti Reorganization Agreement provides that no fractional shares of our Series A Preferred Stock were to be issued in the merger. A Shomiti shareholder that would otherwise have received a fractional share of our Series A Preferred Stock instead received an amount of cash equal to the product of the fraction of the share of our Series A Preferred Stock the holder would have received multiplied by $86.11875. (See Section 2.3(f) of the Shomiti Reorganization Agreement)

    Escrow.  At the closing of the merger, 10% of the shares of our Series A Preferred Stock issuable in the merger were deposited in escrow (the "Escrow") with U.S. Bank Trust, National Association, and will be subject to claims for indemnification by us as described under "Indemnification" below. Any shares of our common stock issued on the conversion of the Series A Preferred Stock held in escrow will remain in the Escrow. (See Section 2.4 and Article IX of the Shomiti Reorganization Agreement)

    Representations and Warranties.  The Shomiti Reorganization Agreement contains representations and warranties of Shomiti to us relating to, among other things, Shomiti's organization, standing and power, capital structure, authority, required filings and consents, financial statements, the absence of undisclosed liabilities, accounts receivable, inventories, the absence of certain changes or events, taxes, tangible assets and real property, intellectual property, bank accounts, contracts, labor difficulties, trade regulation, environmental matters, employee benefit plans, compliance with laws, employees and consultants, litigation, restrictions on business activities, governmental authorization, insurance, interested party transactions, the absence of existing discussions with others, real property holdings, corporate documents and the absence of any misrepresentation. (See Article III of the Shomiti Reorganization Agreement)

    In turn, we and Silver made representations and warranties to Shomiti relating to, among other things, our organization, Finisar's capital structure, authority, the absence of conflicts, required filings and consents, our SEC filings, financial statements, the absence of undisclosed liabilities, litigation and the absence of any misrepresentation. (See Article IV of the Shomiti Reorganization Agreement)

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    Conduct of Business.  Shomiti agreed that, unless we otherwise consented, until the earlier of the consummation of the merger or the termination of the Shomiti Reorganization Agreement, Shomiti would:

(See Article V of the Shomiti Reorganization Agreement)

Shomiti and we agreed to promptly notify each other of the occurrence of any event if the event would have been likely to result in a breach of any agreement made by Shomiti or us in the Shomiti Reorganization Agreement or if the event would have been likely to cause any representation or warranty of Shomiti or us in the Shomiti Reorganization Agreement to be untrue. (See Section 6.4 of the Shomiti Reorganization Agreement)

    No Solicitation.  Shomiti agreed that until the earlier of the consummation of the merger or the termination of the Shomiti Reorganization Agreement, Shomiti would not, directly or indirectly:

(See Section 6.1 of the Shomiti Reorganization Agreement)

    Merger Expenses.  Finisar and Shomiti each paid its own legal, accounting, financial advisory and consulting fees and other out-of-pocket expenses related to the merger. The Shomiti shareholders bore all of Shomiti's expenses, except that we agreed to pay up to $100,000 of the accounting fees and expenses of Shomiti (the "Shomiti Accounting Fee Deductible"). As noted above under "Consideration Delivered to Shomiti Security Holders," the amount of expenses to be borne by the Shomiti shareholders that was used to calculate the number of shares of our Series A Preferred Stock issued in connection with the merger was $375,000. If the amount of expenses that were actually incurred by Shomiti (excluding the Shomiti Accounting Fee Deductible) exceeds $375,000, we may recover the excess expenses from the Escrow described under "Escrow" above. (See Section 6.18 of the Shomiti Reorganization Agreement)

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    Conditions to the Closing.  The obligation of each party to the Shomiti Reorganization Agreement to complete the merger was subject to the satisfaction on or prior to the closing date of the following conditions, in addition to those set forth elsewhere in this portion of the proxy statement:

In addition, we were not required to complete the merger unless the following conditions had been satisfied:

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Shomiti was not required to complete the merger unless the following conditions had been satisfied:

(See Article VII of the Shomiti Reorganization Agreement)

    Indemnification.  For purposes of indemnification under the Shomiti Reorganization Agreement, Finisar, its officers, directors, employees and attorneys, all of Finisar's subsidiaries and affiliates and the respective officers, directors, employees and attorneys of such entities comprise the "Finisar Group." Each member of the Finisar Group will be entitled to recover from the Escrow any and all losses, damages, costs and expenses (including reasonable legal fees and expenses) that any member of the Finisar Group may sustain or incur that are caused by or arise out of:

    However, no member of the Finisar Group may recover:

The above limitations on recoveries from the Escrow will not apply in the case of claims:

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If a claim is asserted for any of these matters, members of the Finisar Group may make claims for up to 24 months following the closing, which will not be subject to the $100,000 deductible, and may be claimed, on a joint basis against any security holder of Shomiti who:


The liability of a Shomiti security holder for these claims may not exceed its portion of the shares of our Series A Preferred Stock issued in the merger or the proceeds, if any, received by the security holder from the disposition of its shares.

(See Article IX of the Shomiti Reorganization Agreement)

    Termination of the Shomiti Reorganization Agreement.  The Shomiti Reorganization Agreement could have been terminated at any time prior to the consummation of the merger:


    In the event of the termination of the Shomiti Reorganization Agreement, no party (or its officers, directors, shareholders or affiliates) would have been liable to the other, except to the extent set forth below or to the extent that the termination resulted from the willful breach by a party of any of its representations, warranties or covenants in the agreement. The following provisions would have remained in effect and survived any termination of the Shomiti Reorganization Agreement:

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    Extension, Waiver and Amendment of the Shomiti Reorganization Agreement.  At any time before the merger, Finisar and Shomiti could have agreed to:

    The terms of the Shomiti Reorganization Agreement could have been changed by Finisar and Shomiti at any time before or after Shomiti's shareholders approved the merger. However, any change which by law would have required the approval of Shomiti's shareholders would have required their subsequent approval to be effective.

(See Article VIII of the Shomiti Reorganization Agreement)

Acquisition of Transwave Fiber, Inc.

    On May 3, 2001, we acquired Transwave Fiber, Inc. ("Transwave"), a privately-held company located in Fremont, California, by a merger of Transwave into Finisar pursuant to an agreement entered into on November 21, 2000 and amended on February 14 and March 19, 2001. The following is a summary of the terms of the acquisition, which should be read in conjunction with the more detailed description of the acquisition that is set forth below.

The Merger   Transwave merged into Finisar. Shares of Transwave capital stock were converted into shares of our Series A Preferred Stock and we assumed all outstanding options to purchase Transwave common stock. (See "Description of the Transaction")
Finisar Series A Preferred Stock Issued in the Merger   1,052,766 shares of our Series A Preferred Stock were issued or reserved for issuance in exchange for:
• all of the outstanding shares of Transwave stock, and
• shares of Transwave stock that would have been issued on the exercise of outstanding Transwave options.
(See "Consideration Delivered to Transwave Security Holders")
Terms of the Finisar Series A Preferred Stock   Each share of our Series A Preferred Stock will automatically convert into three shares of our common stock upon the effectiveness of an increase in the authorized number of shares of our common stock sufficient to allow for the conversion. Pending conversion, holders of Series A Preferred Stock issued in the merger will have the following rights:
• the right to vote on an equal basis with holders of our common stock,
• the right to receive dividends on an equal basis with holders of our common stock, and
• equal rights with holders of our common stock on a liquidation of Finisar.
(See "Consideration Delivered to Transwave Security Holders")

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Lock-up Agreement   562/3% of the shares of our Series A Preferred Stock issued in the merger and any shares of our common stock issued on the automatic conversion thereof are subject to a lock-up agreement that restricts the transfer of these shares during the one-year period ending on the first anniversary of the closing of the merger. For certain principal shareholders of Transwave and the holders of Transwave preferred stock, (a) one-half of the restricted shares will be released from the transfer restrictions on the 180th day following the closing of the merger and (b) all of the restricted shares will be released from the transfer restrictions on the first anniversary of the closing of the merger. For the holders of Transwave common stock (other than the principal shareholders of Transwave), one-half of the restricted shares are not subject to any transfer restrictions and the remaining one-half of the restricted shares will be released from the transfer restrictions on the 180th day following the closing of the merger. (See "Trading in Shares of Our Series A Preferred Stock and Our Common Stock by Transwave Security Holders Following the Merger; Lock-Up Agreement")
Escrow for Performance Shares   One-third of the shares of our Series A Preferred Stock issued in the merger and any shares of our common stock issued upon the automatic conversion thereof (the "Performance Shares") were deposited in an escrow and will be released to the former shareholders of Transwave upon the achievement of certain financial, technical and personnel milestones during the three-year period following the completion of the merger. (See "Additional Terms of the Acquisition—Escrow, and —Indemnification")
Indemnification Escrow   One-third of the Performance Shares that would otherwise be delivered to certain principal shareholders of Transwave on the third anniversary of the merger will be available for indemnity claims made by us. Thus, if any of the representations and warranties made by Transwave are untrue, and we are damaged as a result, we may, subject to a deductible of $50,000, assert claims against these shares to compensate us for our damages. (See "Additional Terms of the Acquisition—Escrow, and —Indemnification")
Voting Agreement   Certain officers, directors and principal shareholders of Transwave holding approximately 64% of Transwave's outstanding capital stock entered into voting agreements in which they agreed to vote for the merger and against the acquisition of Transwave by a person other than us. (See "Vote Required for Approval of the Transaction")
Transwave Shareholder Approval   The merger was required to be approved by the holders of at least 95% of Transwave's outstanding shares. (See "Vote Required for Approval of the Transaction")
Required Regulatory Approval   The California Commissioner must have issued a permit for the issuance of our securities in the merger following a public Fairness Hearing. (See "Regulatory Approval for the Transaction")

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Tax Consequences   The merger was intended to be a tax-free reorganization under Section 368(a) of the Internal Revenue Code.
Accounting Treatment   The merger will be accounted for as a purchase. (See "Accounting Treatment of the Merger")
Employment of Certain Transwave Employees   Prior to the closing of the merger:
• certain specified employees of Transwave entered into employment and noncompetition agreements with us, including three employees who are also major shareholders of Transwave, and
• we received satisfactory assurance that at least 90% of the Transwave employees will remain employed by us after the merger. (See "Additional Terms of the Transaction—Conditions to the Closing")

Information Concerning Transwave

    Transwave was a privately-held company located in Fremont, California. Established in February 2000, Transwave applied its core competencies in fusion couplers, crystal processing and instrumentation technologies to develop a broad line of passive optical products for data communications and telecommunications applications. Its principal executive offices are located at 43022 Christy Street, Fremont, California 94538. Its telephone number is (510) 668-0658. Transwave has not paid any dividends on its capital stock.

Management's Discussion and Analysis of Financial Condition and Results of Operations of Transwave

    The following discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors. The following discussion should be read together with Transwave's financial statements and related notes thereto included elsewhere in this proxy statement.

    Overview.  Transwave was founded in February 2000, to develop and manufacture passive optical components and subsystems used in optical communications systems for wide-area networking, or WANs, and metropolitan area networking applications, or MANs. Transwave's development efforts are primarily focused on products that are typically used by original equipment manufacturers to combine (multiplex), split (demultiplex), isolate (allow to pass or add and drop) and/or modify the behavior of one or more wavelengths of light used in wavelength division multiplexing systems. As of December 31, 2000, Transwave had completed development and had begun shipping its first passive optical component. In order to provide a broad line of passive optical solutions to its customers, Transwave plans to introduce a number of follow-on products during the next twelve months.

    All of Transwave's products are manufactured in its facilities located in Fremont, California and Shanghai, China.

    Research, development and engineering expenses consist primarily of salaries and related expenses for engineers and other technical personnel required to support the development and introduction of new products. Transwave charges all research, development and engineering expenses to operations as incurred. Transwave believes that continued investment in research and development is critical to its long-term success. Accordingly, Transwave expects that research and development expenses will increase in future periods.

    Sales and marketing expenses consist primarily of expenses for the promotion of Transwave's products.

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    General and administrative expenses consist primarily of salaries and related expenses for administrative, finance, information systems and human resources personnel, professional fees and other corporate expenses.

    Acquisition by Finisar.  In November 2000, Transwave entered into an agreement to be acquired by Finisar. Under the terms of the agreement, which was amended in February and March 2001, Transwave shareholders received approximately 1.05 million shares of Finisar's Series A Preferred Stock (which are convertible into approximately 3.2 million shares of common stock), including shares issuable upon exercise of options assumed in the transaction. The transaction will be accounted for under the purchase method of accounting.

    Revenues.  Revenues were $115,290 in the eleven months ended December 31, 2000. This reflects sales of Transwave's initial product primarily to U.S. based customers.

    Gross Profit.  Gross profit of $15,044 in the eleven months ended December 31, 2000 represented 13.0% of revenues and includes costs associated with the initial startup of production.

    Research and Development Expenses.  Research and development expenses were $626,512 in the eleven months ended December 31, 2000, consisting primarily of compensation and material costs associated with the development of new products.

    Sales and Marketing Expenses.  Sales and marketing expenses were $19,494 in the eleven months ended December 31, 2000, consisting primarily of promotional expenses associated with Transwave's sales efforts. These efforts were limited during this period as Transwave was primarily focused on the development of new products.

    General and Administrative Expenses.  General and administrative expenses were $324,566 in the eleven months ended December 31, 2000, consisting primarily of compensation expense.

    Amortization of Deferred Compensation.  The amortization of deferred compensation of $2,351,100 for the eleven months ended December 31, 2000, is related to a noncash compensation charge of $1,933,200 recorded to accrete the value of preferred stock issued to employees to its deemed fair value and a noncash compensation charge of $417,900 recorded in connection with the grant of stock options to employees and consultants representing the difference between the deemed fair value of Transwave's common stock for accounting purposes and the option exercise price for these options.

    Interest Income (Expense), Net.  Interest income, net of interest expense, of $9,464 in the eleven months ended December 31, 2000, is derived from interest earned on cash balances.

    Quarterly Results of Operations.  The following table presents unaudited quarterly statements of operations data for the four fiscal quarters ended December 31, 2000. This information reflects all normal non-recurring adjustments that we consider necessary for a fair presentation of such information in accordance with accounting principles generally accepted in the United States. The

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results for any quarter are not necessarily indicative of results that may be expected for any future period.

 
    
   Three Months Ended
  
 
   Period
from inception (February 7, 2000) to March 31,
2000
   June 30,
2000
   September 30,
2000
   December 31,
2000
  
 
   (in thousands, except per share data)

  
Revenues   $ —   $ —   $ 13   $ 102  
Gross profit (loss)     —     —     (4 )   19  
Net loss     —     (590 )   (233 )   (2,475 )
Basic and diluted net loss per share     —     (0.32 )   (0.03 )   (0.07 )

    Liquidity and Capital Resources.  Since inception, Transwave has financed its operations primarily through the sale of convertible preferred stock totaling $1,420,339 and an unsecured loan from Finisar for $200,000.

    As of December 31, 2000, Transwave's principal source of liquidity was $214,366 in cash and cash equivalents.

    Net cash used by operating activities totaled $934,185 in the eleven months ended December 31, 2000, and was primarily related to startup costs associated with the development of new products.

    Net cash used in investing activities totaled $518,038 in the eleven months ended December 31, 2000, and consisted of the purchase of equipment and leasehold improvements.

    Net cash provided by financing activities in the eleven months ended December 31, 2000, totaled $1,666,589 and consisted primarily of net proceeds from the sale of convertible preferred stock, net of issuance costs, and an unsecured loan of $200,000 from Finisar, which is payable on demand with an interest rate of 6.5%.

    Transwave had no material commitments for capital expenditures at December 31, 2000.

    To date Transwave's working capital requirements have been met through the sale of private equity securities. Transwave has sustained significant operating losses since inception and expects to incur additional quarterly losses at least through the fiscal year ending January 2002, and possibly longer. Transwave has insufficient cash to continue its operations beyond the next three months at its projected level of operations. Transwave's ability to meet obligations in the ordinary course of business is dependent upon the completion of the acquisition by Finisar or successfully raising additional equity or debt financing and, ultimately, upon achieving profitable operations. On May 3, 2001 Finisar acquired Transwave.

Description of Transaction

    On May 3, 2001, under the Second Amended and Restated Agreement and Plan of Reorganization (the "Transwave Reorganization Agreement") dated March 19, 2001 among Finisar, Transwave and certain principal shareholders of Transwave, Transwave merged into Finisar. The Transwave Reorganization Agreement is attached as Annex C to this proxy statement. Shares of our Series A Preferred Stock were issued in exchange for all of the issued and outstanding capital stock of Transwave. Also, we assumed all outstanding options to purchase capital stock of Transwave. The merger was completed by filing an agreement of merger with the Secretary of State of the State of California in accordance with California law.

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Consideration Delivered to Transwave Security Holders

    The total number of shares of our Series A Preferred Stock issued in connection with the merger (including shares issued upon the exercise of options issued by Transwave prior to the merger that are assumed by us) was the number of shares equal to the quotient obtained by dividing the Transwave Total Adjusted Merger Consideration by $85.425. The "Transwave Total Adjusted Merger Consideration" was equal to $90,000,000 less certain of Transwave's expenses for the merger. The amount of such expenses was approximately $65,000. Based on that formula, 870,303 shares of our Series A Preferred Stock were issued in exchange for all outstanding capital stock of Transwave and 182,463 shares of our Series A Preferred Stock have been reserved for issuance upon the exercise of assumed options. For a description of the Series A Preferred Stock see "Approval of Amendment to our Certificate of Incorporation to Increase the Number of Authorized Shares of Common Stock—Background," above.

Trading in Shares of Our Series A Preferred Stock and Our Common Stock by Transwave Security Holders Following the Merger; Lock-Up Agreement

    The shares of our Series A Preferred Stock issued in the merger and the shares of our common stock issuable on the conversion of such Series A Preferred Stock were not and will not be registered under the Securities Act, in reliance on the exemptions from registration contained in Sections 3(a)(9) and 3(a)(10) of the Securities Act. See "Regulatory Approvals for the Transaction—Fairness Hearing". The shares of our Series A Preferred Stock and our common stock issuable on the conversion of such Series A Preferred Stock that are issued to persons who are not affiliates of Transwave or Finisar may be traded without restriction. The shares of our Series A Preferred Stock and our common stock issuable on the conversion of such Series A Preferred Stock that are issued to persons that are affiliates of Transwave or Finisar may only be traded in compliance with the manner of sale, public information, and volume limitation requirements of Rule 144 promulgated under the Securities Act.

    The Series A Preferred Stock has no public market and will not be listed on The Nasdaq National Market or any national securities exchange. The shares of our common stock issuable on conversion of the Series A Preferred Stock will be listed on The Nasdaq National Market.

    Fifty-six and two-thirds percent of the shares of our Series A Preferred Stock issued in the merger and the shares of our common stock issuable on the conversion thereof are subject to a lock-up agreement signed by each Transwave shareholder that restricts the transfer of these shares during the one-year period following the closing of the merger. For the principal shareholders of Transwave and the holders of Transwave preferred stock, (a) one-half of the restricted shares will be released from the transfer restrictions on the 180th day following the closing of the merger and (b) all of the restricted shares will be released from the transfer restrictions on the first anniversary of the closing of the merger. For the holders of Transwave common stock (other than the principal shareholders of Transwave), one-half of the restricted shares will not be subject to any transfer restrictions and the remaining one-half of the restricted shares will be released from the transfer restrictions on the 180th day following the closing of the merger.

Reasons for the Transaction

    Our Board of Directors believes there are several potential benefits of the merger that will contribute to the success of the combined company. These include:

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Employee Retention Pool

    Under the Transwave Reorganization Agreement, we agreed to establish a pool of cash in the aggregate amount of $1 million for retention of Transwave employees. The pool will be allocated among the Transwave employees in accordance with a schedule agreed upon by Finisar and Transwave.

Vote Required for Approval of the Transaction

    No vote was required of our stockholders to approve the merger. However, if our stockholders do not approve the Charter Amendment to increase the number of authorized shares of common stock, there will not be sufficient shares of common stock to permit the automatic conversion of Series A Preferred Stock into shares of our common stock.

    Under applicable law and Transwave's charter and by-laws, the Transwave Reorganization Agreement and the merger were required to be approved by the affirmative vote of the holders of a majority of the outstanding shares of Transwave common stock and the holders of a majority of the outstanding shares of Transwave's preferred stock entitled to vote. Each share of Transwave capital stock was entitled to one vote on the merger. However, under the terms of the Transwave Reorganization Agreement, we were not obligated to complete the merger unless it was approved by the affirmative vote of the holders of not less than 95% of the outstanding shares of Transwave's capital stock. Certain officers, directors and principal shareholders of Transwave holding approximately 64% of Transwave's outstanding capital stock entered into a voting agreement in which they agreed to vote for the merger and against the acquisition of Transwave by any person other than us. The merger was approved by the holders of approximately 97% of Transwave's common stock on an as-converted basis.

Past Transactions

    Prior to the closing of the merger we made six loans to Transwave in an aggregate principal amount of $1,030,000. Three of the loans, totaling $630,000, bore interest at 6.5% per annum and the remaining three loans, totaling $400,000, bore interest at 10% per annum. Each loan was unsecured and payable on demand. Following the acquisition of Transwave, the loans were cancelled.

Accounting Treatment of the Merger

    We will treat the merger as a purchase of assets for accounting purposes.

Regulatory Approval for the Transaction

    The shares of our Series A Preferred Stock issued in the merger were not registered under the Securities Act in reliance on the exemption from registration contained in Section 3(a)(10) of the Securities Act. The Section 3(a)(10) exemption is available because the California Commissioner issued a permit for the issuance of the shares of our Series A Preferred Stock in connection with the merger following a Fairness Hearing on the terms and conditions of the merger held on April 13, 2001.

Additional Terms of the Acquisition

    In addition to the terms and conditions of the merger described elsewhere in this section, the Transwave Reorganization Agreement contains the following additional terms and conditions for the merger:

    Fractional Shares.  The Transwave Reorganization Agreement provides that no fractional shares of our Series A Preferred Stock were to be issued in the merger. A Transwave shareholder that would

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otherwise have received a fractional share of our Series A Preferred Stock instead received an amount of cash equal to the product of the fraction of the share of our Series A Preferred Stock the holder would have received multiplied by $85.425. (See Section 2.4(e) of the Transwave Reorganization Agreement)

    Escrow.  At the closing of the merger, 290,131 shares of our Series A Preferred Stock issuable in the merger were deposited in escrow (the "Escrow") with U.S. Bank Trust, National Association, as escrow agent. The shares will be released to the former shareholders of Transwave on the first three anniversaries of the closing of the merger, subject to the achievement of the milestones described below. In addition, a portion of the shares held in escrow for the benefit of certain principal shareholders of Transwave will be subject to claims for indemnification by us. Any shares of our common stock issued on the conversion of the Series A Preferred Stock held in escrow will remain in the Escrow. The Series A Preferred Stock deposited in Escrow and any shares of our common stock issuable on the conversion thereof are referred to as the "Performance Shares".

    On the first anniversary of the closing of the merger, one-third of the Performance Shares will be released to the former shareholders of Transwave if certain technical, financial and personnel milestones have been met prior to that date. On the second anniversary of the closing, two-thirds of the Performance Shares (less the number of Performance Shares, if any, previously released) will be released to the former shareholders of Transwave if certain financial, technical and personnel milestones have been met prior to that date. On the third anniversary of the closing the balance of the Performance Shares will be released to the former shareholders of Transwave if certain technical, financial and personnel milestones have been met prior to that date. However, one-third of the Performance Shares that would otherwise be released to certain principal shareholders of Transwave will be subject to claims for indemnity by Finisar, and will not be released to the former Transwave shareholders to the extent they are subject to our indemnity claims. (See Sections 2.5 and 9.2 of the Transwave Reorganization Agreement)

    Representations and Warranties.  The Transwave Reorganization Agreement contains representations and warranties of Transwave to us relating to, among other things, Transwave's organization, standing and power, capital structure, authority, required filings and consents, financial statements, the absence of undisclosed liabilities, accounts receivable, inventories, the absence of certain changes or events, taxes, tangible assets and real property, intellectual property, bank accounts, contracts, labor difficulties, trade regulation, environmental matters, employee benefit plans, compliance with laws, employees and consultants, litigation, restrictions on business activities, governmental authorization, insurance, interested party transactions, the absence of existing discussions with others, real property holdings, corporate documents and the absence of any misrepresentation. (See Article III of the Transwave Reorganization Agreement)

    In turn, we made representations and warranties to Transwave relating to, among other things, our organization, capital structure, authority, the absence of conflicts, required filings and consents, our SEC filings, financial statements, the absence of undisclosed liabilities, litigation and the absence of any misrepresentation. (See Article IV of the Transwave Reorganization Agreement)

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    Conduct of Business.  Transwave agreed that, unless we otherwise consented, until the earlier of the consummation of the merger or the termination of the Transwave Reorganization Agreement, Transwave would:

(See Article V of the Transwave Reorganization Agreement)

    No Solicitation.  Transwave agreed that, until the earlier of the consummation of the merger or the termination of the Transwave Reorganization Agreement, Transwave would not, directly or indirectly:

(See Section 6.1 of the Transwave Reorganization Agreement)

    Merger Expenses.  Finisar and Transwave each paid its own legal, accounting, financial advisory and consulting fees and other out-of-pocket expenses related to the merger. The Transwave shareholders will bear all of Transwave's transaction expenses. As noted above under "Consideration Delivered to Transwave Security Holders," the amount of the expenses to be borne by the Transwave shareholders that was used to calculate the number of shares of our Series A Preferred Stock issued in connection with the merger was $65,000. If the amount of expenses that were actually incurred by Transwave exceeds $65,000, we may recover the excess expenses from the Escrow described under "Escrow" above. (See Section 6.15 of the Transwave Reorganization Agreement)

    Conditions to the Closing.  The obligation of each party to the Transwave Reorganization Agreement to complete the merger was subject to the satisfaction on or prior to the closing date of the following conditions, in addition to those set forth elsewhere in this portion of the proxy statement:

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In addition, we were not required to complete the merger unless the following conditions had been satisfied:

Transwave was not required to complete the merger unless the following conditions had been satisfied:

(See Article VII of the Transwave Reorganization Agreement)

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    Indemnification.  For purposes of indemnification under the Transwave Reorganization Agreement, Finisar, its officers, directors, employees and attorneys, all of Finisar's subsidiaries and affiliates and the respective officers, directors, employees and attorneys of such entities comprise the "Finisar Group." Each member of the Finisar Group will be entitled to recover up to one-third of the Performance Shares that would otherwise be released to certain principal shareholders of Transwave on the third anniversary of the closing of the merger for any and all losses, damages, costs and expenses (including reasonable legal fees and expenses) which any member of the Finisar Group may sustain or incur that are caused by or arise out of:

    However, no member of the Finisar Group may recover:

The liability of any indemnifying Transwave shareholder may not exceed the value of one-third of the Performance Shares that would otherwise be released to the shareholder on the third anniversary of the closing of the merger, assuming the relevant financial, technical and personnel milestones have been met for such delivery.

    Regardless of any other provision of the Transwave Reorganization Agreement, there is no limit on the amount of liability or the indemnification period for claims of indemnification by a member of the Finisar Group against Transwave or any shareholder of Transwave or their respective representatives, to the extent the shareholder knowingly participated in fraud, intentional misrepresentation and/or noncompliance with the anti-fraud provisions under federal or state securities laws.

(See Article IX of the Transwave Reorganization Agreement)

    Termination of the Transwave Reorganization Agreement.  The Transwave Reorganization Agreement could have been terminated at any time prior to the consummation of the merger:

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    In the event of the termination of the Transwave Reorganization Agreement, no party (or its officers, directors, shareholders or affiliates) would have been liable to the other, except to the extent set forth below or to the extent that the termination resulted from the willful breach by a party of any of its representations, warranties or covenants set forth in the agreement. The following provisions would have remained in effect and survived any termination of the Transwave Reorganization Agreement:

    Extension, Waiver and Amendment of the Transwave Reorganization Agreement.  At any time before the merger, Finisar and Transwave could have agreed to:

    The terms of the Transwave Reorganization Agreement could have been changed by Finisar and Transwave at any time before or after Transwave's shareholders approved the merger. However, any change which by law would have required the approval of Transwave's shareholders would have required their subsequent approval to be effective.

(See Article VIII of the Transwave Reorganization Agreement)

Acquisition of Marlow Industries, Inc.

    On February 20, 2001, we entered into an agreement to acquire Marlow Industries, Inc. ("Marlow"), a privately-held company located in Dallas, Texas, by a merger of Marlow with a wholly-owned subsidiary of Finisar. The following is a summary of the terms of the acquisition, which should be read in conjunction with the more detailed description of the acquisition that is set forth below.

The Merger   A wholly-owned subsidiary of Finisar will be merged into Marlow. Shares of Marlow common stock will be converted into cash and shares of our common stock and we will assume all outstanding options to purchase Marlow common stock. (See "Description of the Transaction")

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Cash and Common Stock to be Issued in the Merger   $30,000,000 in cash and up to approximately 12.9 million shares of our common stock will be issued in exchange for:
•  all of the outstanding shares of Marlow common stock, and
•  shares of Marlow common stock that would have been issued on the exercise of outstanding Marlow options.
(See "Consideration to be Offered to Marlow Security Holders")
Indemnification Escrow   Shares of our common stock to be issued in the merger having a value equal to 10% of the cash, common stock and options to purchase common stock issued as consideration in the merger (the "Marlow Merger Consideration") will be held in escrow for 18 months following the merger. If any of the representations and warranties made by Marlow are untrue, and we are damaged as a result, we may, subject to a deductible of $250,000, assert claims against the shares held in the escrow to compensate us for our damages. (See "Additional Terms of the Acquisition—Escrow, and— Indemnification")
Voting Agreement   Pursuant to the agreement, the principal shareholder of Marlow, which holds approximately 65% of Marlow's outstanding capital stock, agreed to vote for the merger and against the acquisition of Marlow by a person other than us. (See "Vote Required for Approval of the Transaction")
Marlow Shareholder Approval   The merger must be approved by the holders of at least two-thirds of Marlow's outstanding shares entitled to vote. (See "Vote Required for Approval of the Transaction")
Required Regulatory Approvals   •  The California Commissioner must have issued a permit for the issuance of our securities in the merger following a public Fairness Hearing. A permit has been issued. (See "Regulatory Approvals for the Transaction—Fairness Hearing")
•  The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act shall have been terminated or expired. The waiting period has been terminated. (See "Regulatory Approvals for the Transaction—Hart-Scott-Rodino")
Tax Consequences   The merger is intended to be a tax-free reorganization under Section 368(a) of the Internal Revenue Code.
Accounting Treatment   The merger will be accounted for as a purchase. (See "Accounting Treatment of the Merger")

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Employment of Certain Marlow Employees   Unless waived by us, prior to the closing of the merger:
•  certain specified employees of Marlow will enter into employment and consulting agreements with us, including three employees who are also shareholders of Marlow, and
•  we must have received satisfactory assurance that at least 24 of 27 specified Marlow employees will remain employed by the surviving corporation or us after the merger. (See "Additional Terms of the Transaction—Conditions to the Closing")

Information Concerning Marlow

    Marlow was established in 1973 and designs and manufactures thermoelectric coolers that provide customized thermal-management solutions by stabilizing the temperature of high-tech equipment for the aerospace, military, medical, telecommunications, industrial and consumer products industries. Marlow is one of the world's largest manufacturers of thermoelectric coolers. Its principal executive offices are located at 10451 Vista Park Road, Dallas, Texas 75238. Its telephone number is (214) 340-4900. Marlow has never declared or paid cash dividends on shares of its common stock. In December 1995 the Board of Directors of Marlow approved a 10-for-1 stock split on all of Marlow's common stock. To effectuate such stock split, the Board of Directors of Marlow declared a dividend of nine shares of Marlow common stock for each share of Marlow common stock outstanding. The stock dividend likewise applied to all outstanding options to purchase Marlow common stock.

Management's Discussion and Analysis of Financial Condition and Results of Operations

    The following discussion contains forward-looking statements that involve risks and uncertainties. Marlow's actual results could differ substantially from those anticipated in these forward-looking statements as a result of many factors. The following discussion should be read together with Marlow's consolidated financial statements and related notes thereto included elsewhere in this proxy statement.

    Overview.  Marlow is a world leader in the design and manufacture of thermoelectric coolers, or TECs. Marlow's products are used primarily in telecommunications applications, as well as for defense, space, photonics and commercial cooling system (medical and industrial) applications. Marlow focuses on highly engineered, customized TECs, which fully leverage Marlow's considerable technical capabilities.

    Marlow is a full service, quality based, thermoelectric company founded in 1973. Marlow initially focused on the design and manufacture of TECs for defense and space applications. In recent years, a majority of Marlow's revenues have been derived from sales of TECs for telecommunications and other commercial applications. The rapid growth of revenues in telecommunications applications can be attributed to the expansion of telecommunications and its use of fiber optics to transmit voice, data, and internet traffic. Marlow has funded most of its growth with internal cash flow and periodic bank borrowings.

    Marlow's net sales are derived from the design, engineering and manufacture of thermoelectric modules and subsystems. Sales to Marlow's largest customer accounted for 22% in the fiscal year ending January 28, 2001, 11% of its net sales for the fiscal year ending January 30, 2000, and 12% in the fiscal year ending January 31, 1999.

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    Marlow sells its products through its direct sales force, supplemented with distributors and sales representatives in parts of Europe and Asia. Marlow is structured such that a Customer Focused Business Team exists for each market—telecommunications; defense, space and photonics; and commercial cooling systems to ensure that resources are directed to fully satisfy Marlow's customers.

    Marlow has two international sales offices, one in England to support European customers and one in Japan to support Asian customers. All of Marlow's products are manufactured in its facility located in Dallas, Texas. The cost of Marlow's net sales consists of materials, labor and related expenses for manufacturing personnel, and manufacturing overhead. Marlow experienced significant growth in the demand for its products, particularly in telecommunications applications, starting in the fourth quarter of fiscal 2000 and continuing through the first quarter of fiscal 2002. As Marlow added capacity, its gross margins initially declined in the first two quarters of fiscal 2000, but began to improve in the third quarter.

    Research, development and engineering expenses consist primarily of salaries and related expenses for material scientists, engineers and other technical personnel required to support thermoelectric material research, development of new manufacturing processes and the development of new products. Marlow charges all research, development and engineering expenses to operations as incurred. Marlow believes that continued investment in research and development is critical to its long-term success. Accordingly, Marlow expects that its research and development expenses will increase in future periods.

    Selling expenses consist primarily of salaries and related expenses for personnel engaged in sales, marketing and customer service activities as well as other costs associated with the promotion of Marlow's products.

    Administrative expenses consist primarily of salaries and related expenses for administrative, finance, information systems and human resources personnel, professional fees and other corporate expenses.

    Pending Acquisition.  In February 2001, Marlow entered into an agreement to be acquired by Finisar. Under the terms of the agreement, Marlow stockholders will be entitled to receive $30 million in cash and up to approximately 12.9 million shares of Finisar common stock, including shares issuable upon the exercise of options to be assumed in the transaction. The acquisition is subject to approval by Marlow's shareholders, the approval by Finisar stockholders of an increase in the number of authorized shares of Finisar common stock, receipt of governmental approvals and other customary conditions. In addition, should the average trading price of Finisar common stock during the 10-day period ending one day prior to the closing date for the transaction be less than $16.00, Marlow will have the right to terminate the agreement and not proceed with the acquisition. Subject to the foregoing, the transaction is expected to close during the quarter ending July 31, 2001.

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    Results of Operations.  The following table sets forth certain statement of operations data as a percentage of net sales for the periods indicated:

 
   Fiscal Year Ended
January
  
 
   1999
   2000
   2001
  
Net Sales   100.0 % 100.0 % 100.0 %
Cost of Sales   68.8   66.2   68.7  
   
 
 
 
Gross Profit   31.2   33.8   31.3  
   
 
 
 
Operating Expenses              
  Research, development, and engineering   6.9   7.2   6.3  
  Selling   9.4   9.3   8.1  
  Administrative   8.2   8.6   7.6  
   
 
 
 
Total Operating Expenses   24.5   25.1   22.0  
   
 
 
 
  Operating Income   6.7   8.7   9.3  
  Interest income (expense), net   (1.4 ) (0.7 ) (0.5 )
  Other income (expense), net   (0.0 ) (0.0 ) (0.0 )
   
 
 
 
Income before income taxes   5.3   8.0   8.8  
Provision for income taxes   1.4   2.4   2.6  
   
 
 
 
Net income   3.9 % 5.6 % 6.2 %
   
 
 
 

    Net Sales.  Net sales increased 53.5% from $32.7 million in fiscal 2000 to $50.2 million in fiscal 2001. The majority of the increase was in products sold to the telecommunications market where sales increased 123% during the period. Sales of TECs in the defense, space and photonics market increased 15% year to year. Sales of TECs in the commercial cooling systems market decreased 6% during fiscal 2001 as compared to the prior year's period due primarily to a decision to withdraw from lower margin consumer product applications when capacity was constrained due to demand from customers in the telecommunications market.

    Sales to a principal customer in the telecommunications market representing 10% or more of total net sales during fiscal 2000 and fiscal 2001 were $3.8 million or 11% and $11.0 million or 22%, respectively.

    Gross Profit.  Gross profit increased 41.4% from $11.1 million in fiscal 2000 to $15.7 million in fiscal 2001. As a percentage of net sales, gross profit decreased from 33.8% in fiscal 2000 to 31.3% in fiscal 2001. Gross profit increased in actual dollars due to increased sales, primarily to telecommunications customers; however, the lower gross margin percent reflects the initial cost of adding additional capacity to meet the increased demand for Marlow's products, primarily in the telecommunications market.

    Research, Development and Engineering Expenses.  Research, development and engineering expenses increased 33.3% from $2.4 million in fiscal 2000 to $3.2 million in fiscal 2001 primarily due to increased spending in materials research and increased engineering support. Research and development expenses as a percentage of net sales decreased from 7.2% in fiscal 2000 to 6.3% in fiscal 2001.

    Selling Expenses.  Selling expenses increased 36.7% from $3.0 million in fiscal 2000 to $4.1 million in fiscal 2001. This increase was due to higher compensation expenses resulting from higher personnel levels. Selling expenses as a percentage of net sales decreased from 9.3% in fiscal 2000 to 8.1% in fiscal 2001.

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    Administrative Expenses.  Administrative expenses increased 35.7% from $2.8 million in fiscal 2000 to $3.8 million in fiscal 2001 primarily due to increased personnel to support Marlow's growth and the associated compensation expense. Administrative expenses decreased as a percent of net sales from 8.6% in fiscal 2000 to 7.6% in fiscal 2001.

    Interest Income (Expense), Net.  Net interest expense was $0.2 million in both fiscal 2000 and fiscal 2001.

    Provision for Income Taxes.  The provision for income taxes increased from $0.8 million in fiscal 2000 to $1.3 million in fiscal 2001. The effective tax rate increased slightly from 29.7% to 29.9%. The effective tax rate differs from the statutory rate primarily due to the exemption of a portion of Marlow's foreign sales corporation (FSC) income from federal income tax, the benefits of certain research and development tax credits, and the benefit of the exercise of non-qualified stock options, offset somewhat by non-deductible meal and entertainment expenses. See Note 6 to Marlow's financial statements.

    Net Sales.  Net sales increased 14.7% from $28.5 million in fiscal 1999 to $32.7 million in fiscal 2000. This was primarily due to an increase in sales of TECs in the telecommunications market due to increased use of Marlow's products by large telecommunications equipment companies. Sales of TECs in the defense, space and photonics market also increased as a result of several contracts moving into production. Sales of TECs in the commercial cooling systems market was essentially flat.

    Sales to Marlow's largest customer were $3.5 million or 12% of net sales during fiscal 1999 and $3.8 million or 11% of net sales during fiscal 2000.

    Gross Profit.  Gross profit increased from $8.9 million in fiscal 1999 to $11.1 million in fiscal 2000. As a percentage of net sales, gross profit increased from 31.2% in fiscal 1999 to 33.8% in fiscal 2000 due to increased sales over which to spread Marlow's fixed manufacturing costs and a favorable product mix.

    Research, Development and Engineering Expenses.  Research, development and engineering expenses increased 20% from $2.0 million in fiscal 1999 to $2.4 million in fiscal 2000, as Marlow continued to invest in materials research and expand engineering resources. Research, development and engineering expenses as a percentage of net sales increased from 6.9% in fiscal 1999 to 7.2% in fiscal 2000.

    Selling Expenses.  Selling expenses increased 11.1% from $2.7 million in fiscal 1999 to $3.0 million in fiscal 2000. The increase was attributed to Marlow's continued growth in the telecommunications market and the opening of Marlow's Asian sales office. Selling expenses as a percent of net sales decreased from 9.4% in fiscal 1999 to 9.3% in fiscal 2000.

    Administrative Expenses.  Administrative expenses increased 21.7% from $2.3 million in fiscal 1999 to $2.8 million in fiscal 2000. Most of the increase was associated with salaries and related expenses to support Marlow's growth. Administrative expenses increased as a percent of net sales from 8.2% in fiscal 1999 to 8.6% in fiscal 2000.

    Interest Income (Expense), Net.  Net interest expense of $0.2 million in fiscal 2000 decreased slightly compared to a net interest expense of $0.4 in fiscal 1999. Marlow's average borrowing decreased due to increased cash flow from operations.

    Provision for Income Taxes.  The provision for income taxes increased from $0.4 million in fiscal 1999 to $0.8 million in fiscal 2000 reflecting an effective tax rate of 27.0% and 29.7%, respectively. The effective tax rate differs from the statutory rate primarily due to the exemption of a portion of

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Marlow's foreign sales corporation (FSC) income from federal taxation and the benefit of certain research and development tax credits, offset somewhat by non-deductible meal and entertainment expenses. The increase in the effective tax rate is a result of decreased FSC income as a percent of total income. See Note 6 to Marlow's financial statements.

    Quarterly Results of Operations.  The following table presents unaudited quarterly statements of operations data for Marlow for the eight quarters ended January 28, 2001, and such data expressed as a percentage of net sales. This information reflects all normal non-recurring adjustments that Marlow considers necessary for a fair presentation of such information in accordance with accounting principles generally accepted in the United States. The results for any quarter are not necessarily indicative of results that may be expected for any future period.

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   Three Months Ended
  
 
   May 2, 1999
   Aug 1, 1999
   Oct 31, 1999
   Jan 30, 2000
   Apr 30, 2000
   Jul 30, 2000
   Oct 29, 2000
   Jan 28, 2001
  
 
   (in thousands, except per share data)

  
NET SALES   $ 7,056   $ 8,330   $ 8,731   $ 8,615   $ 9,156   $ 11,449   $ 13,979   $ 15,566  
COST OF SALES     4,559     5,319     5,659     6,137     6,620     8,080     9,562     10,177  
   
 
 
 
 
 
 
 
 
Gross Profit     2,497     3,011     3,072     2,478     2,536     3,369     4,417     5,389  
   
 
 
 
 
 
 
 
 
OPERATING EXPENSES:                                                  
  Research, Develop, and Engineering     640     571     607     538     700     775     775     937  
  Selling     641     777     832     783     883     851     936     1,384  
  Administrative     667     699     712     740     743     787     958     1,293  
   
 
 
 
 
 
 
 
 
Total Operating Expenses     1,948     2,047     2,151     2,061     2,326     2,413     2,669     3,614  
   
 
 
 
 
 
 
 
 
OPERATING INCOME     549     964     921     417     210     956     1,748     1,775  
Interest Income (Expense), net     (96 )   (37 )   (49 )   (36 )   (39 )   (22 )   (71 )   (106 )
Other Income (Expense)     8     2     (6 )   (18 )   6     (1 )   26     (47 )
   
 
 
 
 
 
 
 
 
Income Before Income Taxes     461     929     866     363     177     933     1,703     1,622  
Provision For Income Taxes     157     258     258     106     56     296     534     438  
   
 
 
 
 
 
 
 
 
Net Income   $ 304   $ 671   $ 608   $ 257   $ 121   $ 637   $ 1,169   $ 1,184  
   
 
 
 
 
 
 
 
 
Basic net income per share   $ 0.43   $ 0.95   $ 0.86   $ 0.37   $ 0.17   $ 0.90   $ 1.65   $ 1.66  
   
 
 
 
 
 
 
 
 
Diluted net income per share   $ 0.41   $ 0.90   $ 0.82   $ 0.35   $ 0.16   $ 0.84   $ 1.54   $ 1.55  
   
 
 
 
 
 
 
 
 
 
   Three Months Ended
  
 
   May 2, 1999
   Aug 1, 1999
   Oct 31, 1999
   Jan 30, 2000
   Apr 30, 2000
   Jul 30, 2000
   Oct 29, 2000
   Jan 28, 2001
  
 
   (as a percentage of revenue)

  
NET SALES   100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
COST OF SALES   64.6   63.9   64.8   71.2   72.3   70.6   68.4   65.4  
   
 
 
 
 
 
 
 
 
Gross Profit   35.4   36.1   35.2   28.8   27.7   29.4   31.6   34.6  
   
 
 
 
 
 
 
 
 
OPERATING EXPENSES:                                  
  Research, Develop, and Engineering   9.1   6.8   7.0   6.2   7.7   6.8   5.5   6.0  
  Selling   9.1   9.3   9.5   9.1   9.6   7.4   6.7   8.9  
  Administrative   9.4   8.4   8.1   8.6   8.1   6.9   6.9   8.3  
   
 
 
 
 
 
 
 
 
Total Operating Expenses   27.6   24.5   24.6   23.9   25.4   21.1   19.1   23.2  
   
 
 
 
 
 
 
 
 
OPERATING INCOME   7.8   11.6   10.6   4.9   2.3   8.3   12.5   11.4  
Interest Income (Expense), net   (1.4 ) (0.4 ) (0.6 ) (0.5 ) (0.5 ) (0.2 ) (0.5 ) (0.8 )
Other Income (Expense)   0.1   0.0   (0.1 ) (0.2 ) 0.1   0.0   0.2   (0.2 )
   
 
 
 
 
 
 
 
 
Income Before Income Taxes   6.5   11.2   9.9   4.2   1.9   8.1   12.2   10.4  
Provision For Income Taxes   2.2   3.1   3.0   1.2   0.6   2.6   3.8   2.8  
   
 
 
 
 
 
 
 
 
Net Income   4.3 % 8.1 % 6.9 % 3.0 % 1.3 % 5.5 % 8.4 % 7.6 %
   
 
 
 
 
 
 
 
 

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    Net sales increased over the last eight quarters as a result of increased TEC unit sales, primarily in the telecommunications market.

    Gross profit margins were generally lower over the four quarters ending October 29, 2000, as a result of the costs associated with the expansion of manufacturing capacity to support the growth in demand for Marlow's TECs in the telecommunications market. Margins returned to historical levels in the quarter ending January 28, 2001.

    Quarterly increases in operating expenses reflected the continued expansion of Marlow's operations throughout the eight-quarter period. Income from operations was adversely affected beginning in the quarter ended January 31, 2000 through the quarter ended April 30, 2000, by decreased gross profit margins. Income from operations in the two most recent quarters ending January 28, 2001 were closer to historical levels.

    Net interest expense was relatively constant throughout the eight quarters with slight fluctuations as Marlow used its line of credit to satisfy working capital requirements when needed.

    Marlow may experience a delay in generating net sales in the future for a number of reasons. Booked orders at the beginning of each quarter typically do not equal expected net sales for that quarter in Marlow's commercial cooling systems market. In view of current market volatility, orders for Marlow's products in the telecommunications market may be rescheduled or cancelled outside of a thirty-day window. Normally, the customer will pay cancellation charges, but those charges may not replace the lost net sales.

    Most of Marlow's expenses, such as employee compensation and lease payments for facilities and equipment, are relatively fixed in the near term. In addition, Marlow's expense levels are based in part on its expectations regarding future net sales. As a result, any shortfall in net sales relative to Marlow's expectations could cause significant changes in its operating results from quarter to quarter. Marlow's quarterly and annual operating results have fluctuated in the past and are likely to continue to fluctuate significantly in the future due to a variety of factors, some of which are outside of Marlow's control. Due to the foregoing factors, you should not rely on Marlow's quarterly net sales and operating results to predict its future performance.

    Liquidity and Capital Resources.  Since its inception, Marlow has financed its operations primarily through internal cash flow and periodic bank borrowings for equipment financing and a revolving line of credit.

    As of January 28, 2001, Marlow's principal sources of liquidity were $0.9 million in cash, cash equivalents and short-term investments, and a $3.5 million revolving loan facility that matures on June 30, 2001. Borrowings under the facility are collateralized by substantially all of Marlow's assets and bear interest at the bank's prime rate. Borrowings of $0.5 million out of the $3.5 million available existed at January 28, 2001.

    Net cash provided by operating activities was $3.4 million in fiscal 1999, $3.1 million in fiscal 2000 and $2.5 million in fiscal 2001. Cash provided by operations during fiscal 1999, 2000 and 2001 was primarily a result of continued growth in net sales and net income offset in part by an increase in working capital to fund that growth.

    Net cash used in investing activities was $1.0 million in fiscal 1999, $1.2 million in fiscal 2000 and $5.2 million in fiscal 2001, and consisted primarily of purchases of equipment to increase Marlow's manufacturing capacity.

    Net cash used by financing activities was $2.3 million in fiscal 1999 and $0.6 million in fiscal 2000. Net cash provided by financing activities was $1.8 million in fiscal 2001. Net cash used by financing activities in fiscal 1999 and in fiscal 2000 primarily consisted of payments on existing debt and the line

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of credit. Net cash provided by financing activities in fiscal 2001 consisted of additional long term debt, net borrowings on the line of credit and proceeds from the exercise of stock options.

    Marlow had commitments of approximately $4.4 million for capital expenditures at January 28, 2001.

    Marlow believes that its existing balances of cash, cash equivalents and short-term investments, together with its available credit facilities and cash flow expected to be generated from future operations, will be sufficient to meet its cash needs for working capital and capital expenditures for at least the next 12 months.

    Effect of New Accounting Statements.  In June 1998, the Financial and Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives in the balance sheet and measure those instruments at fair value. Marlow does not have any derivatives therefore, SFAS No. 133 does not have a material impact on Marlow's financial position or disclosures. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective beginning in the fiscal year ending February 2, 2002.

    In December 1999, the Commission staff issued SAB 101 "Revenue Recognition in Financial Statements". SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. In addition, the Emerging Issues Task Force ("EITF") issued a consensus in EITF 99-19 "Reporting Gross Revenue as a Principal versus Net as an Agent". SAB 101 and the EITF 99-19 is effective in Marlow's fourth quarter of the fiscal year ended January 28, 2001. Marlow does not expect any impact from the adoption of SAB 101.

    In May 2000, the EITF issued EITF 00-10 "Accounting for Shipping and Handling Fees and Costs". This pronouncement provides accounting guidance for the income statement classification for shipping and handling fees and costs by companies that record revenue based on the gross amount billed to customers. EITF 00-10 issued a consensus that all amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent net sales earned for the goods provided and should be classified as revenue. EITF 00-10 is effective in Marlow's fourth quarter of the fiscal year ended January 28, 2001.

    In 1999 the FASB issued an exposure draft for a proposed statement accounting for business combinations and intangible assets. This exposure draft, among other things, eliminates the pooling of interest business combinations, eliminates the amortization of goodwill and provides for assessing the carrying value of goodwill on an impairment approach. The final version of the proposed statement is currently expected to be released in the second or third calendar quarter of 2001. The provisions of this proposed standard would be effective for fiscal quarters beginning after the issuance of a final statement. The adoption of this standard, as it is proposed, will not have any impact on Marlow's financial statements but could be applicable for the pending acquisition accounting.

Description of the Transaction

    Under the Agreement and Plan of Reorganization (the "Marlow Reorganization Agreement") dated February 20, 2001 by and between Finisar, Marble Acquisition Corp., our wholly-owned subsidiary ("Marble"), Marlow, The Marlow Co., Ltd. and Raymond Marlow as the Shareholders' Representative, Marble will be merged into Marlow, with Marlow remaining as the surviving corporation and becoming our wholly-owned subsidiary. The Marlow Reorganization Agreement is attached as Annex D to this proxy statement. We will deliver $30,000,000 in cash and issue shares of our common stock in exchange for all of the issued and outstanding capital stock of Marlow. Also, we will assume all outstanding options to purchase capital stock of Marlow. The merger will be completed

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by filing articles of merger with the Secretary of State of the State of Texas in accordance with Texas law.

Consideration to be Offered to Marlow Security Holders

    We will deliver $30,000,000 in cash and issue shares and options to purchase shares of our common stock in connection with the merger. The total number of shares of our common stock to be issued in connection with the acquisition of Marlow (including shares issuable upon the exercise of options that are assumed by us) is the number of shares equal to the quotient obtained by dividing the difference between (a) $270,000,000 and (b) the sum of (i) certain of Marlow's transaction expenses for the merger and (ii) $4,045,970 of a retention pool for employees, by the Finisar Average Share Price. Marlow has estimated that the amount of such transaction expenses for the merger will be approximately $8,715,000. The "Finisar Average Share Price" is the greater of (x) $20.00 or (y) the average closing sale price of our common stock for the ten consecutive trading days ending four business days prior to the closing of the merger as reported on The Nasdaq National Market. Based on Marlow's estimate of its transaction expenses for the merger and assuming that the Finisar Average Share Price will be $20.00, approximately 12.9 million shares of our common stock will be issued in connection with the merger, including shares issuable upon the exercise of assumed options.

Trading in Shares of Our Common Stock by Marlow Security Holders Following the Merger

    The shares of our common stock issuable in the merger will not be registered under the Securities Act, in reliance on the exemption from registration contained in Section 3(a)(10) of the Securities Act. See "Regulatory Approvals for the Transaction—Fairness Hearing". The shares of our common stock that are issued to persons who are not affiliates of Marlow or Finisar may be traded without restriction. The shares of our common stock that are issued to persons that are affiliates of Marlow or Finisar may only be traded in compliance with the manner of sale, public information, and volume limitation requirements of Rule 144 promulgated under the Securities Act.

    Marlow will not be required to close the merger unless the shares of our common stock that are issued in the merger have been approved for quotation on The Nasdaq National Market, subject to official notice of issuance.

Reasons for the Transaction

    Our Board of Directors identified several potential benefits of the acquisition of Marlow that it believes will contribute to the success of the combined company and facilitate our strategic objectives. These include:

Employee Retention Pool

    Under the Marlow Reorganization Agreement, we have agreed to establish a pool of cash in the aggregate amount of $4,045,970 for the retention of Marlow employees. A portion of the amount allocated to each eligible employee will be payable to the employee at the effective time of the merger, provided he or she accepts continued employment with Marble, except that the amounts allocated to two employees will be paid in full at the effective time of the merger. With the exception of these two individuals, eligible employees will vest in the remaining amount allocated to them in equal installments, which shall be paid on the first and second anniversaries of the closing date of the merger,

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subject to their continued employment by Finisar or one of its subsidiaries. However, any unpaid portion of an employee's share of the retention pool will become vested and payable upon the involuntary termination of his or her employment following the closing of the merger.

Vote Required for Approval of the Transaction

    No vote is required of our stockholders to approve the merger. However, if our stockholders do not approve the Charter Amendment to increase the number of authorized shares of common stock, there will not be sufficient shares of common stock to consummate the merger. We are required by the Marlow Reorganization Agreement to use commercially reasonable efforts to mail this proxy statement to you as promptly as practicable for a meeting of our stockholders to increase the number of authorized shares of our common stock to a number that will be sufficient to allow us to consummate the merger. It is a condition to the closing of the merger that our stockholders approve an increase in the number of authorized shares of our common stock. Certain officers and directors of Finisar have entered into voting agreements pursuant to which they have agreed to vote shares of Finisar common stock owned by them and their affiliates in favor of the Charter Amendment. The shares of Finisar common stock subject to the voting agreements represents approximately 32% of Finisar's outstanding voting power.

    Under applicable law and Marlow's charter and by-laws, the Marlow Reorganization Agreement and the merger must be approved by the affirmative votes of the holders of two-thirds of the outstanding shares of Marlow's common stock entitled to vote. The principal shareholder of Marlow, which holds approximately 65% of Marlow's outstanding capital stock, has agreed to vote for the merger and against the acquisition of Marlow by any person other than us.

Accounting Treatment of the Merger

    We will treat the merger as a purchase of assets for accounting purposes.

Regulatory Approvals for the Transaction

    Fairness Hearing.  The shares of our common stock to be issued in the merger will not be registered under the Securities Act in reliance on the exemption from registration contained in Section 3(a)(10) of the Securities Act. The exemption is available because the California Commissioner issued a permit for the issuance of the shares of our common stock to be issued in connection with the merger (including shares issued following the merger upon the exercise of options previously issued by Marlow that remain outstanding after the merger) following a Fairness Hearing on the terms and conditions of the merger held on April 27, 2001.

    Hart-Scott-Rodino.  In order for the merger to be consummated, the waiting period applicable to the merger under the Hart-Scott-Rodino Act must have been terminated or expired. The parties have been notified that early termination of the waiting period has been granted.

Additional Terms of the Acquisition

    In addition to the terms and conditions of the merger described elsewhere in this section, the Marlow Reorganization Agreement contains the following additional terms and conditions for the merger:

    Fractional Shares.  The Marlow Reorganization Agreement provides that no fractional shares of our common stock will be issued in the merger. A Marlow shareholder that would otherwise receive a fractional share of our common stock will instead receive an amount of cash equal to the product of the fraction of the share of our common stock the holder would receive and the Finisar Average Share Price. (See Section 2.3(d) of the Marlow Reorganization Agreement)

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    Escrow.  At the closing of the merger, shares of our common stock equal to 10% of the Marlow Merger Consideration will be deposited in escrow (the "Escrow") with U.S. Bank Trust, National Association, as escrow agent in accordance with and subject to the provisions of an escrow agreement, and will be subject to claims for indemnification by us as described under "Indemnification" below. (See Section 2.4 and Article IX of the Marlow Reorganization Agreement)

    Representations and Warranties.  The Marlow Reorganization Agreement contains representations and warranties of Marlow to us relating to, among other things, Marlow's organization, standing and power, capital structure, authority, required filings and consents, financial statements, the absence of undisclosed liabilities, accounts receivable, inventories, the absence of certain changes or events, taxes, tangible assets and real property, intellectual property, bank accounts, contracts, labor difficulties, trade regulation, environmental matters, employee benefit plans, compliance with laws, employees and consultants, litigation, restrictions on business activities, governmental authorization, insurance, interested party transactions, the absence of existing discussions with others, real property holdings, corporate documents and the absence of any misrepresentation. (See Article III of the Marlow Reorganization Agreement)

    In turn, we and Marble made representations and warranties to Marlow relating to, among other things, our organization, Finisar's capital structure, authority, the absence of conflicts, required filings and consents, our SEC filings, financial statements, the absence of undisclosed liabilities, the absence of certain changes or events, litigation, investment intent, financing, taxes and the absence of any misrepresentation. (See Article IV of the Marlow Reorganization Agreement)

    Conduct of Business.  Unless we otherwise consent, until the earlier of the consummation of the merger or the termination of the Marlow Reorganization Agreement, Marlow has agreed to:

(See Article V of the Marlow Reorganization Agreement)

    No Solicitation.  Until the earlier of the consummation of the merger or the termination of the Marlow Reorganization Agreement, Marlow has agreed not to, directly or indirectly:

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(See Section 6.1 of the Marlow Reorganization Agreement)

    Merger Expenses.  Finisar and Marlow will each pay its own legal, accounting, financial advisory and consulting fees and other out-of-pocket expenses related to the merger. If the merger is completed, the Marlow shareholders will bear all of Marlow's transaction expenses (as defined in the Marlow Reorganization Agreement). As noted above under "Consideration to be Offered to Marlow Security Holders," an estimate of the expenses to be borne by the Marlow shareholders will be used to calculate the number of shares of our common stock to be issued in connection with the merger. If the amount of expenses that are actually incurred by Marlow exceeds the estimate, we may recover the excess expenses from the Escrow described under "Escrow" above. (See Section 6.18 of the Marlow Reorganization Agreement)

    Conditions to the Closing.  The obligation of each party to the Marlow Reorganization Agreement to complete the merger is subject to the satisfaction on or prior to the closing date of the following conditions, in addition to those set forth elsewhere in this portion of the proxy statement:

In addition, we will not be required to complete the merger unless the following conditions have been satisfied:

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Marlow will not be required to complete the merger unless the following conditions have been satisfied:

(See Article VII of the Marlow Reorganization Agreement)

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    Indemnification.  For purposes of indemnification under the Marlow Reorganization Agreement, Finisar, its officers, directors, employees and attorneys, all of Finisar's subsidiaries and affiliates and the respective officers, directors, employees and attorneys of such entities comprise the "Finisar Group." Each member of the Finisar Group will be entitled to recover from the Escrow any and all losses, damages, costs and expenses (including reasonable legal fees and expenses) which any member of the Finisar Group may sustain or incur that are caused by or arise out of:

    However, no member of the Finisar Group may recover:

    The above limitations on recoveries from the Escrow will not apply in the case of claims on account of willful fraud or intentional misrepresentation by Marlow, any security holder of Marlow or any of their respective representatives. If a claim is asserted for these matters, members of the Finisar Group may make claims that will not be subject to the $250,000 deductible as the indemnification provisions shall not limit, in any manner, any remedy at law or in equity to which any member of the Finisar Group may be entitled against Marlow or any security holder of Marlow or their respective representatives.

(See Article IX of the Marlow Reorganization Agreement)

    Termination of the Marlow Reorganization Agreement.  The Marlow Reorganization Agreement may be terminated at any time prior to the consummation of the merger:

59

    In the event of the termination of the Marlow Reorganization Agreement, no party (or its officers, directors, shareholders or affiliates) will be liable to the other, except to the extent set forth below or to the extent that the termination results from the willful or intentional breach by a party of any of its representations, warranties or covenants set forth in the agreement. The following provisions will remain in effect and survive any termination of the Marlow Reorganization Agreement:

    In the event the Charter Amendment is not approved, Marlow is not in breach of any of its material obligations under the Marlow Reorganization Agreement and Marlow terminates the Marlow Reorganization Agreement as a result of such failure, we will be required to pay Marlow a termination fee of $4,500,000 in cash within 30 days following such termination. In the event the Marlow shareholders do not approve the merger, we are not in breach of any of our material obligations under the Marlow Reorganization Agreement and we terminate the Marlow Reorganization Agreement as a result of such failure, Marlow will be required to pay us a termination fee of $4,500,000 in cash within 30 days following such termination.

    Since the date on which the Marlow Reorganization Agreement was signed, our common stock has traded at a price below $16.00 per share, although it is currently trading at a price above $16.00 per share. If the average trading price for our common stock does not remain above $16.00 per share for the ten trading days ending one business day prior to the date on which the other closing conditions are satisfied or waived, Marlow could elect to exercise its right to terminate the Marlow Reorganization Agreement and not proceed with the merger.

    Extension, Waiver and Amendment of the Marlow Reorganization Agreement.  At any time before the merger, Finisar and Marlow may agree to:

    The terms of the Marlow Reorganization Agreement may be changed by Finisar and Marlow at any time before or after Marlow's shareholders approve the merger. However, any change which by law requires the approval of Marlow's shareholders will require their subsequent approval to be effective.

(See Article VIII of the Marlow Reorganization Agreement)

60


FINISAR SELECTED FINANCIAL DATA

    The following table presents selected financial data for Finisar for each of the fiscal years ended April 30, 1996 through 2000 and for the unaudited nine months ended January 31, 2000 and 2001. The statement of operations data set forth below for the years ended April 30, 1998, 1999 and 2000 and the balance sheet data as of April 30, 1999 and 2000 are derived from, and are qualified by reference to, our audited consolidated financial statements, including the notes thereto, that have been audited by Ernst & Young LLP, independent auditors, and included elsewhere in this proxy statement. The statement of operations data for the year ended April 30, 1997 and the balance sheet data as of April 30, 1997 and 1998 are derived from audited consolidated financial statements not included in this proxy statement. The statement of operations data set forth below for the year ended April 30, 1996 and the balance sheet data as of April 30, 1996 are derived from unaudited consolidated financial statements not included in this proxy statement. The statement of operations data and balance sheet data set forth below as of January 31, 2001 and for the nine months ended January 31, 2000 and 2001 are derived from, and are qualified by reference to, our unaudited consolidated financial statements included elsewhere in this proxy statement. The unaudited consolidated financial statements include all normal recurring adjustments that we consider necessary for a fair presentation of our consolidated financial position and results of operations. The results of operations for the nine months ended January 31, 2001 are not necessarily indicative of the results that may be expected for the full fiscal year ending April 30, 2001, or any other future period.

 
   Fiscal Year Ended April 30,
   Nine Months
Ended
January 31,
  
 
   1996
   1997
   1998
   1999
   2000
   2000
   2001
  
 
   (in thousands, except per share data)

  
Statement of Operations Data:                                            
  Revenues   $ 5,660   $ 8,457   $ 22,067   $ 35,471   $ 67,147   $ 46,466   $ 136,566  
  Cost of revenues     3,122     3,438     8,705     15,514     34,190     22,252     79,436  
  Amortization of acquired developed technology     —     —     —     —     —     —     5,167  
   
 
 
 
 
 
 
 
  Gross profit     2,538     5,019     13,362     19,957     32,957     24,214     51,963  
   
 
 
 
 
 
 
 
Operating expenses:                                            
  Research and development     1,442     2,536     3,806     7,864     13,806     10,051     20,890  
  Sales and marketing     116     645     1,629     4,145     7,122     5,080     11,304  
  General and administrative     280     464     833     2,299     3,516     2,597     6,427  
  Amortization of deferred stock compensation     —     —     —     428     5,530     3,791     5,343  
  Acquisition of in-process research and development     —     —     —     —     —     —     28,797  
  Amortization of acquired intangible assets     —     —     —     —     —     —     27,482  
  Other acquisition costs     —     —     —     —     —     —     1,127  
   
 
 
 
 
 
 
 
Total operation expenses     1,838     3,645     6,268     14,736     29,974     21,519     101,370  
   
 
 
 
 
 
 
 
Income (loss) from operations     700     1,374     7,094     5,221     2,983     2,695     (49,407 )
Interest income (expense), net     10     13     5     (275 )   3,252     1,169     11,659  
Other income (expense), net     —     —     (25 )   (28 )   (99 )   (72 )   454  
   
 
 
 
 
 
 
 
Income (loss) before income taxes     710     1,387     7,074     4,918     6,136     3,792     (37,294 )
Provision for income taxes     247     440     2,715     1,873     3,255     2,583     5,897  
   
 
 
 
 
 
 
 
Net income (loss)   $ 463   $ 947   $ 4,359   $ 3,045   $ 2,881   $ 1,209   $ (43,191 )
   
 
 
 
 
 
 
 
Net income (loss) per share:                                            
  Basic   $ 0.00   $ 0.01   $ 0.03   $ 0.03   $ 0.03   $ 0.01   $ (0.27 )
   
 
 
 
 
 
 
 
  Diluted   $ 0.00   $ 0.01   $ 0.03   $ 0.02   $ 0.02   $ 0.01   $ (0.27 )
   
 
 
 
 
 
 
 
Shares used in per share calculations:                                            
  Basic     132,000     132,000     131,259     110,580     113,930     103,884     157,205  
   
 
 
 
 
 
 
 
  Diluted     132,000     132,000     131,259     134,814     144,102     138,087     157,205  
   
 
 
 
 
 
 
 

61

 
   April 30,
    
 
   January 31,
2001
 
   1996
   1997
   1998
   1999
   2000
 
   (in thousands)
Balance Sheet Data:                                    
  Cash, cash equivalents and short-term investments   $ 722   $ 422   $ 722   $ 5,044   $ 320,735   $ 199,999
  Working capital     856     1,685     5,730     13,011     342,711     315,450
  Total assets     1,948     2,987     7,761     20,955     365,042     930,732
  Long-term portion of note payable and capital lease obligations, deferred income taxes and other long-term liabilities     —     —     416     11,032     524     44,894
  Convertible redeemable preferred stock     —     —     —     26,260     —     —
  Total stockholders' equity (deficit)     1,141     2,088     6,447     (21,503 )   352,422     852,254

62


SHOMITI SELECTED FINANCIAL DATA

    The following table presents selected financial data for Shomiti for each of the fiscal years ended September 30, 1996 through 2000 and for the unaudited three months ended December 31, 1999 and 2000. The statement of operations data set forth below for the fiscal year ended September 30, 2000 and the balance sheet data as of September 30, 2000 are derived from, and are qualified by reference to, the audited financial statements, including the notes thereto, that have been audited by Ernst & Young LLP, independent auditors, and included elsewhere in this proxy statement. The statement of operations data for the fiscal years ended October 2, 1998 and October 1, 1999 and the balance sheet data as of October 1, 1999 are derived from unaudited financial statements included elsewhere in this proxy statement. The statement of operations data for the fiscal years ended September 30, 1996 and 1997 and the balance sheet data as of September 30, 1996 and 1997 and October 2, 1998 are derived from unaudited financial statements not included in this proxy statement. The statement of operations data and balance sheet data set forth below as of December 31, 2000 and for the three months ended December 31, 1999 and 2000 are derived from, and are qualified by reference to, the unaudited financial statements included elsewhere in this proxy statement. The unaudited financial statements include all normal recurring adjustments that we consider necessary for a fair presentation of the financial position and results of operations of Shomiti. The results of operations for the three months ended December 31, 2000 are not necessarily indicative of the results that may be expected for the full fiscal year ending September 30, 2001, or any other future period.

 
   Fiscal Year Ended September
   Three Months Ended
December 31,
  
 
   1996
   1997
   1998
   1999
   2000
   1999
   2000
  
 
   (in thousands, except per share data)

  
Statement of Operations Data:                                            
  Revenue   $ 369   $ 3,272   $ 5,998   $ 8,725   $ 13,633   $ 3,037   $ 3,484  
  Costs of sales     88     919     1,755     2,539     3,697     733     1,120  
   
 
 
 
 
 
 
 
  Gross profit     281     2,353     4,243     6,186     9,936     2,304     2,364  
   
 
 
 
 
 
 
 
Operating expenses:                                            
  Research and development     1,371     3,592     3,978     4,300     4,708     1,036     1,322  
  Sales and marketing     642     3,577     4,446     4,357     5,485     1,175     1,954  
  General and administrative     402     616     1,322     1,366     1,841     371     309  
   
 
 
 
 
 
 
 
  Total operating expenses     2,415     7,785     9,746     10,023     12,034     2,582     3,585  
   
 
 
 
 
 
 
 
Loss from operations     (2,134 )   (5,432 )   (5,503 )   (3,837 )   (2,098 )   (278 )   (1,221 )
Interest income (expense), net     37     100     26     (113 )   (185 )   (44 )   (24 )
   
 
 
 
 
 
 
 
Net loss   $ (2,097 ) $ (5,332 ) $ (5,477 ) $ (3,950 ) $ (2,283 ) $ (322 ) $ (1,245 )
   
 
 
 
 
 
 
 
Net loss per share—Basic and diluted   $ (0.63 ) $ (1.52 ) $ (1.46 ) $ (0.97 ) $ (0.55 ) $ (0.08 ) $ (0.30 )
   
 
 
 
 
 
 
 
Shares used in per share calculations—Basic and diluted     3,328     3,516     3,742     4,075     4,140     4,127     4,158  
   
 
 
 
 
 
 
 
 
   September 30,
    
    
    
    
  
 
   October 2, 1998
   October 1, 1999
   September 30, 2000
   December 31,
2000
  
 
   1996
   1997
  
 
   (in thousands)

  
Balance Sheet Data:                                      
  Cash and cash equivalents   $ 2,586   $ 4,305   $ 6,046   $ 1,160   $ 353   $ 322  
  Working capital     2,573     4,440     6,021     2,388     (124 )   (1,272 )
  Total assets     3,283     7,589     9,415     5,340     5,803     5,642  
  Long-term portion of note payable and capital lease obligations     298     623     776     463     282     282  
Mandatorily redeemable convertible preferred stock     4,881     12,373     19,567     19,666     19,765     19,765  
  Total other stockholders' equity (net capital deficiency)     (2,172 )   (7,455 )   (12,903 )   (16,754 )   (18,924 )   (20,078 )

63


TRANSWAVE SELECTED FINANCIAL DATA

    The following table presents selected financial data for Transwave for the period from inception (February 7, 2000) to December 31, 2000. The statement of operations data set forth below for the period from inception (February 7, 2000) to December 31, 2000 and the balance sheet data as of December 31, 2000 are derived from, and are qualified by reference to, the audited financial statements, including the notes thereto, that have been audited from Ernst & Young LLP, independent auditors, and included elsewhere in this proxy statement.

 
   From inception
(February 7, 2000) to
December 31, 2000
  
 
   (in thousands, except
per share data)

  
Statement of Operations Data:        
Revenues   $ 115  
Cost of revenues     (100 )
   
 
Gross profit     15  
Operating expenses:        
  Research and development     626  
  Sales and marketing     19  
  General and administrative     325  
  Amortization of deferred stock compensation     2,351  
   
 
Total operating expenses     3,321  
   
 
Loss from operations     (3,306 )
Interest expense     (1 )
Interest and other income     9  
   
 
Net loss   $ (3,298 )
   
 
Net loss per share—basic and diluted   $ (0.40 )
   
 
Shares used in per share calculation—basic and diluted     8,172  
   
 

 
 
 
 
 
 
   December 31, 2000
  
 
   (in thousands)

  
Balance Sheet Data:        
Cash and cash equivalents   $ 214  
Working capital     41  
Total assets     995  
Total stockholders' equity     520  

64


MARLOW SELECTED FINANCIAL DATA

    The following table presents selected consolidated financial data for Marlow for each of the fiscal years ended January 31, 1997 through 2001. The selected statement of operations data set forth below for the fiscal years ended January 31, 1999, January 30, 2000 and January 28, 2001 and the balance sheet data as of January 30, 2000 and January 28, 2001 are derived from Marlow's consolidated financial statements and notes, that have been audited by Arthur Andersen LLP, independent public accountants, and included elsewhere in this proxy statement. The selected statement of operations and balance sheet data for the fiscal years ended January 31, 1997 and 1998 are derived from the audited financial statements not included in this proxy statement.

 
   Fiscal Year Ended January
  
 
   1997
   1998
   1999
   2000
   2001
  
 
   (in thousands, except per share data)

  
Statement of Operations                                
Net Sales   $ 20,440   $ 22,932   $ 28,450   $ 32,732   $ 50,150  
Cost of Sales     15,041     16,376     19,577     21,674     34,439  
   
 
 
 
 
 
Gross Profit     5,399     6,556     8,873     11,058     15,711  
   
 
 
 
 
 
Operating Expenses                                
  Research, development, and engineering     940     1,392     1,969     2,355     3,187  
  Selling expenses     1,829     2,368     2,671     3,034     4,054  
  Administrative expenses     1,450     1,794     2,316     2,818     3,781  
   
 
 
 
 
 
Total Operating Expenses     4,219     5,554     6,956     8,207     11,022  
   
 
 
 
 
 
  Operating income     1,180     1,002     1,917     2,851     4,689  
  Interest income (expense), net     (597 )   (487 )   (402 )   (218 )   (238 )
  Other income (expense), net     23     (38 )   (5 )   (14 )   (16 )
   
 
 
 
 
 
Net income before income taxes     606     477     1,510     2,619     4,435  
Provision for income taxes     153     110     407     779     1,324  
   
 
 
 
 
 
Net income   $ 453   $ 367   $ 1,103   $ 1,840   $ 3,111  
   
 
 
 
 
 
Net income per share:                                
  Basic   $ 0.62   $ 0.53   $ 1.56   $ 2.61   $ 4.38  
   
 
 
 
 
 
  Diluted   $ 0.60   $ 0.51   $ 1.50   $ 2.48   $ 4.09  
   
 
 
 
 
 
Shares used in per share calculations:                                
  Basic     725     696     705     705     711  
   
 
 
 
 
 
  Diluted     755     726     737     743     761  
   
 
 
 
 
 
 
   Fiscal Year Ended January 31,
 
   1997
   1998
   1999
   2000
   2001
Balance Sheet Data:                              
Cash and cash equivalents   $ 408   $ 387   $ 508   $ 1,765   $ 862
Working capital     3,525     3,723     4,636     6,080     6,764
Total assets     13,072     13,373     12,843     15,116     24,621
Notes Payable, long-term portion, and other long-term liabilities     3,972     3,236     2,697     2,051     3,029
Total stockholders' equity     4,951     5,218     6,319     8,169     11,480

65


FINISAR CORPORATION, SHOMITI SYSTEMS, INC., TRANSWAVE FIBER, INC. AND MARLOW INDUSTRIES, INC.

INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION

    The Unaudited Pro Forma Condensed Statement of Operations for the year ended April 30, 2000 and the nine months ended January 31, 2001 are based on the pro forma financial statements of Finisar Corporation, which include the previous acquisitions of Sensors Unlimited, Inc., Demeter Technologies, Inc. and Medusa Technologies, Inc. (the "Completed Transactions") (collectively "Finisar"), and Shomiti Systems, Inc. ("Shomiti"), Transwave Fiber, Inc. ("Transwave") and Marlow Industries, Inc. ("Marlow") (collectively the "Pending Transactions") after giving effect to the acquisition of the Pending Transactions under the purchase method of accounting and the assumptions and adjustments described in the accompanying Notes to the Unaudited Pro Forma Condensed Financial Statements. The Unaudited Pro Forma Condensed Statements of Operations are presented as if the combinations had taken place on May 1, 1999.

    The Unaudited Pro Forma Condensed Statement of Operations for the nine months ended January 31, 2001 combines the pro forma nine months ended January 31, 2001 for Finisar, the nine months ended December 31, 2000 for Shomiti, the nine months ended January 31, 2001 for Transwave and the nine months ended January 28, 2001 for Marlow. The Unaudited Pro Forma Condensed Statement of Operations for the year ended April 30, 2000 combines the pro forma year ended April 30, 2000 for Finisar, the twelve months ended March 31, 2000 for Shomiti, the twelve months ended April 30, 2000 for Transwave and the twelve months ended April 30, 2000 for Marlow. The Unaudited Pro Forma Condensed Balance Sheet is presented to give effect to the acquisitions of Shomiti, Transwave and Marlow as if they occurred on January 31, 2001 and combines the pro forma balance sheet of Finisar as of January 31, 2001 with the balance sheets of Shomiti as of December 31, 2000, Transwave as of January 31, 2001 and Marlow as of January 28, 2001.

    The Unaudited Pro Forma Condensed Financial Statements should be read in conjunction with the historical financial statements of Finisar Corporation, the Pending Transactions and the pro forma financial statements of Finisar Corporation and the Completed Transactions included elsewhere in this proxy statement. The pro forma information does not purport to be indicative of the results that would have been reported if the above transactions had been in effect for the period presented or which may result in the future.

66

FINISAR, SHOMITI, TRANSWAVE AND MARLOW
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Year ended April 30, 2000
(in thousands, except per share data)

 
   Finisar
   Shomiti
   Transwave
   Marlow
   Pro Forma Adjustments
    
  
 
   Year Ended
April 30,
2000
   12 Months
Ended March 31,
2000
   12 Months
Ended April 30,
2000
   12 Months
Ended April 30,
2000
   Combined Pro Forma
  
 
   Shomiti
   Transwave
   Marlow
  
Revenue   $ 79,911   $ 11,930   $ —   $ 34,832     (79 )(F)   —     (244 )(F) $ 126,350  
Cost of revenues     38,336     3,182     —     23,735     (79 )(F)   —     (244 )(F)   64,930  
Amortization of acquired developed technology     17,185     —     —     —     7,313 (A)   2,656 (B)   11,767 (C)   38,921  
   
 
 
 
 
 
 
 
 
Gross profit     24,390     8,748     —     11,097     (7,313 )   (2,656 )   (11,767 )   22,499  

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Research and development     14,840     4,339     49     2,417     —     —     —     21,645  
  Sales and marketing     8,365     4,253     —     3,275     —     —     —     15,893  
  General and administrative     4,779     1,297     10     2,893     —     —     —     8,979  
  Amortization of deferred stock compensation     11,786     —     —     —     448 (A)   314 (B)   1,130 (C)   13,678  
  Amortization of intangibles     91,421     —     —     —     18,347 (A)   7,612 (B)   46,138 (C)   163,518  
   
 
 
 
 
 
 
 
 
Total operating expenses     131,191     9,889     59     8,585     18,795     7,926     47,268     223,713  
   
 
 
 
 
 
 
 
 
Income (loss) from operations     (106,801 )   (1,141 )   (59 )   2,512     (26,108 )   (10,582 )   (59,035 )   (201,214 )
Interest income (expense), net     3,218     (226 )   —     (189 )   —     —     —     2,803  
Other income (expense), net     (106 )   —     —     12     —     —     —     (94 )
   
 
 
 
 
 
 
 
 
Income (loss) before income taxes     (103,689 )   (1,367 )   (59 )   2,335     (26,108 )   (10,582 )   (59,035 )   (198,505 )
Provision for income taxes     (5,562 )   —     —     678     (3,939 )(A)   (1,340 )(B)   (7,422 )(C)   (17,585 )(D)
   
 
 
 
 
 
 
 
 
Net income (loss)   $ (98,127 ) $ (1,367 ) $ (59 ) $ 1,657   $ (22,169 ) $ (9,242 ) $ (51,613 ) $ (180,920 )
   
 
 
 
 
 
 
 
 
Net income (loss) per share:                                                  
Basic   $ (0.76 )                                     $ (1.28 )
   
                                     
 
Diluted   $ (0.76 )                                     $ (1.28 )
   
                                     
 
Shares used in computing net income (loss) per share:                                                  
Basic     129,431                                         141,059 (E)
   
                                     
 
Diluted     129,431                                         141,059 (E)
   
                                     
 

See accompanying notes to Finisar, Shomiti, Transwave and Marlow unaudited pro forma condensed financial statements.

67

FINISAR, SHOMITI, TRANSWAVE AND MARLOW

UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
Nine months ended January 31, 2001
(in thousands, except per share data)

 
   Finisar
   Shomiti
   Transwave
   Marlow
    
    
    
    
  
 
   Pro Forma Adjustments
    
  
 
   Nine Months Ended
January 31,
2001
   Nine Months Ended December 31,
2000
   Nine Months Ended January 31,
2001
   Nine Months Ended January 28,
2001
   Combined Pro Forma
  
 
   Shomiti
   Transwave
   Marlow
  
Revenue   $ 147,447   $ 10,746   $ 192   $ 40,994   $ (158 )(F) $ (138 )(F) $ (598 )(F) $ 198,485  
Cost of revenues     83,723     3,259     136     27,819     (158 )(F)   (138 )(F)   (598 )(F)   114,043  
Amortization of acquired developed technology     12,890     —     —     —     5,485 (A)   1,992 (B)   8,825 (C)   29,192  
   
 
 
 
 
 
 
 
 
Gross profit     50,834     7,487     56     13,175     (5,485 )   (1,992 )   (8,825 )   55,250  

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Research and development     22,811     3,786     611     2,487     —     —     —     29,695  
  Sales and marketing     12,644     5,212     19     3,171     —     —     —     21,046  
  General and administrative     8,454     1,416     454     3,038     —     —     —     13,362  
  Amortization of deferred stock compensation     8,603     —     2,351     —     336 (A)   236 (B)   848 (C)   12,374  
  Amortization of intangibles     68,623     —     —     —     13,760 (A)   5,709 (B)   34,604 (C)   122,696  
  Acquired in-process research and development     28,797     —     —     —     —     —     —     28,797  
  Other acquisition costs     1,127     —     —     —     —     —     —     1,127  
   
 
 
 
 
 
 
 
 
Total operating expenses     151,059     10,414     3,435     8,696     14,096     5,945     35,452     229,097  
   
 
 
 
 
 
 
 
 
Income (loss) from operations     (100,225 )   (2,927 )   (3,379 )   4,479     (19,581 )   (7,937 )   (44,277 )   (173,847 )
Interest income (expense), net     11,643     (120 )   6     (199 )   —     —     —     11,330  
Other income (expense), net     470     —     2     (22 )   —     —     —     450  
   
 
 
 
 
 
 
 
 
Income (loss) before income taxes     (88,112 )   (3,047 )   (3,371 )   4,258     (19,581 )   (7,937 )   (44,277 )   (162,067 )
Provision for income taxes     1,994     —     —     1,268     (2,954 )(A)   (1,005 )(B)   (5,567 )(C)   (6,264 )(D)
   
 
 
 
 
 
 
 
 
Net income (loss)     (90,106 )   (3,047 )   (3,371 )   2,990     (16,627 )   (6,932 )   (38,710 )   (155,803 )
   
 
 
 
 
 
 
 
 
Net income (loss) per share:                                                  
Basic   $ (0.54 )                                     $ (0.87 )
   
                                     
 
Diluted   $ (0.54 )                                     $ (0.87 )
   
                                     
 
Shares used in computing net income (loss) per share:                                                  
Basic     166,598                                         178,226 (E)
   
                                     
 
Diluted     166,598                                         178,226 (E)
   
                                     
 

See accompanying notes to Finisar, Shomiti, Transwave and Marlow unaudited pro forma condensed financial statements.

68

FINISAR, SHOMITI, TRANSWAVE AND MARLOW
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
January 31, 2001
(in thousands)

 
   Finisar
   Shomiti
   Transwave
   Marlow
   Pro Forma Adjustments
    
  
 
   January 31,
2001
   December 31,
2000
   January 31,
2001
   January 28, 2001
   Combined Pro Forma
  
 
   Shomiti
   Transwave
   Marlow
  
Assets  
Current assets:                                                  
  Cash and cash equivalents   $ 21,992   $ 322   $ 300   $ 862   $ —   $ —   $ —   $ 23,476  
  Short-term investments     171,498     —     —     —     —     —     (30,000 )(C)   141,498  
  Accounts receivable—trade, net     42,034     2,524     107     8,303     —     —     —     52,968  
  Accounts receivable, other     13,715     —     43     —     (2,500 )(F)   (200 )(F)   —     11,058  
  Inventories     51,039     1,450     210     6,230     —     —     —     58,929  
  Income tax receivable     37,734     —     —     —     —     —     —     37,734  
  Deferred income taxes     1,877     —     —     771     —     —     —     2,648  
  Prepaid expenses     2,927     105     —     710     —     —     —     3,742  
   
 
 
 
 
 
 
 
 
Total current assets     342,816     4,401     660     16,876     (2,500 )   (200 )   (30,000 )   332,053  
Other assets     15,626     371     —     213     —     —     —     16,210  
Property, equipment and improvements, net     66,164     870     516     7,532     —     —     —     75,082  
Purchased intangible assets     88,879     —     —     —     43,727 (A)   14,424 (B)   81,372 (C)   228,402  
Goodwill     418,361     —     —     —     81,302 (A)   36,156 (B)   202,397 (C)   738,216  
   
 
 
 
 
 
 
 
 
Total assets   $ 931,846   $ 5,642   $ 1,176   $ 24,621   $ 122,529   $ 50,380   $ 253,769   $ 1,389,963  
   
 
 
 
 
 
 
 
 

Liabilities and Stockholders' Equity
 
Current liabilities:                                                  
  Accounts payable   $ 20,277   $ 1,631   $ 381   $ 3,902   $ —   $ —   $ —   $ 26,191  
  Accrued compensation     3,646     —     207     2,791     —     —     —     6,644  
  Other accrued liabilities     7,778     1,426     —     1,367     650 (A)   500 (B)   9,215 (C)   20,936  
  Income tax payable     1,338     —     —     634     —     —     —     1,972  
  Deferred revenue     300     —     —     —     —     —     —     300  
  Short-term debt, and long-term debt and capital lease obligations, current portions     825     2,616     200     1,418     (2,500 )(F)   (200 )(F)   —     2,359  
   
 
 
 
 
 
 
 
 
Total current liabilities     34,164     5,673     788     10,112     (1,850 )   300     9,215     58,402  
Long-term liabilities:                                                  
Deferred income taxes     42,872     —     —     529     18,164 (A)   5,105 (B)   30,606 (C)   97,276  
Long-term debt     1,425     —     —     2,500     —     —     —     3,925  
Other long-term liabilities     1,375     282     —     —     —     —     —     1,657  
   
 
 
 
 
 
 
 
 
Total long-term liabilities     45,672     282     —     3,029     18,164     5,105     30,606     102,858  
   
 
 
 
 
 
 
 
 
Stockholders' equity:                                                  
  Preferred stock     —     19,765     1,460     —     (19,765) (A)   (1,460) (B)   —     —  
  Common stock and additional paid-in capital     942,446     1,744     17,929     241     112,302 (A)   49,118 (B)   231,109 (C)   1,334,975  
                                (1,744) (A)   (17,929) (B)   (241) (C)      
  Notes receivable from stockholders     (2,544 )   —     (40 )   —     —     —     —     (2,584 )
  Deferred stock compensation     (26,171 )   (1,362 )   (15,531 )   —     (1,792) (A)   (1,257) (B)   (3,391) (C)   (32,611 )
                              1,362 (A)   15,531 (B)            
  Accumulated other comprehensive income     900     —     —     —     —     —     —     900  
  Retained earnings (accumulated deficit)     (62,621 )   (20,460 )   (3,430 )   11,239     20,460 (A)   3,430 (B)   (11,239) (C)   (71,977 )
                              (4,608) (A)   (2,458) (B)   (2,290) (C)      
   
 
 
 
 
 
 
 
 
Total stockholders' equity     852,010     (313 )   388     11,480     106,215     44,975     213,948     1,228,703  
   
 
 
 
 
 
 
 
 
Total liabilities and stockholders' equity   $ 931,846   $ 5,642   $ 1,176   $ 24,621   $ 122,529   $ 50,380   $ 253,769   $ 1,389,963  
   
 
 
 
 
 
 
 
 

See accompanying notes to Finisar, Shomiti, Transwave and Marlow unaudited pro forma condensed financial statements.

69

NOTES TO FINISAR, SHOMITI, TRANSWAVE AND MARLOW

UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS

    (A) On November 21, 2000 Finisar and Shomiti entered into an Agreement and Plan of Reorganization pursuant to which Finisar acquired Shomiti. On February 7, 2001 the agreement was amended to provide for the issuance of convertible Series A preferred stock which will be automatically converted into common stock on a three-for-one basis upon the approval of additional authorized common shares by the stockholders of Finisar. The transaction closed on March 23, 2001. Shomiti is headquartered in San Jose, California. Shomiti was founded in July 1995 and designs products which measure the performance of Ethernet networks in order to enhance their quality of service.

    Pursuant to the reorganization agreement, Finisar issued 1,120,984 shares of its convertible Series A preferred stock (convertible into 3,362,952 shares of common stock) in exchange for the outstanding shares of Shomiti common and preferred stock. In addition, Finisar assumed options to purchase Shomiti common stock and reserved 139,991 shares of Finisar convertible Series A preferred stock for issuance upon the exercise of the assumed options. The assumed options generally vest to the extent of 25% of the total number of shares subject to the option at the date of grant, with the remainder vesting in 48 equal monthly installments, subject to the optionholder's continued service with Finisar or a subsidiary.

    At the closing of the transaction, certificates representing 125,902 shares of Finisar convertible Series A preferred stock were deposited into escrow. The escrow shares will be subject to claims for indemnification by Finisar under the reorganization agreement and the procedures specified in the escrow agreement. Those shares will remain in escrow until all pending claims for indemnification, if any, have been resolved.

    Finisar's cost to acquire Shomiti is calculated to be $113.0 million using a Finisar common stock price of $30.03, which is the average of the closing market prices of Finisar's common stock for a period from three days before through three days after February 7, 2001, the day the transaction was amended. The fair value of the assumed stock options of $11.3 million, as well as estimated direct transaction expenses of $0.7 million, have been included as a part of the estimated total purchase cost. Shomiti currently operates as a wholly-owned subsidiary of Finisar.

    The cost to acquire Shomiti has been allocated to the assets acquired and liabilities assumed according to their respective fair values, with the excess purchase price being allocated to goodwill. The fair value of the acquired assets and liabilities is based upon an independent valuation.

    The estimated total purchase cost of Shomiti is as follows (in thousands):

Value of securities issued on an as-if-converted basis   $ 100,989
Assumption of Shomiti common stock options on an as-if-converted basis     11,313
Estimated transaction costs and expenses     650
   
    $ 112,952
   

    The preliminary purchase price allocation as of December 31, 2000 is as follows (in thousands):

 
   Amount
   Useful Life
in Years
   Annual
Amortization
  
Net tangible assets (liabilities) of Shomiti   $ (313 )          
Intangible assets acquired:                  
  Developed technology     36,566   5   $ 7,313  
  In-process research and development     4,608   N/A     N/A  
  Assembled workforce     1,431   3     477  
  Customer base     3,477   3     1,159  
  Tradename     2,253   5     451  
  Goodwill     81,302   5     16,260  
Deferred income tax     (18,164 ) 3-5     (3,939 )
Deferred compensation     1,792   4     448  
   
     
 
Total preliminary purchase price allocation   $ 112,952       $ 22,169  
   
     
 

70

    An independent valuation specialist performed an allocation of the total purchase price of Shomiti to its individual assets. The purchase price was allocated to Shomiti's tangible assets, specific intangible assets such as assembled workforce, customer base, tradename and developed technology and to in-process research and development.

    The acquired developed technology, which is comprised of products that are already technologically feasible, mainly includes the Surveyor software suite including Surveyor, Remote, Expert, Packet Blaster, and Multi-QOS; the Explorer analyzer family including the 10/100, Gigabit, and THG systems and modules; and a series of probes which include multiple models for the Century Tap, Fiber Tap, and Voyager. The products are used for monitoring, measuring, analyzing and troubleshooting network quality of service (QOS) for extended enterprise ethernet local area networks (LANs) and VoIP (Voice Over Internet Protocol) communications. Finisar will amortize the acquired developed technology of approximately $36.6 million on a straight-line basis over an average estimated remaining useful life of five years.

    The acquired assembled workforce is comprised of all the skilled employees of Shomiti and includes the estimated cost to replace existing employees, including recruiting and training costs and loss of productivity costs. Finisar will amortize the value assigned to the assembled workforce of approximately $1.4 million on a straight-line basis over an average estimated useful life of three years.

    The acquired customer base is based on historical costs incurred and is comprised of Shomiti management's estimation of resources that have been devoted to the development of the relationships with key customers. Finisar will amortize the value assigned to customer relationships of approximately $3.5 million on a straight-line basis over an average estimated useful life of three years.

    The acquired tradename is recognized for the intrinsic value of the Shomiti name and products in the marketplace. Finisar will amortize the value assigned to the tradename of approximately $2.3 million on a straight-line basis over an average estimated useful life of five years.

    Deferred compensation expense is recognized for the intrinsic value on the date of closing of the unvested Finisar options exchanged for options held by Shomiti's employees. The $1.8 million of deferred compensation will be amortized over the remaining vesting period of approximately four years.

    Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets and deferred compensation, will be amortized on a straight-line basis over its estimated remaining useful life of five years.

    In-process research and development represents that portion of the purchase price of an acquisition related to the research and development activities which: (i) have not demonstrated their technological feasibility, and (ii) have no alternative future uses. Accordingly, Finisar recognized an expense of $4.6 million during the quarter ended April 30, 2001 in conjunction with the completion of this acquisition.

    (B) On November 21, 2000 Finisar and Transwave entered into an Agreement and Plan of Reorganization pursuant to which Finisar acquired Transwave. On February 14, 2001 the agreement was amended to provide for the issuance of convertible Series A preferred stock which will be automatically converted into common stock on a three-for-one basis upon the approval of additional authorized common shares by the stockholders of Finisar. The agreement was further amended on March 19, 2001. The transaction closed on May 3, 2001. Transwave is headquartered in Fremont, California with operations in Shanghai, China. Transwave was founded in February 2000 and is focused on the development of a line of passive optical components for data communications and telecommunications applications.

71

    Pursuant to the reorganization agreement, Finisar issued 870,303 shares of its convertible Series A preferred stock (convertible into 2,610,909 shares of common stock) in exchange for the outstanding shares of Transwave common and preferred stock. In addition, Finisar assumed options to purchase Transwave common stock and reserved 182,463 shares of Finisar convertible Series A preferred stock for issuance upon the exercise of the assumed options. The assumed options generally vest to the extent of 20% of the total number of shares subject to the option at the closing of the merger, with the remainder vesting in 4 equal annual installments, subject to the optionholder's continued service with Finisar or a subsidiary.

    At the closing of the transaction, certificates representing 580,172 shares of Finisar convertible Series A preferred stock were issued to the former stockholders of Transwave (the "Initial Consideration") and certificates representing 290,131 shares of convertible Series A preferred stock, or approximately one-third of the shares issued pursuant to the transaction, were deposited into escrow (the "Deferred Consideration"). One-third of the shares deposited in escrow will be released on each of the first three anniversaries of the closing date subject to the achievement of certain financial, development and personnel milestones. If the milestones are not achieved, the escrow shares will be cancelled and returned to the status of authorized but unissued shares. Further, a portion of the escrowed shares will be subject to claims for indemnification by Finisar under the agreement and the procedures specified in the escrow agreement. Those shares will remain in escrow until all pending claims for indemnification have been resolved.

    Only the Initial Consideration has been recorded for accounting purposes since the payment of the Deferred Consideration is contingent upon future events that are not assured of occurring beyond a reasonable doubt. The Deferred Consideration, if any, will be recorded as additional purchase cost at the then current market price of the common stock when the milestones are attained. Accordingly, Finisar's initial cost to acquire Transwave is calculated to be $49.6 million using a Finisar common stock price of $21.74, which is the average of the closing market prices of Finisar's common stock for a period from three days before through three days after February 14, 2001, the day the transaction was amended. The fair value of the assumed stock options of $11.3 million, as well as estimated direct transaction expenses of $0.5 million, have been included as a part of the total purchase cost. Transwave will operate as a wholly-owned subsidiary of Finisar.

    The cost to acquire Transwave has been allocated to the assets acquired and liabilities assumed according to their respective fair values, with the excess purchase price being allocated to goodwill. The fair value of the acquired assets and liabilities is based upon an independent valuation.

    The estimated total initial purchase cost of Transwave is as follows (in thousands):

Value of securities issued on an as-if-converted basis   $ 37,839
Assumption of Transwave common stock options on an as-if-converted basis     11,279
Estimated transaction costs and expenses     500
   
    $ 49,618
   

72

    The preliminary purchase price allocation as of January 31, 2001 is as follows (in thousands):

 
   Amount
   Useful Life
in Years
   Annual
Amortization
  
Net tangible assets of Transwave   $ 428            
Intangible assets acquired:                  
  Developed technology     13,281   5   $ 2,656  
  In-process research and development     2,458   N/A     N/A  
  Assembled workforce     1,019   3     340  
  Customer base     124   3     41  
  Goodwill     36,156   5     7,231  
Deferred income tax     (5,105 ) 3-5     (1,340 )
Deferred compensation     1,257   4     314  
   
     
 
Total preliminary purchase price allocation   $ 49,618       $ 9,242  
   
     
 

    An independent valuation specialist performed a preliminary allocation of the total purchase price of Transwave to its individual assets. The purchase price was allocated to Transwave's tangible assets, specific intangible assets such as assembled workforce, customer base and developed technology and to in-process research and development.

    The acquired developed technology, which is comprised of products that are already technologically feasible, mainly includes wave plates used to prevent background reflections and enhance the performance of lasers and a broadband light source for testing wavelength division multiplexing ("WDM") systems. Finisar will amortize the acquired developed technology of approximately $13.3 million on a straight-line basis over an average estimated remaining useful life of five years.

    The acquired assembled workforce is comprised of all the skilled employees of Transwave and includes the estimated cost to replace existing employees, including recruiting and training costs and loss of productivity costs. Finisar will amortize the value assigned to the assembled workforce of approximately $1.0 million on a straight-line basis over an average estimated useful life of three years.

    The acquired customer base is based on historical costs incurred and is comprised of Transwave management's estimation of resources that have been devoted to the development of the relationships with key customers. Finisar will amortize the value assigned to customer relationships of approximately $0.1 million on a straight-line basis over an average estimated useful life of three years.

    Deferred compensation expense is recognized for the intrinsic value on the date of closing of the unvested Finisar options exchanged for options held by Transwave's employees. The $1.3 million of deferred compensation will be amortized over the remaining vesting period of approximately four years.

    Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets and deferred compensation, will be amortized on a straight-line basis over its estimated remaining useful life of five years.

    In-process research and development represents that portion of the purchase price of an acquisition related to the research and development activities which: (i) have not demonstrated their technological feasibility, and (ii) have no alternative future uses. Accordingly, Finisar expects to recognize an expense of $2.5 million during the quarter ending July 31, 2001 in conjunction with the completion of this acquisition.

73

    (C) On February 20, 2001 Finisar and Marlow entered into an Agreement and Plan of Reorganization pursuant to which Finisar will acquire Marlow. The transaction is expected to close in the quarter ending July 31, 2001. Marlow is headquartered in Dallas, Texas. Marlow was founded in January 1973 and is focused on the design and manufacture of thermoelectric coolers for a variety of telecommunications applications as well as for defense, space, photonics and medical applications.

    Pursuant to the agreement, Finisar will issue up to 11,628,475 shares of its common stock in exchange for the outstanding shares of Marlow common stock upon the approval of additional authorized common stock by the stockholders of Finisar. In addition, Finisar will assume options to purchase Marlow common stock and will reserve up to 1,233,525 shares of Finisar common stock for issuance upon the exercise of the assumed options. The assumed options will generally vest to the extent of 50% of the total number of shares subject to the option at the date of grant, with the remainder vesting in equal annual increments over the following three years, subject to the optionholder's continued service with Finisar or a subsidiary.

    At the closing of the transaction, certificates representing up to approximately 1,436,200 shares of Finisar common stock will be deposited into escrow. The escrow shares will be subject to claims for indemnification by Finisar under the reorganization agreement and the procedures specified in the escrow agreement. Those shares will remain in escrow until all pending claims for indemnification, if any, have been resolved.

    Finisar's estimated cost to acquire Marlow is calculated to be $270.3 million using a Finisar common stock price of $18.00, which is the average of the closing market prices of Finisar's common stock for a period from three days before through three days after February 20, 2001, the day the transaction was announced. The fair value of the assumed stock options of $21.8 million, as well as estimated direct transaction expenses of $9.2 million, have been included as a part of the total purchase cost. Marlow will operate as a wholly-owned subsidiary of Finisar.

    The cost to acquire Marlow will be allocated to the assets acquired and liabilities assumed according to their respective fair values, with the excess purchase price being allocated to goodwill. The fair value of the acquired assets and liabilities will be based upon an independent valuation.

    The estimated total purchase cost of Marlow is as follows (in thousands):

Value of securities issued   $ 209,313
Assumption of Marlow common stock options     21,796
Cash     30,000
Estimated transaction costs and expenses     9,215
   
    $ 270,324
   

74

    The preliminary purchase price allocation as of January 28, 2001 is as follows (in thousands):

 
   Amount
   Useful Life
in Years
   Annual
Amortization
  
Net tangible assets of Marlow   $ 11,480            
Intangible assets acquired:                  
  Developed technology     58,835   5   $ 11,767  
  In-process research and development     2,290   N/A     N/A  
  Assembled workforce     5,495   3     1,832  
  Customer base     3,140   3     1,047  
  Patents     13,902   5     2,780  
  Goodwill     202,397   5     40,479  
Deferred income tax     (30,606 ) 3-5     (7,422 )
Deferred compensation     3,391   3     1,130  
   
     
 
Total preliminary purchase price allocation   $ 270,324       $ 51,613  
   
     
 

    An independent valuation specialist performed a preliminary allocation of the total purchase price of Marlow to its individual assets. The purchase price was allocated to Marlow's tangible assets, specific intangible assets such as assembled workforce, customer base, patents and developed technology and to in-process research and development.

    The acquired developed technology, which is comprised of products that are already technologically feasible, mainly includes thermoelectric coolers and subassemblies used in the telecommunications industry to provide temperature stabilization and control to telecommunication lasers that generate and amplify optical signals for fiber optic systems, or in various applications for defense, space and photonics markets or in medical, industrial or commercial applications such as DNA replication/sequencing. Finisar will amortize the acquired developed technology of approximately $58.8 million on a straight-line basis over an average estimated remaining useful life of five years.

    The acquired assembled workforce is comprised of all the skilled employees of Marlow and includes the estimated cost to replace existing employees, including recruiting and training costs and loss of productivity costs. Finisar will amortize the value assigned to the assembled workforce of approximately $5.5 million on a straight-line basis over an average estimated useful life of three years.

    The acquired customer base is based on historical costs incurred and is comprised of Marlow management's estimation of resources that have been devoted to the development of the relationships with key customers. Finisar will amortize the value assigned to customer relationships of approximately $3.1 million on a straight-line basis over an average estimated useful life of three years.

    The acquired patents are comprised of system and device patents, process patents and new materials patents related to thermoelectric coolers. Finisar will amortize the acquired patents of approximately $13.9 million on a straight-line basis over an average estimated remaining useful life of five years.

    Deferred compensation expense is recognized for the intrinsic value on the date of closing of the unvested Finisar options exchanged for options held by Marlow's employees. The $3.4 million of deferred compensation will be amortized over the remaining vesting period of approximately three years.

75

    Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets and deferred compensation, will be amortized on a straight-line basis over its estimated remaining useful life of five years.

    In-process research and development represents that portion of the purchase price of an acquisition related to the research and development activities which: (i) have not demonstrated their technological feasibility, and (ii) have no alternative future uses. Accordingly, the Company expects to recognize an expense of $2.3 million during the quarter ending July 31, 2001 in conjunction with the completion of this acquisition.

    (D) The pro forma combined provision for income taxes does not represent the amounts that would have resulted had Finisar, Shomiti, Transwave and Marlow filed consolidated income tax returns during the periods presented.

    (E) The pro forma basic and diluted net earnings per share for the year ended April 30, 2000 and for the nine months ended January 31, 2001 are based on the weighted average number of shares of Finisar common stock outstanding and up to 11,628,475 common shares to be issued by Finisar in the Marlow transaction.

    The 1,120,984 shares of convertible Series A preferred stock issued by Finisar in the Shomiti transaction and the initial 580,172 shares of Series A preferred stock issued by Finisar in the Transwave transaction have been excluded as they are anti-dilutive.

    (F) Intercorporate loans and intercorporate sales.

76

Risk Factors Related to the Acquisitions

    You should carefully consider the risks described below regarding the acquisitions and our business following the acquisitions, together with all of the other information included in or annexed to this proxy statement, before making a decision about how to vote on the proposal to increase the number of authorized shares of common stock.

    Some of the information in this proxy statement, including the risk factors in this section, contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In many cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," or "continue," or the negative of these terms and other comparable terminology. These statements are only predictions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including, but not limited to, the risks faced by us following completion of the Acquisitions.

    We believe it is important to communicate our expectations to investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risk factors listed below, as well as any cautionary language in this proxy statement, provide examples of risks, uncertainties, and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before making your decision regarding the proposal to increase the number of authorized shares of our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this proxy statement could have a material adverse effect on our business, operating results, and financial condition. If our business is harmed, the trading price of our common stock could decline, and our stockholders may lose all or part of their investment.

Risks Related to the Acquisitions

    We cannot assure you that we will be successful in overcoming problems encountered in connection with these acquisitions, and our inability to do so could significantly harm our business.

Our ability to integrate successfully the businesses of Marlow, as well as Sensors, Demeter, Medusa, Shomiti and Transwave, with each other and with our own business is uncertain.

    After the acquisitions, our business and the businesses of Sensors, Demeter, Medusa, Shomiti, Transwave and Marlow (the "Acquired Companies"), each of which had previously operated independently of each other, will need to be integrated. The integration of the six businesses will be complex, time consuming and could be expensive. The integration will require significant efforts from each company, including the coordination of their research and development and sales and marketing efforts. Our experience in acquiring other businesses and technologies is limited. We may find it difficult to integrate these operations. The combined company will have a large number of employees in dispersed locations in California, New Jersey, Texas, England, China and Japan, which will increase the difficulty of integrating operations. Current personnel may leave us or one or more of the Acquired Companies because of the business combinations or the mergers. The challenges involved in this integration include, but are not limited to, the following:

77

    It is not certain that we and the Acquired Companies can be successfully integrated in a timely manner or at all or that any of the anticipated benefits will be realized. Risks from unsuccessful integration of the Acquired Companies include:

    The combined company may not succeed in addressing these risks. Further we cannot assure you that the growth rate of the combined company will equal the historical growth rates that we have experienced.

The acquisitions may fail to achieve beneficial synergies.

    Our management and the managements of the Acquired Companies have entered into the acquisitions with the expectation that they will result in beneficial synergies between and among the companies' businesses. Achieving these anticipated synergies and the potential benefits underlying their reasons for entering into the acquisitions will depend on a number of factors, some of which include:

    Even if the companies are able to integrate operations, there can be no assurance that the anticipated synergies will be achieved. The failure to achieve such synergies could have a material adverse effect on the business, results of operations, and financial condition of the combined company.

Demeter, Shomiti and Transwave have experienced financial losses and may require significant financial support from us.

    Demeter, Shomiti and Transwave have all suffered losses from operations in recent periods. Demeter and Transwave were formed only recently and do not have a long history of operations. Following the acquisitions, these companies may experience further losses, which would affect our financial results, reduce our earnings per share, and require funding by us to sustain their operations if losses continue at historic levels for these companies, the acquisitions may require us to use a significant portion of our cash balances.

78

    The combined company's reported financial results will suffer as a result of purchase accounting treatment and the impact of amortization of goodwill and other intangibles, and restructuring charges relating to the acquisitions.

    We will account for the acquisitions as purchases of the Acquired Companies under the purchase method of accounting. Under purchase accounting, we will record the fair value of the following as the cost of acquiring the Acquired Companies:

We will allocate these costs to the individual assets and liabilities of the companies being acquired, including various identifiable intangible assets such as acquired technology, acquired trademarks and trade names and acquired workforce, and to in-process research and development, based on their respective fair values. Intangible assets, including goodwill, will be generally amortized over a three- to five-year period.

    We may incur restructuring costs in order to achieve desired synergies after the acquisitions that would adversely impact future financial results. These restructuring costs could be a result of, but not limited to, the following:

Uncertainty related to the acquisitions could harm the combined company.

    In response to the acquisitions, our customers and suppliers and customers and suppliers of one or more of the Acquired Companies may delay or defer product purchase or other decisions. Any delay or deferral in product purchase or other decisions by customers or suppliers could have a material adverse effect on the business of the relevant company, regardless of whether the acquisitions have been or are ultimately completed. Similarly, current and prospective employees of Finisar and the Acquired Companies may experience uncertainty about their future roles with us and until our strategies with regard to the integration of operations of Finisar and the Acquired Companies are announced or executed. This may adversely affect the ability of us and the Acquired Companies to attract and retain key management, sales, marketing, and technical personnel.

    The acquisitions could adversely affect combined financial results and dilute the percentage ownership of our existing stockholders.

    We and the Acquired Companies are expected to incur direct transaction costs of approximately $38 million in connection with the acquisitions. If the benefits of the acquisitions do not exceed the costs associated with the acquisitions, including any dilution to our stockholders resulting from the issuance of shares in connection with the acquisitions, the combined company's financial results, including earnings per share, could be adversely affected.

    We have issued stock in order to complete the acquisitions of Sensors, Demeter, Shomiti and Transwave and expect to issue stock to complete the acquisition of Marlow. The issuance of stock to consummate these recent and future acquisitions dilutes existing stockholders' percentage ownership. In addition, we could incur substantial debt or assume contingent liabilities in the course of these acquisitions.

79

    Failure to complete the proposed acquisition of Marlow could have a negative impact on our stock price, future business and operations, or financial results.

    If the proposed acquisition of Marlow is not completed for any reason, we may be subject to a number of material risks, including the following:

Quantitative and Qualitative Disclosures About Market Risk

    The exposure of Finisar to market risk for changes in interest rates relates to its investment portfolio. Finisar places its investments with high credit issuers in short-term securities with maturities ranging from overnight up to 36 months. The average maturity of the portfolio will not exceed 18 months. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. Finisar has no investments denominated in foreign country currencies and therefore its investments are not subject to foreign exchange risk.

Vote Required and Board of Directors' Recommendation

    The affirmative vote of a majority of the voting power of our outstanding capital stock is required for approval of this proposal. Abstentions and broker non-votes will be counted as present for purposes of determining if a quorum is present. Abstentions and broker non-votes will have the same effect as a negative vote on this proposal.

    The Board of Directors unanimously recommends that the stockholders vote FOR approval of the amendment to the Certificate of Incorporation to increase the number of authorized shares of common stock from 200,000,000 to 500,000,000 shares.


RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

    The Board of Directors has selected Ernst & Young LLP as independent auditors to audit our consolidated financial statements for the fiscal year ending April 30, 2001. Ernst & Young LLP has acted in such capacity since its appointment in fiscal year 1999. A representative of Ernst & Young LLP is expected to be present at the annual meeting, with the opportunity to make a statement if the representative desires to do so, and is expected to be available to respond to appropriate questions.

Audit Fees

    The aggregate fees billed for professional services rendered for the audit of our annual financial statements for our fiscal year ended April 30, 2000 and the reviews of the financial statements included in our Forms 10-Q that we filed with the Securities and Exchange Commission for that fiscal year were $149,690.

All Other Fees

    All other fees were $572,500, including audit related fees of $564,000 and nonaudit services of $8,500. Audit related services generally include business acquisitions, accounting consulting and SEC registration statements.

80

Vote Required and Board of Directors' Recommendation

    The affirmative vote of a majority of the votes cast affirmatively or negatively at the annual meeting of stockholders at which a quorum representing a majority of all outstanding shares of our common stock is present and voting, either in person or by proxy, is required for approval of this proposal. Abstentions and broker non-votes will each be counted as present for purposes of determining the presence of a quorum. Neither abstentions nor broker non-votes will have any effect on the outcome of the proposal.

    The Board of Directors unanimously recommends a vote "FOR" the appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending April 30, 2001.

81


STOCKHOLDER PROPOSALS TO BE PRESENTED
AT NEXT ANNUAL MEETING

    We have an advance notice provision under our bylaws for stockholder business to be presented at meetings of stockholders. Such provision states that in order for stockholder business to be properly brought before a meeting by a stockholder, such stockholder must have given timely notice thereof in writing to our Secretary. To be timely a stockholder proposal must be received at our principal executive offices not less than 120 calendar days in advance of the one year anniversary of the date our proxy statement was released to stockholders in connection with the previous year's annual meeting of stockholders; except that (i) if no annual meeting was held in the previous year, (ii) if the date of the annual meeting has been changed by more than thirty calendar days from the date contemplated at the time of the previous year's proxy statement or (iii) in the event of a special meeting, then notice must be received not later than the close of business on the tenth day following the day on which notice of the date of the meeting was mailed or public disclosure of the meeting date was made.

    Since we did not hold an annual meeting of stockholders last year, proposals of stockholders intended to be presented at the next annual meeting of the stockholders of Finisar must be received by us at our offices at 1308 Moffett Park Drive, Sunnyvale, California 94089 no later than the close of business on the tenth business day following public disclosure of the meeting date and satisfy the conditions established by the SEC for stockholder proposals to be included in our proxy statement for that meeting.


WHERE YOU CAN FIND MORE INFORMATION

    We file annual, quarterly, and special reports, proxy statements, and other information with the United States Securities and Exchange Commission (the "SEC"). Our common stock is traded on The Nasdaq National Market ("Nasdaq") under the symbol "FNSR." You may read and copy any document filed by us at the SEC's public reference facilities or on the SEC's website at http://www.sec.gov.

    The following are the locations of the public reference facilities maintained by the SEC:

Judiciary Plaza
Room 1024
450 Fifth Street, N.W.
Washington, D.C. 20549		   Citicorp Center
500 West Madison Street
Suite 1400
Chicago, Illinois 60661		   Seven World Trade Center
13th Floor
New York, New York 10048

    Copies of filed documents can also be obtained by mail at prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, or by calling the SEC at 1-800-SEC-0330. Reports, proxy statement, and other information concerning us can also be inspected at The Nasdaq National Market, Operations, 1735 K Street, N.W., Washington, D.C.

    Shomiti, Transwave and Marlow are not reporting companies and therefore no additional reports or financial information are publicly available about any of them.

82


TRANSACTION OF OTHER BUSINESS

    At the date of this proxy statement, the Board of Directors knows of no other business that will be conducted at the annual meeting of stockholders of Finisar Corporation other than as described in this proxy statement. If any other matter or matters are properly brought before the meeting, or any adjournment or postponement of the meeting, it is the intention of the persons named in the accompanying form of proxy to vote the proxy on such matters in accordance with their best judgment.

May 14, 2001

83


INDEX TO FINANCIAL STATEMENTS

    

Finisar Corporation Audited Consolidated Financial Statements as of April 30, 1999 and 2000 and for each of the three years in the period ended April 30, 2000 (information as of January 31, 2001 and for the nine months ended January 31, 2000 and 2001 is unaudited)    
Report of Ernst & Young LLP, Independent Auditors   F-4
Consolidated Financial Statements:    
  Consolidated Balance Sheets   F-5
  Consolidated Statements of Operations   F-6
  Consolidated Statement of Convertible Redeemable Preferred Stock, Redeemable Preferred Stock and Changes in Stockholders' Equity (Deficit)   F-7
  Consolidated Statements of Cash Flows   F-9
  Notes to Consolidated Financial Statements   F-10
Sensors Unlimited, Inc. Audited Financial Statements as of December 31, 1999 and 1998 and for the years then ended    
Report of Arthur Andersen LLP   F-36
Financial Statements:    
  Balance Sheets   F-37
  Statements of Income   F-38
  Statements of Change in Stockholders' Equity (Deficit)   F-39
  Statements of Cash Flows   F-40
  Notes to Financial Statements   F-41
Sensors Unlimited, Inc. Unaudited Interim Financial Statements as of September 30, 2000 and for the nine months ended September 30, 2000 and 1999    
Balance Sheet   F-50
Statements of Operations   F-51
Statement of Cash Flows   F-52
Note to Financial Statements   F-53
Demeter Technologies, Inc. Audited Financial Statements as of October 31, 2000 and for the period from inception (June 22, 2000) to October 31, 2000    
Report of Ernst & Young LLP, Independent Auditors   F-56
Financial Statements:    
  Balance Sheet   F-57
  Statement of Operations   F-58
  Statement of Stockholders' Equity   F-59
  Statement of Cash Flows   F-60
  Notes to Financial Statements   F-61
Finisar Corporation, Sensors Unlimited, Inc., Demeter Technologies, Inc. and Medusa Technologies, Inc. Unaudited Pro Forma Information for the year ended April 30, 2000 and for the nine months ended January 31, 2001    
Introduction to Pro Forma Financial Information   F-70
Pro Forma Condensed Statement of Operations for the year ended April 30, 2000   F-71
Pro Forma Condensed Statement of Operations for the nine months ended January 31, 2001   F-72
Pro Forma Condensed Balance Sheet   F-73
Notes to Pro Forma Condensed Financial Statements   F-74

F–1

Shomiti Systems, Inc. Audited Financial Statements as of September 30, 2000 and for the year then ended as of October 1, 1999 and for each of the two years in the period ended October 1, 1999 is unaudited    
Report of Ernst & Young LLP, Independent Auditors   F-82
Financial Statements:    
  Balance Sheet   F-83
  Statement of Operations   F-84
  Statement of Shareholders' Equity   F-85
  Statement of Cash Flows   F-86
  Notes to Financial Statements   F-87
Shomiti Systems, Inc. Unaudited Interim Financial Statements as of December 31, 2000 and for the three months ended December 31, 2000 and 1999    
  Balance Sheet   F-102
  Statement of Operations   F-103
  Statements of Cash Flows   F-104
  Note to Financial Statements   F-105
Transwave Fiber, Inc. Audited Consolidated Financial Statements as of December 31, 2000 and for the period from inception (Feb 7, 2000) to December 31, 2000    
Report of Ernst & Young LLP, Independent Auditors   F-108
Consolidated Financial Statements:    
  Consolidated Balance Sheet   F-109
  Consolidated Statement of Operations   F-110
  Consolidated Statement of Shareholders' Equity   F-111
  Consolidated Statement of Cash Flows   F-112
  Notes to Consolidated Financial Statements   F-113
Marlow Industries, Inc. and Subsidiaries Audited Consolidated Financial Statements as of January 28, 2001 and January 30, 2000 and for each of the three fiscal years ended January 28, 2001    
Report of Arthur Andersen LLP   F-122
Consolidated Financial Statements:    
  Consolidated Balance Sheets   F-123
  Consolidated Statements of Income   F-124
  Consolidated Statements of Stockholders' Equity   F-125
  Consolidated Statements of Cash Flows   F-126
  Notes to Consolidated Financial Statements   F-127

F–2

CONSOLIDATED FINANCIAL STATEMENTS

FINISAR CORPORATION

As of April 30, 1999 and 2000 and for each of the three years in the period ended
April 30, 2000 (information as of January 31, 2001 and for the nine months ended
January 31, 2000 and 2001 is unaudited)

F–3


REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Finisar Corporation

    We have audited the accompanying consolidated balance sheets of Finisar Corporation as of April 30, 1999 and 2000, and the related consolidated statements of operations, convertible redeemable preferred stock, redeemable preferred stock and changes in stockholders' equity (deficit), and cash flows for each of the three years in the period ended April 30, 2000. These financial statements are the responsibility of Finisar Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.

    We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Finisar Corporation at April 30, 1999 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2000, in conformity with accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Palo Alto, California
May 25, 2000

F–4

FINISAR CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 
   April 30,
    
  
 
   January 31,
2001
  
 
   1999
   2000
  
 
    
    
   (unaudited)

  
Assets  
Current assets:                    
  Cash and cash equivalents   $ 5,044   $ 171,194   $ 28,501  
  Short-term investments     —     149,541     171,498  
  Accounts receivable (net of allowance for doubtful accounts of $265, $455 and $1,493
at April 30, 1999, April 30, 2000 and January 31, 2001)		     6,653     14,348     41,758  
  Accounts receivable, other     3     151     13,715  
  Inventories     5,236     16,494     51,039  
  Income tax receivable     —     148     37,734  
  Deferred income taxes     1,047     2,653     1,877  
  Prepaid expenses     194     278     2,912  
   
 
 
 
Total current assets     18,177     354,807     349,034  
Other assets     296     809     15,626  
Property, equipment and improvements, net     2,482     9,426     66,008  
Purchased intangibles     —     —     86,999  
Goodwill     —     —     413,065  
   
 
 
 
Total assets   $ 20,955   $ 365,042   $ 930,732  
   
 
 
 

Liabilities, Convertible Redeemable Preferred Stock and Stockholders' Equity
 
Current liabilities:                    
  Accounts payable   $ 1,394   $ 5,908   $ 20,263  
  Accrued compensation     1,499     3,001     3,646  
  Other accrued liabilities     1,476     3,065     7,778  
  Income tax payable     743     122     1,072  
  Capital lease obligations, current portion     54     —     519  
  Short-term debt     —     —     306  
   
 
 
 
Total current liabilities     5,166     12,096     33,584  
   
 
 
 

Long-term liabilities:
 
 
 
 
 
 
 
 
 
 
  Deferred income taxes     —     —     42,094  
  Note payable, long-term portion     11,015     —     1,425  
  Capital lease obligations, long-term portion     17     —     —  
  Other long-term liabilities     —     524     1,375  
   
 
 
 
Total long-term liabilities     11,032     524     44,894  
   
 
 
 
Commitments and contingent liabilities                    
Convertible redeemable preferred stock:                    
  No par value, 12,100,000 shares authorized at April 30, 1999, and no shares authorized at April 30, 2000 and October 31, 2000; 12,039,486 shares issued and outstanding at April 30, 1999; no shares issued and outstanding at April 30, 2000 and January 31, 2001     26,260     —     —  
Stockholders' equity (deficit):                    
  Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or outstanding at April 30, 1999 and 2000 and January 31, 2001     —     —     —  
  Common stock:                    
    $0.001 par value, 200,000,000 shares authorized: 159,842,784 and 176,111,466 shares issued and outstanding at April 30, 2000 and January 31, 2001     —     160     176  
    No par value, 75,000,000 shares authorized at April 30, 1999; no shares authorized at April 30, 2000 and January 31, 2001; 97,147,095 shares issued and outstanding at April 30, 1999; no shares issued and outstanding at April 30, 2000 and January 31, 2001     4,304     —     —  
  Additional paid-in capital     —     384,526     942,174  
  Notes receivable from stockholders     (1,521 )   (3,248 )   (2,269 )
  Deferred stock compensation     (1,975 )   (9,404 )   (26,106 )
  Accumulated other comprehensive income (loss)     —     (182 )   900  
  Retained earnings (accumulated deficit)     (22,311 )   (19,430 )   (62,621 )
   
 
 
 
Total stockholders' equity (deficit)     (21,503 )   352,422     852,254  
   
 
 
 
Total liabilities and stockholders' equity (deficit)   $ 20,955   $ 365,042   $ 930,732  
   
 
 
 

See accompanying notes.

F–5

FINISAR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 
   Fiscal Years Ended April 30,
   Nine Months Ended January 31,
  
 
   1998
   1999
   2000
   2000
   2001
  
Revenues   $ 22,067   $ 35,471   $ 67,147   $ 46,466   $ 136,566  
Cost of revenues     8,705     15,514     34,190     22,252     79,436  
Amortization of acquired developed technology     —     —     —     —     5,167  
   
 
 
 
 
 
Gross profit     13,362     19,957     32,957     24,214     51,963  
   
 
 
 
 
 

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Research and development     3,806     7,864     13,806     10,051     20,890  
  Sales and marketing     1,629     4,145     7,122     5,080     11,304  
  General and administrative     833     2,299     3,516     2,597     6,427  
  Amortization of deferred stock compensation     —     428     5,530     3,791     5,343  
  Acquired in-process research and development     —     —     —     —     28,797  
  Amortization of acquired intangibles     —     —     —     —     27,482  
  Other acquisition costs     —     —     —     —     1,127  
   
 
 
 
 
 
Total operating expenses     6,268     14,736     29,974     21,519     101,370  
   
 
 
 
 
 
Income (loss) from operations     7,094     5,221     2,983     2,695     (49,407 )
Interest income     38     154     3,704     1,616     11,762  
Interest expense     (33 )   (429 )   (452 )   (447 )   (103 )
Other income (expense), net     (25 )   (28 )   (99 )   (72 )   454  
   
 
 
 
 
 
Income (loss) before income taxes     7,074     4,918     6,136     3,792     (37,294 )
Provision for income taxes     2,715     1,873     3,255     2,583     5,897  
   
 
 
 
 
 
Net income (loss)   $ 4,359   $ 3,045   $ 2,881   $ 1,209   $ (43,191 )
   
 
 
 
 
 

Net income (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Basic   $ 0.03   $ 0.03   $ 0.03   $ 0.01   $ (0.27 )
   
 
 
 
 
 
  Diluted   $ 0.03   $ 0.02   $ 0.02   $ 0.01   $ (0.27 )
   
 
 
 
 
 

Shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Basic     131,259     110,580     113,930     103,884     157,205  
   
 
 
 
 
 
  Diluted     131,259     134,814     144,102     138,087     157,205  
   
 
 
 
 
 

See accompanying notes.

F–6

FINISAR CORPORATION
CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK,
REDEEMABLE PREFERRED STOCK AND
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except share and per share data)

 
    
    
    
    
   Common Stock
    
    
    
    
    
    
  
 
    
    
   Stockholders' Equity (Deficit)
  
 
   Convertible Redeemable
Preferred Stock
   Redeemable Preferred Stock
    
    
    
    
    
    
    
    
  
 
    
    
    
   Notes
Receivable
From
Stockholders
    
   Accumulated
Other
Comprehensive
Income (loss)
   Retained
Earnings
(Accumulated
Deficit)
   Total
Stockholders'
Equity
(Deficit)
  
 
    
    
   Additional
Paid-in
Capital
   Deferred Stock
Compensation
  
 
   Shares
   Amount
   Shares
   Amount
   Shares
   Amount
  
Balance at April 30, 1997   —   $ —   —   $ —   132,000,000   $ 95   $ —   $ —   $ —   $ —   $ 1,993   $ 2,088  
  Contribution of shares by principal shareholder   —     —   —     —   (6,600,000 )   —     —     —     —     —     —     —  
  Net income and comprehensive income   —     —   —     —   —     —     —     —     —     —     4,359     4,359  
   
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 30, 1998   —     —   —     —   125,400,000     95     —     —     —     —     6,352     6,447  
  Stock options exercised   —     —   —     —   15,118,980     1,806     —     (1,521 )   —     —     —     285  
  Issuance of preferred stock at $2.1932 per share, net of issuance costs of $145   12,039,486     26,260   —     —   —     —     —     —     —     —     —     —  
  Repurchase of common stock at $0.7311
per share		   —     —   —     —   (43,371,885 )   —     —     —     —     —     (31,708 )   (31,708 )
  Deferred stock compensation   —     —   —     —   —     2,403     —     —     (2,403 )   —     —     —  
  Amortization of deferred stock compensation   —     —   —     —   —     —     —     —     428     —     —     428  
  Net income and comprehensive income   —     —   —     —   —     —     —     —     —     —     3,045     3,045  
   
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 30, 1999   12,039,486     26,260   —     —   97,147,095     4,304     —     (1,521 )   (1,975 )   —     (22,311 )   (21,503 )
  Reincorporation in State of Delaware   —     —   —     —   —     (4,207 )   4,207     —     —     —     —     —  
  Conversion of preferred stock   (12,039,486 )   (26,260 ) 12,039,486     2,640   26,945,691     27     23,593     —     —     —     —     23,620  
  Issuance of common stock, net of issuance costs of $2,720   —     —   —     —   31,815,699     32     341,534     —     —     —     —     341,566  
  Redemption of preferred stock   —     —   (12,039,486 )   (2,640 ) —     —     —     —     —     —     —     —  
  Stock options exercised net of loans and repurchase of unvested shares   —     —   —     —   3,934,299     4     2,233     (1,897 )   —     —     —     340  
  Deferred stock compensation   —     —   —     —   —     —     12,959     —     (12,959 )   —     —     —  
  Amortization of deferred stock compensation   —     —   —     —   —     —     —     —     5,530     —     —     5,530  
  Payments received on stockholder notes receivable   —     —   —     —   —     —     —     170     —     —     —     170  
  Unrealized loss on short-term investments   —     —   —     —   —     —     —     —     —     (182 )   —     (182 )
  Net income   —     —   —     —   —     —     —     —     —     —     2,881     2,881  
  Comprehensive income                                                                 2,699  
   
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 30, 2000   —   $ —   —   $ —   159,842,784   $ 160   $ 384,526   $ (3,248 ) $ (9,404 ) $ (182 ) $ (19,430 ) $ 352,422  
   
 
 
 
 
 
 
 
 
 
 
 
 

table continued on following page.

F–7

FINISAR CORPORATION
CONSOLIDATED STATEMENT OF CONVERTIBLE REDEEMABLE PREFERRED STOCK,
REDEEMABLE PREFERRED STOCK AND
CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (Continued)
(in thousands, except share and per share data)

 
    
    
    
    
   Common Stock
    
    
    
    
    
    
  
 
    
    
   Stockholders' Equity (Deficit)
  
 
   Convertible Redeemable
Preferred Stock
   Redeemable Preferred Stock
    
    
    
    
    
    
    
    
  
 
    
    
    
   Notes
Receivable
From
Stockholders
    
   Accumulated
Other
Comprehensive
Income (loss)
   Retained
Earnings
(Accumulated
Deficit)
   Total
Stockholders'
Equity
(Deficit)
  
 
    
    
   Additional
Paid-in
Capital
   Deferred Stock
Compensation
  
 
   Shares
   Amount
   Shares
   Amount
   Shares
   Amount
  
Balance at April 30, 2000   —     —   —     —   159,842,784   $ 160   $ 384,526   $ (3,248 ) $ (9,404 ) $ (182 ) $ (19,430 ) $ 352,422  
  Stock options exercised net of loans and repurchase of unvested shares and stock purchase plan (unaudited)   —     —   —     —   767,561     —     4,243     (151 )   —     —     —     4,092  
    Tax benefit on employee stock options (unaudited)   —     —   —     —   —     —     39,084     —     —     —     —     39,084  
    Issuance of common stock in business acquisitions (unaudited)   —     —   —     —   15,501,121     16     514,321     —     (22,045 )   —     —     492,292  
    Amortization of deferred stock compensation (unaudited)   —     —   —     —   —     —     —     —     5,343     —     —     5,343  
    Payments received on stockholder notes receivable (unaudited)   —     —   —     —   —     —     —     1,130     —     —     —     1,130  
    Unrealized gain on short-term investments (unaudited)   —     —   —     —   —     —     —     —     —     1,082     —     1,082  
    Net income (unaudited)   —     —   —     —   —     —     —     —     —     —     (43,191 )   (43,191 )
    Comprehensive income (unaudited)                                                                 (42,109 )
   
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 31, 2001 (unaudited)   —   $ —   —   $ —   176,111,466   $ 176   $ 942,174   $ (2,269 ) $ (26,106 ) $ 900   $ (62,621 ) $ 852,254  
   
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes.

F–8

FINISAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
   Fiscal Years Ended
April 30,
   Nine Months Ended January 31,
  
 
   1998
   1999
   2000
   2000
   2001
  
 
    
    
    
   (unaudited)

  
Operating activities                                
Net income (loss)   $ 4,359   $ 3,045   $ 2,881     1,209     (43,191 )
Adjustments to reconcile net income (loss) to net cash from operating activities:                                
  Depreciation and amortization     161     433     1,161     788     3,171  
  Amortization of deferred stock compensation     —     428     5,530     3,791     5,343  
  Loss on fixed assets disposal     30     237     —     —     —  
  Acquired in-process research and development     —     —     —     —     28,797  
  Amortization of acquired intangibles     —     —     —     —     32,649  
Changes in operating assets and liabilities:                                
  Accounts receivable     (1,584 )   (3,868 )   (7,695 )   (3,517 )   (24,587 )
  Inventories     (1,781 )   (2,505 )   (11,258 )   (9,851 )   (32,698 )
  Other assets     8     (490 )   (745 )   (315 )   (14,261 )
  Deferred income taxes     (241 )   (660 )   (1,606 )   (774 )   (1,893 )
  Accounts payable     (179 )   1,129     4,514     2,854     11,546  
  Accrued compensation     55     1,383     1,502     759     365  
  Income tax payable     (298 )   824     (769 )   —     2,448  
  Other accrued liabilities     212     1,103     2,113     1,053     (2,461 )
  Other liabilities     —     —     —     —     851  
   
 
 
 
 
 
Net cash provided by (used in) operating activities     742     1,059     (4,372 )   (4,003 )   (33,921 )
   
 
 
 
 
 
Investing activities                                
Purchases of property and equipment     (855 )   (2,100 )   (8,355 )   (4,441 )   (54,161 )
Purchase of short-term investments     —     —     (150,109 )   (67,816 )   (17,503 )
Sale of short-term investments     —     —     750     —     —  
Acquisition of business, net of cash acquired     —     —     —     —     (26,833 )
Other investments     —     —     —     —     (14,622 )
   
 
 
 
 
 
Net cash used in investing activities     (855 )   (2,100 )   (157,714 )   (72,257 )   (113,119 )
   
 
 
 
 
 
Financing activities                                
Payments on capital lease obligations     (37 )   (39 )   (71 )   28     —  
Proceeds from borrowings     500     11,015     —     —     306  
Repayments of borrowings     (50 )   (450 )   (11,015 )   (11,015 )   (1,232 )
Proceeds from exercise of stock options, net of loans, repurchase of
unvested shares and stock purchase plan		     —     285     396     277     5,273  
Proceeds from issuance of common stock in initial public offering and secondary public offering, net of issue costs     —     —     341,566     150,978     —  
Proceeds from issuance of preferred stock     —     26,260     —     —     —  
Redemption of preferred stock     —     —     (2,640 )   (2,640 )   —  
Repurchase of common stock     —     (31,708 )   —     —     —  
   
 
 
 
 
 
Net cash provided by financing activities     413     5,363     328,236     137,572     4,347  
   
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents     300     4,322     166,150     61,312     (142,693 )
Cash and cash equivalents beginning of period     422     722     5,044     5,044     171,194  
   
 
 
 
 
 
Cash and cash equivalents at end of period   $ 722   $ 5,044   $ 171,194     66,356     28,501  
   
 
 
 
 
 
Supplemental disclosure of cash flow information                                
  Cash paid for interest   $ 33   $ 364   $ 481   $ 510   $ 24  
   
 
 
 
 
 
  Cash paid for taxes   $ 3,254   $ 1,710   $ 5,028   $ 3,352   $ 6,552  
   
 
 
 
 
 
Supplemental schedule of non-cash investing activities                                
  Acquisition of property, equipment and improvements under
capital lease obligations		   $ 132   $ —   $ —   $ —   $ —  
   
 
 
 
 
 
  Issuance of common stock in exchange for notes receivable   $ —   $ 1,521   $ 1,950   $ 2,175   $ 151  
   
 
 
 
 
 
  Conversion of preferred stock to common stock   $ —   $ —   $ 23,620   $ 23,620   $ —  
   
 
 
 
 
 
  Issuance of common stock and assumption of options in acquisition of Sensors Unlimited, Inc. and Demeter Technologies, Inc.   $ —   $ —   $ —   $ —   $ 514,337  
   
 
 
 
 
 

See accompanying notes.

F–9

FINISAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of January 31, 2001 and for the nine month periods ended
January 31, 2001 and 2000 is unaudited)

1. Summary of Significant Accounting Policies

Description Of Business

    Finisar Corporation was incorporated in the state of California on April 17, 1987. In November 1999, Finisar Corporation reincorporated in the state of Delaware. Finisar Corporation designs, manufactures, and markets fiber optic subsystems and network performance test systems for high-speed data communications. The Consolidated Financial Statements include the accounts of Finisar Corporation and its wholly-owned subsidiaries (collectively "Finisar" or the "Company"). Intercompany accounts and transactions have been eliminated in consolidation.

Interim Financial Information

    The interim financial information at January 31, 2001 and for the nine months ended January 31, 2001 and 2000 is unaudited but, in the opinion of management, has been prepared on the same basis as the annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) that Finisar considers necessary for a fair presentation of its financial position at such date and its operating results and cash flows for those periods. Results for the interim periods are not necessarily indicative of the results to be expected for the entire year, or any future period.

Fiscal Periods

    In fiscal 2000, the Company began to maintain its financial records on the basis of a fiscal year ending on April 30, with fiscal quarters ending on the Sunday closest to the end of the period (thirteen-week periods). For ease of reference, all references to period end dates have been presented as though the period ended on the last day of the calendar month. The first three quarters of fiscal 2000 ended on August 1, 1999, October 31, 1999 and January 30, 2000, respectively and the first two quarters of fiscal 2001 ended on July 30, 2000, October 29, 2000 and January 28, 2001, respectively.

Use Of Estimates

    The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

Revenue and Warranty Recognition

    Revenue is recognized at the time of product shipment, net of allowances for estimated returns. Warranty expenses are also estimated and provided for at the time of shipment.

Concentrations Of Credit Risk

    Financial instruments which potentially subject Finisar to concentrations of credit risk include cash, cash equivalents, short-term investments and accounts receivable. Finisar places its cash, cash equivalents and short-term investments with high-credit quality financial institutions. Such investments are generally in excess of FDIC insurance limits. Concentrations of credit risk, with respect to accounts receivable, exist to the extent of amounts presented in the financial statements. Accounts receivable

F–10

from two customers represented 33.8% and 16.0% of the total at April 30, 1999, two customers represented 24.7% and 12.5% of the total balance at April 30, 2000 and two customers represented 29.1% and 14.0% of the total balance at January 31, 2001, respectively. Generally, Finisar does not require collateral or other security to support customer receivables. Finisar performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses based on historical experience and other information available to management. Losses to date have been within management's expectations.

Current Vulnerabilities Due To Certain Concentrations

    Finisar sells products primarily to customers located in North America. During fiscal 1998, 1999 and 2000, revenues from two customers represented 43.9% and 14.6%, 25.1% and 24.1%, and 24.5% and 24.0% of net revenues, respectively. During the nine months ended January 31, 2000, revenues from two customers represented 29.1% and 21.5% of net revenues and during the nine months ended January 31, 2001 revenues from three customers represented 21.6%, 19.7% and 10.0% of net revenues.

Research And Development

    Research and development expenditures are charged to operations as incurred.

Cash And Cash Equivalents

    Finisar's cash equivalents consist of money market funds and highly liquid short-term investments with qualified financial institutions. Finisar considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents.

Short-Term Investments

    Short-term investments consist of interest bearing securities with maturities greater than 90 days. The Company has adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). Under SFAS 115, the Company has classified its short-term investments as available-for-sale.

    Available-for-sale securities are stated at market value and unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of stockholders' equity until realized. A decline in the market value of the security below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security. At January 31, 2001, the Company's marketable investment securities consisted of highly liquid investments in both taxable and tax free municipal obligations with various maturity dates through September 29, 2003. The difference between market value and cost of these securities at January 31, 2001 was a gain of $1,506,947 or $899,755 on an after-tax basis and at April 30, 2000 was a loss of $302,608 or $182,065 on an after tax basis.

Inventories

    Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.

F–11

Property, Equipment and Improvements

    Property, equipment and improvements are stated at cost, net of accumulated depreciation and amortization. Property, equipment and improvements are depreciated on a straight-line basis over the estimated useful lives of the assets, generally five years for equipment and 25 years for buildings.

Goodwill and other intangible assets

    Goodwill and other intangible assets result from acquisitions accounted for under the purchase method. Amortization of goodwill and other intangibles is provided on the straight-line basis over the respective estimated useful lives of the assets. As January 31, 2001, goodwill and other intangible assets were being amortized over periods ranging from three to five years. In accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("FAS 121"), the Company periodically evaluates whether changes have occurred that would require revision of the remaining estimated useful life of the assigned intangible assets or render the intangibles not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted value of expected future operating cash flows to determine whether the intangible assets are impaired.

Stock-Based Compensation

    Finisar accounts for employee stock option grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25") and has adopted the disclosure-only alternative of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").

Net Income (Loss) Per Share

    Basic and diluted net income per share are presented in accordance with SFAS No. 128, "Earnings Per Share" ("SFAS 128"), for all periods presented. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98, common shares and convertible preferred shares issued or granted for nominal consideration prior to the effective date of Finisar's initial public offering are required to be included in the calculation of basic and diluted net income per share as if they had been outstanding for all periods presented. To date, Finisar has not had any issuances or grants for nominal consideration.

    Effective April 12, 2000, the Company's Board of Directors approved a three-for-one stock split in the form of a stock dividend. Accordingly, all share and per-share data for all prior periods presented have been restated to reflect this event.

    Basic net income (loss) per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net income (loss) per share has been computed using the weighted-average number of shares of common stock and dilutive potential common shares from options (under the treasury stock method) and convertible redeemable preferred stock (on an if-converted basis) outstanding during the period.

F–12

    The following table presents the calculation of basic and diluted net income (loss) per share (in thousands, except per share amounts):

 
   Fiscal Years Ended
April 30,
   Nine Months Ended
January 31,
  
 
   1998
   1999
   2000
   2000
   2001
  
 
    
    
    
   (unaudited)

  
Numerator:                                
  Net income (loss)   $ 4,359   $ 3,045   $ 2,881   $ 1,209   $ (43,191 )
   
 
 
 
 
 
Historical:                                
Denominator for basic net income per share:                                
  Weighted-average shares outstanding—total     131,259     119,709     124,678     114,543     170,388  
  Weighted-average shares outstanding—subject to repurchase.     —     (9,129 )   (10,748 )   (10,659 )   (9,016 )
  Weighted-average shares outstanding—performance shares     —     —     —     —     (4,167 )
   
 
 
 
 
 
  Weighted-average shares outstanding—basic     131,259     110,580     113,930     103,884     157,205  
   
 
 
 
 
 
Effect of dilutive securities:                                
  Employee stock options     —     2,187     4,994     4,338     —  
  Stock subject to repurchase     —     9,129     10,748     10,659     —  
  Convertible redeemable preferred stock     —     12,918     14,430     19,206     —  
   
 
 
 
 
 
Dilutive potential common shares     —     24,234     30,172     34,203     —  
   
 
 
 
 
 
Denominator for diluted net income (loss) per share     131,259     134,814     144,102     138,087     157,205  
   
 
 
 
 
 
Basic net income (loss) per share     $0.03     $0.03     $0.03     $0.01     $(0.27 )
   
 
 
 
 
 
Diluted net income (loss) per share     $0.03     $0.02     $0.02     $0.01     $(0.27 )
   
 
 
 
 
 
Common stock equivalents related to potentially dilutive securities excluded from computation because they are anti-dilutive:                                
    Employee stock options     —     —     —     —     5,882  
    Stock subject to repurchase     —     —     —     —     9,016  
   
 
 
 
 
 
      —     —     —     —     14,898  
   
 
 
 
 
 

Comprehensive Income

    Financial Accounting Standards Board Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130") establishes rules for reporting and display of comprehensive income and its components. SFAS 130 requires unrealized gains or losses on the Company's available-for-sale securities to be included in comprehensive income. The amount of the change in net unrealized gain on available-for-sale securities in the nine months ended January 31, 2001 was $1,857,722 or $1,081,821 on an after-tax basis. The amount of the change in net realized loss

F–13

on available-for-sale securities in fiscal 2000 was $302,608 or $182,065 on an after tax basis. Prior to fiscal 2000, net income equaled comprehensive income.

Segment Reporting

    Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has determined that it operates only in one segment.

Effect Of New Accounting Statements

    In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). Finisar is required to adopt SFAS 133 for the fiscal year ending April 30, 2002. SFAS 133 establishes methods of accounting for derivative financial instruments and hedging activities. Because Finisar currently holds no derivative financial instruments as defined by SFAS 133 and does not currently engage in hedging activities, adoption of SFAS 133 is not expected to have a material effect on Finisar's financial condition or results of operations.

    In March 1998, the American Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities capitalize certain costs related to internal use software once certain criteria have been met. Finisar has implemented SOP 98-1 for the year ending April 30, 2000. Adoption of SOP 98-1 did not have a material effect on Finisar's financial condition or results of operations in fiscal 2000.

    In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"("SAB 101"). The bulletin summarizes some of the commission's views in applying accounting principles generally accepted in the United States to revenue recognition in financial statements. Due to the complex nature of the implementation of SAB 101, the SEC has deferred the implementation of SAB 101 which, for the Company, will be effective in the fourth quarter of fiscal 2001 with retroactive application to the beginning of the fiscal year. Although the Company has not fully assessed the impact, the Company believes the adoption of SAB 101 will not have a significant impact on its consolidated financial position, results of operations, or cash flows.

F–14

2. Short-Term Investments

    The following table summarizes the Company's short-term investments in terms of type of investment, original cost, gross unrealized gain or (loss) and fair market value as of April 30, 2000 (in thousands).

 
   Original
Purchase
Cost
   Gross
Unrealized
Gain
(Loss)
   Market
Value
Investment Type                  
  Corporate   $ 65,684   $ (194 ) $ 65,490
  Government Agency     2,037     (13 )   2,024
  Municipal     82,122     (95 )   82,027
   
 
 
  Total   $ 149,843   $ (302 ) $ 149,541
   
 
 

    Included in the above table is $67,812 of investments with maturities in the years ended April 30, 2002 and 2003.

3. Inventories

    Inventories consist of the following (in thousands):

 
   April 30,
    
 
   January 31, 2001
 
   1999
   2000
 
    
    
   (unaudited)
Raw materials   $ 2,908   $ 8,960   $ 28,219
Work-in-process     1,763     6,524     19,299
Finished goods     565     1,010     3,521
   
 
 
    $ 5,236   $ 16,494   $ 51,039
   
 
 

F–15

4. Property, Equipment and Improvements

    Property, equipment and improvements consist of the following (in thousands):

 
   April 30,
    
  
 
   Janaury 31, 2001
  
 
   1999
   2000
  
 
    
    
   (unaudited)

  
Computer equipment   $ 840   $ 2,603   $ 6,489  
Office equipment, furniture, and fixtures     445     833     1,778  
Machinery and equipment     1,795     6,144     26,002  
Leasehold improvements     —     1,470     3,516  
Construction in process     —     —     241  
Land     —     —     18,790  
Building     —     —     13,986  
   
 
 
 
      3,080     11,050     70,802  
Accumulated depreciation and amortization     (598 )   (1,624 )   (4,794 )
   
 
 
 
Property and equipment, net   $ 2,482   $ 9,426   $ 66,008  
   
 
 
 

    Finisar had financed $132,447 of equipment purchased under capital lease arrangements as of April 30, 1999. These leases arrangements were paid in full as of April 30, 2000. Accumulated amortization of assets acquired under capital leases was $40,261 at April 30, 2000 and $0 at April 30, 1999.

5. Commitments

    Future minimum payments under non-cancelable operating lease agreements are as follows as of April 30, 2000 (in thousands):

Fiscal years ending April 30:      
2001   $ 2,097
2002     2,157
2003     1,850
2004     1,857
2005     1,902
Thereafter     2,563
   
Total minimum payments required   $ 12,426
   

    Rent expense was approximately $412,000, $366,905 and $1,168,726 for the years ended April 30, 1998, 1999 and 2000.

6. Loan Agreement

    On November 4, 1998, Finisar borrowed the principal amount of $11,015,000 under a secured term loan agreement and entered into a secured revolving loan facility for additional borrowings of up to $6,500,000. The term loan was repaid in November 1999 with proceeds from the common stock

F–16

offering (see Note 7). The revolving loan facility expires in October 2003. No amounts were outstanding under the revolving loan facility at April 30, 1999 or April 30, 2000. All business assets have been pledged as collateral for borrowings under the term loan and the revolving loan facility.

7. Convertible Redeemable Preferred Stock, Redeemable Preferred Stock And Stockholders' Equity (Deficit)

Common Stock And Preferred Stock

    Following the Company's re-incorporation in November 1999, Finisar is authorized to issue 200,000,000 shares of $0.001 par value common stock and 5,000,000 shares of $0.001 par value preferred stock. The board of directors has the authority to issue the undesignated preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof. The holder of each share of common stock has the right to one vote.

    Common stock subject to future issuance as of April 30, 2000 is as follows:

Exercise of outstanding options   5,678,706
Common stock available for grant under stock option plans   14,128,815
Common stock reserved for issuance under the employee
stock purchase plan		   750,000
   
    20,557,521
   

    Effective November 11, 1999, the Company sold 27,915,000 shares in an initial public offering of its common stock at a price of $6.33, including 3,465,000 shares that were sold upon exercise of the underwriters' overallotment option. Of the shares sold, 25,815,699 shares, with an aggregate offering price of $163,499,427, were sold by Finisar, and 2,099,301 shares, with an aggregate offering price of $13,295,573, were sold by selling stockholders. An aggregate underwriting discount of $12,375,650 was paid in connection with the offering, $11,444,960 of which was paid by Finisar and $930,690 of which was paid by the selling stockholders. Other expenses of the offering incurred by Finisar were approximately $1,500,000. Net proceeds of the offering to the Company after deducting underwriting discounts and commissions, and other expenses aggregated approximately $150.6 million. Of the net proceeds raised in the initial public offering, $11.0 million was used to repay bank loans and another $2.6 million was used to redeem the Company's no par value, redeemable preferred stock.

    Effective April 6, 2000, the Company sold 23,175,000 shares in an additional public offering of its common stock at a price of $33.33 per share, including 75,000 shares that were sold upon exercise of the underwriters' overallotment option. Of the shares sold, 6,000,000 shares, with an aggregate offering price of $200,000,000, were sold by Finisar, and 17,175,000 shares, with an aggregate offering price of $572,500,000, were sold by selling stockholders. An aggregate underwriting discount of $30,127,500 was paid in connection with the offering, $7,800,000 of which was paid by Finisar and $22,327,500 of which was paid by the selling stockholders. Other expenses of the offering incurred by Finisar were approximately $1,100,000. Net proceeds of the offering to the Company after deducting underwriting discounts and commissions, and other expenses aggregated approximately $191.0 million.

F–17

    The balance of the net proceeds raised from the initial public offering and secondary offering will be used for general corporate purposes, including working capital and capital expenditures. The Company may also use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to any of these types of acquisitions or investments. Pending such uses, the remaining net proceeds of the offering have been invested in short-term, investment-grade, interest-bearing securities.

Convertible Redeemable Preferred Stock

    On November 6, 1998 and November 25, 1998, Finisar issued an aggregate of 12,039,486 shares of convertible redeemable preferred stock to investors at $2.1932 per share, resulting in gross cash proceeds of $26,405,000. In conjunction with the Company's initial public offering on November 11, 1999, the convertible redeemable preferred shares were converted into 26,945,691 shares of common stock and 12,039,486 shares of redeemable preferred stock; the Company then paid $2.6 million to redeem the redeemable preferred stock.

    Holders of convertible redeemable preferred stock were entitled to non cumulative dividends at an annual rate equal to $0.1316 per share (adjusted for stock splits and like events), in preference to other stockholders if, when and as declared by the board of directors. No dividends had been declared as of April 30, 2000.

    The holders of outstanding convertible redeemable preferred stock, voted as a single class, and were entitled to appoint one director of Finisar. In all other matters, each holder of convertible redeemable preferred stock had voting rights based on the number of shares of common stock into which the preferred stock was convertible.

    The holders of outstanding convertible redeemable preferred stock were entitled to receive upon liquidation and in certain other circumstances (a merger, acquisition, or similar event), an amount per share of $2.1932 plus all accrued but unpaid dividends (including any unpaid interest on such amounts). Any remaining assets would be distributed on a pro rata basis among the holders of all common stock and preferred stock (on an if-converted basis).

Redeemable Preferred Stock

    Holders of outstanding redeemable preferred stock were entitled to non cumulative dividends at an annual rate equal to $0.0381 per share (adjusted for stock splits and like events), in preference to holders of common stock as and when declared by the board of directors. No dividends had been declared as of April 30, 2000. In conjunction with the initial public offering on November 11, 1999, all outstanding convertible redeemable preferred shares were converted into 26,945,691 shares of common stock and 12,039,486 shares of redeemable preferred stock; the Company then paid $2.6 million to redeem the redeemable preferred stock.

F–18

FINISAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of January 31, 2001 and for the nine month periods ended
January 31, 2001 and 2000 is unaudited)

7. Convertible Redeemable Preferred Stock, Redeemable Preferred Stock And Stockholders' Equity (Deficit) (Continued)

    The holders of redeemable preferred stock had no voting rights.

    The holders of redeemable preferred stock were entitled to receive upon liquidation and in certain other circumstances (a merger, acquisition, or similar event), an amount per share of $0.6345 plus all accrued but unpaid dividends (including any unpaid interest on such amounts).

1999 Employee Stock Purchase Plan

    Finisar's 1999 Employee Stock Purchase Plan was adopted by the board of directors and approved by the stockholders in September 1999. A total of 750,000 shares of common stock are reserved for issuance under the plan, cumulatively increased by 750,000 shares on May 1, 2001 and each May 1 thereafter through May 1, 2010. Employees, including officers and employee directors, are eligible to participate in the plan if they are employed by Finisar for more than 20 hours per week and more than five months in any calendar year. The plan will be implemented during sequential 12-month offering periods, generally commencing on or about December 1 of each year. However, the first such offering period commenced on the effective date of the initial public offering and will terminate on November 30, 2000. In addition, a six-month offering period will generally commence on June 1 of each year. The employee stock purchase plan permits eligible employees to purchase Finisar common stock through payroll deductions, which may not exceed 20% of the employee's total compensation. Stock may be purchased under the plan at a price equal to 85% of the fair market value of Finisar common stock on either the first or the last day of the offering period, whichever is lower.

Stock Option Plans

    As discussed in Note 1 and as permitted under Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), Finisar has elected to follow APB Opinion No. 25 and related interpretations in accounting for stock-based awards to employees.

    During fiscal 1989 and 1999, Finisar adopted the 1989 and 1999 Stock Option Plans (the "Plans"). Under the Plans, options to purchase common stock may be granted at an exercise price of not less than 85% of the fair value of a share of common stock on the date of grant (110% of the fair value in certain instances) as determined by the board of directors. For purposes of determining the fair market value of the common stock, the board of directors has considered a number of factors including appraisals by independent third parties, the price paid for convertible redeemable preferred stock in arms'-length transactions and the illiquid nature of the common stock. Options generally vest over five years and have a maximum term of 10 years. All options granted under the Plans are immediately exercisable. As of April 30, 2000, 10,747,361 shares issued upon exercise of options are subject to repurchase.

    Finisar's 1999 Stock Option Plan was amended by the board of directors and approved by the stockholders in September 1999. The amendment increased the aggregate maximum number of shares that may be issued under the Plan on May 1, 2001 and each May 1 thereafter by a number of shares equal to 5% of the number of shares of Finisar's common stock issued and outstanding as of the

F–19

immediately preceding April 30, subject to certain restrictions on the aggregate maximum number of shares that may be issued pursuant to incentive stock options.

    A summary of activity under the Plans is as follows:

 
    
    
   Options Outstanding
 
   Options Available
For Grant
   Number of Shares
   Price Per Share
   Weighted-Average
Exercise Price
Balance at April 30, 1997   74,966,400   2,133,600   $0.004-$0.017   $ 0.013
Options granted   (8,811,000 ) 8,811,000   $0.043   $ 0.043
Options canceled   66,000   (66,000 ) $0.017   $ 0.017
   
 
         
Balance at April 30, 1998   66,221,400   10,878,600   $0.004-$0.043   $ 0.038
Decrease in authorized shares   (37,916,400 ) —   —     —
Options granted   (8,700,000 ) 8,700,000   $0.05-$0.437   $ 0.234
Options exercised   —   (15,118,980 ) $0.004-$0.437   $ 0.120
   
 
         
Balance at April 30, 1999   19,605,000   4,459,620   $0.017-$0.437   $ 0.190
Options granted   (5,497,710 ) 5,497,710   $0.47-$21.708   $ 2.287
Options exercised   —   (4,041,099 ) $0.017-$3.40   $ 0.591
Options canceled   237,525   (237,525 ) $0.017-$6.33   $ 0.775
Shares repurchased   25,800   —   $0.043-$0.050   $ 0.050
Options expired   (241,800 ) —   —     —
   
 
         
Balance at April 30, 2000   14,128,815   5,678,706   $0.017-$21.708   $ 1.916
   
 
         
Exercise Price
   Number
Outstanding at
April 30, 2000
   Number
Exercisable
at April 30, 2000
   Weighted-Average
Remaining
Contractual Life
   Weighted-Average
Exercise Price
$0.02   240,000   240,000   6.84   $ 0.02
$0.04   2,044,620   2,044,620   7.88   $ 0.04
$0.05   102,000   102,000   8.27   $ 0.05
$0.09   40,500   40,500   8.45   $ 0.09
$0.44   420,000   420,000   8.94   $ 0.44
$0.47   383,400   383,400   9.26   $ 0.47
$0.67   195,000   195,000   9.33   $ 0.67
$1.00   338,001   338,001   9.40   $ 1.00
$3.40   778,500   —   9.45   $ 3.40
$3.67   240,000   —   9.49   $ 3.67
$6.33   847,935   —   9.53   $ 6.33
$21.71   48,750   —   9.75   $ 21.71
   
 
         
$0.02-$21.71   5,678,706   3,763,521   8.70   $ 1.92
   
 
         

F–20

    The weighted-average fair value of options granted was $0.05 during fiscal 1999 and $2.287 during fiscal 2000.

Restricted Shares Issued for Promissory Notes

    During fiscal 1999, employees exercised options for 7,938,924 shares of common stock in exchange for promissory notes in the aggregate principal amount of $1,520,788. During fiscal 2000, employees exercised options for 2,792,523 shares of common stock in exchange for promissory notes in the aggregate principal amount of $1,632,413. The notes are full recourse, are secured by the shares and bear interest at a rate of 6% per annum. The shares are restricted and are subject to a right of repurchase at the original exercise price in favor of Finisar. This repurchase right lapses in accordance with the original vesting schedule of the option, which is generally five years.

Deferred Stock Compensation

    In connection with the grant of certain stock options to employees, Finisar recorded deferred stock compensation of $2.4 million during fiscal 1999 and $13.0 million during fiscal 2000 prior to the Company's initial public offering, representing the difference between the deemed value of our common stock for accounting purposes and the option exercise price of these options at the date of grant. The deferred compensation incurred prior to the Company's initial public offering is being amortized to income over a five year vesting period using the graded vesting method. In addition, the Company recorded an additional $22.0 million in deferred compensation in conjunction with the assumption of certain stock options in the acquisition of Sensors Unlimited, Inc., and Demeter Technologies, Inc. Deferred stock compensation is presented as a reduction of stockholders' equity. The amortization expense relates to options awarded to employees in all operating expense categories. The following table summarizes the amount of deferred stock compensation expense which Finisar has recorded and the amortization it has recorded and expects to record in future periods for transactions which have been consummated as of January 31, 2001. Amounts to be recorded in future periods could

F–21

decrease if options for which accrued but unvested compensation has been recorded are forfeited (in thousands):

 
   Deferred
Stock
Compensation
Prior to IPO
   Deferred
Stock
Compensation-
Acquisitions
   Amortization
Expense
Fiscal year ended April 30, 1999   $ 2,403   $ —   $ 428
Fiscal year ended April 30, 2000     12,959     —     5,530
First quarter ended July 31, 2000 (unaudited)     —     —     1,699
Second quarter ended October 31, 2000 (unaudited)     —     8,744     1,183
Third quarter ended January 31, 2001 (unaudited)     —     13,301     2,461
Fourth quarter ending April 30, 2001 (unaudited)     —     —     2,447
Fiscal year ending April 30, 2002 (unaudited)     —     —     8,898
Fiscal year ending April 30, 2003 (unaudited)     —     —     7,706
Fiscal year ending April 30, 2004 (unaudited)     —     —     5,255
Fiscal year ending April 30, 2005 (unaudited)     —     —     1,800
   
 
 
Total (unaudited)   $ 15,362   $ 22,045   $ 37,407
   
 
 

Accounting for Stock-Based Compensation

    Pro forma information regarding net income is required by SFAS 123 as if Finisar had accounted for its employee stock options granted subsequent to April 30, 1995 under the fair value method of SFAS 123. The fair value for Finisar's stock option grants prior to the Company's initial public offering were estimated at the date of grant using the minimum value option valuation model. The fair value of stock options grants subsequent to the initial public offering were valued using Black-Scholes valuation model based on the actual stock closing price on the day previous to the date of grant. The option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because Finisar's stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards. The fair value of these options was estimated at the date of grant using the following weighted-average assumptions for fiscal years 1998, 1999 and 2000: risk-free interest rates of 6% for 1998, 5.5% for 1999 and 6% for 2000; a dividend yield of 0%; a volatility factor of .91 for 2000; and a weighted-average expected life of the option of four years.

F–22

    For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Finisar Corporation's pro forma information is as follows (in thousands, except per share amounts):

 
   Years Ended April 30,
 
   1998
   1999
   2000
Net income:                  
  As reported   $ 4,359   $ 3,045   $ 2,881
   
 
 
  Pro forma   $ 4,333   $ 3,000   $ 2,463
   
 
 
Basic net income per share:                  
  As reported   $ 0.03   $ 0.03   $ 0.03
   
 
 
  Pro forma   $ 0.03   $ 0.03   $ 0.02
   
 
 
Diluted net income per share:                  
  As reported   $ 0.03   $ 0.02   $ 0.02
   
 
 
  Pro forma   $ 0.03   $ 0.02   $ 0.02
   
 
 

8. Income Taxes

    Finisar's provision for income taxes consists of the following (in thousands):

 
   Years Ended April 30,
  
 
   1998
   1999
   2000
  
Current:                    
  Federal   $ 2,391   $ 1,995   $ 3,875  
  State     565     538     473  
   
 
 
 
      2,956     2,533     4,348  
   
 
 
 
Deferred:                    
  Federal     (226 )   (508 )   (968 )
  State     (15 )   (152 )   (125 )
   
 
 
 
      (241 )   (660 )   (1,093 )
   
 
 
 
Provision for income taxes   $ 2,715   $ 1,873   $ 3,255  
   
 
 
 

F–23

    Finisar's provision for income taxes differs from the amount computed by applying the federal statutory rate to income taxes as follows:

 
   Years Ended April 30,
  
 
   1998
   1999
   2000
  
Expected income tax provision at U.S. federal statutory rate   34.0 % 34.0 % 34.0 %
State taxes, net of federal benefit   5.0   4.8   3.7  
Deferred compensation   —   3.0   30.6  
Tax Exempt Interest   —   —   (7.6 )
Research and development credits   (0.8 ) (4.0 ) (7.9 )
Other permanent differences   0.2   0.3   0.2  
   
 
 
 
    38.4 % 38.1 % 53.0 %
   
 
 
 

    Significant components of Finisar's deferred federal and state income taxes are as follows (in thousands):

 
   April 30,
  
 
   1999
   2000
  
Deferred tax assets:              
  Inventory reserve   $ 503   $ 1,091  
  Accruals not currently deductible     679     787  
  Tax Credits     —     654  
  Unrealized loss on marketable securities     —     121  
   
 
 
Total deferred tax assets     1,182     2,653  
Deferred tax liabilities:              
  Tax depreciation over book depreciation     (135 )   (392 )
   
 
 
Net deferred tax assets   $ 1,047   $ 2,261  
   
 
 

F–24

FINISAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Information as of January 31, 2001 and for the nine month periods ended
January 31, 2001 and 2000 is unaudited)

9. Segments and Geographic Information

    Finisar operates in one reportable segment, the design, manufacture, and marketing of fiber optic subsystems and network performance test systems for high-speed data communications. The following is a summary of operations within geographic areas based on the location of the entity purchasing the Company's product (in thousands):

 
   Years Ended April 30,
 
   1998
   1999
   2000
Revenues from sales to unaffiliated customers:                  
  United States   $ 9,877   $ 24,822   $ 46,900
  Canada     9,695     8,941     16,878
  Rest of the World     2,495     1,708     3,369
   
 
 
    $ 22,067   $ 35,471   $ 67,147
   
 
 

    Revenues generated in the U.S. and Canada (collectively, North America) are all to customers located in those geographic regions.

10. Pending Litigation

    In April 1999, Methode (formerly Methode Electronics), a manufacturer of electronic component devices, filed a lawsuit against Finisar and another manufacturer, Hewlett-Packard Co., in the United States District Court for the Northern District of Illinois alleging that the Company's optoelectronic products infringe four patents held by Methode. The original complaint sought monetary damages and injunctive relief. In July 1999, the Company and Hewlett-Packard filed a motion, which was opposed by Methode, to transfer the case to the United States District Court for the Northern District of California. In August 1999, the Court granted our motion. Methode has amended its complaint to add Agilent Technologies, Inc. as an additional defendant, to allege infringement of a fifth Methode patent and to allege that Finisar breached its obligations under a license and supply agreement with Methode by failing to provide Methode with unspecified information regarding new technology related to the products licensed under the agreement. The amended complaint seeks compensatory damages of at least $224.3 million plus interest for the alleged breach of contract. In addition, Methode has also notified Finisar that it intends to file another amended complaint alleging infringement of a sixth Methode patent. On June 5, 2000, Methode transferred the patents at issue in the litigation, as well as a number of other patents, to an affiliated company, Stratos Lightwave LLC, and on June 21, 2000, Stratos Lightwave LLC transferred the same patents to Stratos Lightwave, Inc. Methode has made a motion to add Stratos Lightwave, Inc. to the lawsuit as an additional plaintiff.

    In September 2000, Methode and Stratos Lightwave filed an additional lawsuit against the Company, alleging infringement of a sixth patent, which issued in August, 2000. This patent is a reissue of a previous patent that is the parent of four of five patents that are the subject of the original lawsuit filed by Methode against Finisar.

    In January 2001, Methode and Stratos Lightwave filed a third lawsuit against the Company in the United States District Court for the Northern District of California, alleging that the Company's optoelectronic products infringe a seventh patent, which issued in July 1998.

F–25

    Based on consultation with counsel, it is the Company's position that the Methode patents are invalid, unenforceable and/or not infringed by Finisar's products. The United States Patent and Trademark Office has determined that all of the claims asserted by Methode in one of the patents are invalid, although this determination is not final and is subject to further administrative review. The Company also believes, based on consultation with counsel, that the breach of contract claim included in the amended complaint is without merit and that, in any event, the amended complaint grossly overstates the amount of damages that Methode could possibly have suffered as a result of any such breach. The Company believes that it has strong defenses against Methode's lawsuit. In addition, the Company filed a counterclaim against Methode and Stratos Lightwave asserting, among other things, that one of Finisar's founders, Frank H. Levinson, is the primary inventor of the technology that is the subject of all seven patents, that Methode improperly obtained the patents based on the Company's disclosure of the technology to Methode and that the Company is the rightful owner or co-owner of the patents. Portions of the Company's counterclaim, based on principles of state law, were dismissed in May 2000 on grounds of federal preemption; however, the Company's basic claims of ownership of the patents remain subject to our pending counterclaims.

    Finisar intends to defend Methode's lawsuits and pursue the counterclaims vigorously. However, the lawsuits are in the preliminary stage, and their outcome cannot be predicted with certainty. The litigation process is inherently uncertain. Patent litigation is particularly complex and can extend for a protracted time, which can substantially increase the cost of such litigation. In connection with the Methode lawsuits, the Company has incurred, and expects to continue to incur, substantial legal fees and expenses. The Methode litigation has also diverted, and is expected to continue to divert, the efforts and attention of some of the Company's key management and technical personnel. As a result, the Company's defense of these lawsuits, regardless of their eventual outcome, has been, and will likely continue to be, costly and time consuming. Should the outcome of the lawsuit be adverse to the Company, the Company could be required to pay significant monetary damages to Methode and could be enjoined from selling those products found to infringe Methode's patents unless and until the Company is able to negotiate a license from Methode. In the event the Company obtains a license from Methode, the Company would likely be required to make royalty payments with respect to sales of products covered by the license. Any such payments would increase the Company's cost of revenues and reduce the Company's gross profit. If the Company is required to pay significant monetary damages, are enjoined from selling any of its products or are required to make substantial royalty payments pursuant to any such license agreement, the Company's business would be significantly harmed.

11. Acquisitions (Unaudited)

    On August 16, 2000 Finisar and Sensors Unlimited, Inc. ("Sensors") entered into an Agreement and Plan of Reorganization pursuant to which Finisar effectively acquired Sensors. The transaction closed on October 17, 2000. Sensors is headquartered in Princeton, New Jersey and is a leading supplier of optical components that monitor the performance of dense wavelength division multiplexing, or DWDM, systems. Finisar designated September 30, 2000 as the acquisition date for accounting

F–26

purposes and, accordingly, the accompanying financial statements include the results of operations of Sensors subsequent to September 30, 2000.

    Pursuant to the reorganization agreement, Finisar issued 18,962,141 shares of common stock in exchange for the outstanding shares of Sensors common stock. In addition, Finisar assumed options to purchase Sensors common stock and reserved 381,417 shares of Finisar common stock for issuance upon the exercise of the assumed options. At the closing of the merger transaction, the assumed Sensors options converted into Finisar options and vested to the extent of the greater of (i) 25% of the total number of shares subject to the option or (ii) the vested percentage of the Sensors option at the closing of the merger transaction, up to a maximum of 50% of the total number of shares subject to the option. The unvested portion of each assumed option will vest in three approximately equal annual installments on each of the first three anniversaries of the date of closing of the transaction, subject to the option holder's continued service with Finisar or a subsidiary.

    At the closing of the transaction, certificates representing 9,481,109 shares of Finisar common stock were issued to the former stockholders of Sensors (the "Initial Consideration") and 9,481,032 shares of common stock, or approximately one-half of the shares issued pursuant to the transaction, were deposited into escrow with U.S. Bank Trust, National Association (the "Deferred Consideration"). One-third of the shares deposited in escrow will be released on each of the first three anniversaries of October 17, 2000, the closing date, subject to the achievement of certain development milestones. If the milestones are not achieved, the escrow shares will be cancelled and returned to the status of authorized but unissued shares. Further, one-third of the escrow shares that would otherwise be delivered to the principal shareholders of Sensors on the third anniversary of the closing of the transaction will be subject to claims for indemnification by Finisar under the reorganization agreement and the procedures specified in the escrow agreement. Those shares will remain in escrow until all pending claims for indemnification have been resolved.

    In addition to the Initial Consideration and Deferred Consideration, on each of the first three anniversaries of the closing of the transaction, Finisar will issue and deliver to the former shareholders of Sensors, on a pro rata basis, additional shares of Finisar common stock (valued on the basis of the average closing trading price per share of such stock on the Nasdaq National Market for the ten trading days preceding the applicable payment date) (the "Additional Consideration"). These shares of Finisar common stock, with an estimated value of $48 million, will be distributed as follows:

F–27

    Only the Initial Consideration has been recorded for accounting purposes since the payment of the Deferred Consideration and Additional Consideration is contingent upon future events that are not assured of occurring beyond a reasonable doubt. The Deferred Consideration, if any, will be recorded as additional purchase cost at the then current market price of the common stock when the milestones are attained. The Additional Consideration, if any, will be recorded as additional purchase cost at the then current market price of common stock on the first, second and third anniversaries of the closing of the transaction. Accordingly, Finisar's initial cost to acquire Sensors is calculated to be $355.0 million using a Finisar common stock price of $33.47, which is the average of the closing market prices of Finisar's common stock for a period from three days before through three days after August 16, 2000, the day the transaction was announced. The fair value of the assumed stock options of $12.7 million, as well as estimated direct transaction expenses of $25.0 million, have been included as a part of the total purchase cost. Sensors currently operates as a wholly-owned subsidiary of Finisar.

    The cost to acquire Sensors has been allocated to the assets acquired and liabilities assumed according to their respective fair values, with the excess purchase price being allocated to goodwill. The fair value of the acquired assets and liabilities is based upon an independent valuation.

    The estimated total initial purchase cost of Sensors is as follows (in thousands):

Value of securities issued   $ 317,342
Assumption of Sensors common stock options     12,675
Estimated transaction costs and expenses     25,025
   
    $ 355,042
   

F–28

    The preliminary purchase price allocation is as follows (in thousands):

 
   Amount
   Useful life
in Years
   Annual
Amortization
  
Net tangible assets of Sensors   $ 353            
Intangible assets acquired:                  
  Developed technology     54,825   5   $ 10,965  
  In-process research and development     22,764   N/A     N/A  
  Assembled workforce     1,539   3     513  
  Customer base     1,901   3     634  
  Tradename     3,722   5     744  
  Goodwill     288,380   5     57,676  
Deferred income tax     (27,186 ) 3-5     (6,308 )
Deferred compensation     8,744   3     2,915  
   
     
 
Total preliminary purchase price allocation   $ 355,042       $ 67,139  
   
     
 

    An independent valuation specialist performed an allocation of the total purchase price of Sensors to its individual assets. The purchase price was allocated to Sensors' tangible assets, specific intangible assets such as assembled workforce, customer base, tradename, and developed technology and to in-process research and development.

    The acquired developed technology, which is comprised of products that are already technologically feasible, mainly includes optical components that monitor the performance of dense wavelength division multiplexing networks. Sensors' technology enables telecommunications companies to optimize the use of existing bandwidth in fiber optic networks. Finisar will amortize the acquired developed technology of approximately $54.8 million on a straight-line basis over an average estimated remaining useful life of five years.

    The acquired assembled workforce is comprised of all the skilled employees of Sensors and includes the estimated cost to replace existing employees, including recruiting and training costs and loss of productivity costs. Finisar will amortize the value assigned to the assembled workforce of approximately $1.5 million on a straight-line basis over an average estimated useful life of three years.

    The acquired customer base is based on historical costs incurred and is comprised of Sensors management's estimation of resources that have been devoted to the development of the relationships with key customers. Finisar will amortize the value assigned to customer relationships of approximately $1.9 million on a straight-line basis over an average estimated useful life of three years.

    The acquired tradename is recognized for the intrinsic value of the Sensors name and products in the marketplace. Finisar will amortize the value assigned to the tradename of approximately $3.7 million on a straight-line basis over an average estimated useful life of five years.

    Deferred compensation is recognized for the intrinsic value on the date of closing of the unvested Finisar options exchanged for options held by Sensors' employees. The $8.7 million of deferred compensation will be amortized over the remaining vesting period of approximately three years.

F–29

    Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets and deferred compensation, will be amortized on a straight-line basis over its estimated remaining useful life of five years.

    In-process research and development represents that portion of the purchase price of an acquisition related to the research and development activities which: (i) have not demonstrated their technological feasibility, and (ii) have no alternative future uses. Accordingly, the Company recognized an expense of $22.8 million during the quarter ended October 31, 2000 in conjunction with the completion of this acquisition.

    On November 21, 2000, the Company completed the acquisition of Demeter Technologies, Inc., a privately-held company located in El Monte, California ("Demeter"). Demeter was founded in June 2000 and is focused on the development of long wavelength Fabry Perot and distributed feedback lasers for data communications and telecommunications applications. Finisar designated November 1, 2000 as the acquisition date for accounting purposes and, accordingly, the accompanying financial statements include the results of operations of Demeter subsequent to November 1, 2000.

    Pursuant to the reorganization agreement, the Company issued 6,020,012 shares of common stock in exchange for the outstanding shares of Demeter capital stock. In addition, Finisar assumed options to purchase Demeter common stock and reserved 566,573 shares of Finisar common stock for issuance upon the exercise of the assumed options. The assumed options generally vest to the extent of 25% of the total number of shares subject to the option at the end of one year after the date of grant, with the remainder vesting in 36 equal monthly installments, subject to the optionholder's continued service with Finisar or a subsidiary.

    At the closing of the transaction, certificates representing 601,993 shares of Finisar common stock were deposited into escrow with the U.S. Bank Trust, National Association. The escrow shares will be subject to claims for indemnification by Finisar under the reorganization agreement and the procedures specified in the escrow agreement. Those shares will remain in escrow until all pending claims for indemnification, if any, have been resolved.

    Finisar's cost to acquire Demeter is calculated to be $187.3 million using a Finisar common stock price of $28.05, which is the average of the closing market prices of Finisar's common stock for a period from three days before through three days after November 21, 2000, the day the transaction was announced. The fair value of the assumed stock options of $15.4 million, as well as estimated direct transaction expenses of $3.0 million, have been included as a part of the total purchase cost. Demeter currently operates as a wholly-owned subsidiary of Finisar.

    The costs to acquire Demeter have been allocated to the assets acquired and liabilities assumed according to their respective fair values, with the excess purchase price being allocated to goodwill. The fair value of the acquired assets and liabilities is based upon an independent valuation.

F–30

    The estimated total purchase cost of Demeter is as follows (in thousands):

Value of securities issued   $ 168,882
Assumption of Demeter common stock options     15,438
Estimated transaction costs and expenses     3,000
   
    $ 187,320
   

    The preliminary purchase price allocation is as follows (in thousands):

 
   Amount
   Useful Life
in Years
   Annual
Amortization
  
Net tangible assets of Demeter   $ 3,217            
Intangible assets acquired:                  
  Developed technology     30,231   5   $ 6,046  
  In-process research and development     6,033   N/A     N/A  
  Assembled workforce     384   3     128  
  Customer base     247   3     82  
  Goodwill     151,484   5     30,297  
Deferred income tax     (17,577 ) 3-5     (3,832 )
Deferred compensation     13,301   4     3,325  
   
     
 
Total preliminary purchase price allocation   $ 187,320       $ 36,046  
   
     
 

    An independent valuation specialist performed an allocation of the total purchase price of Demeter to its individual assets. The purchase price was allocated to Demeter's tangible assets, specific intangible assets such as assembled workforce, customer base and developed technology and to in-process research and development.

    The acquired developed technology, which is comprised of products that are already technologically feasible, mainly includes long wavelength Fabry Perot and distributed feedback lasers for data communications and telecommunications applications. Finisar will amortize the acquired developed technology of approximately $30.2 million on a straight-line basis over an average estimated remaining useful life of five years.

    The acquired assembled workforce is comprised of all the skilled employees of Demeter and includes the estimated cost to replace existing employees, including recruiting and training costs and loss of productivity costs. Finisar will amortize the value assigned to the assembled workforce of approximately $0.4 million on a straight-line basis over an average estimated useful life of three years.

    The acquired customer base is based on historical costs incurred and is comprised of Demeter management's estimation of resources that have been devoted to the development of the relationships with key customers. Finisar will amortize the value assigned to customer relationships of approximately $0.2 million on a straight-line basis over an average estimated useful life of three years.

F–31

    Deferred compensation is recognized for the intrinsic value on the date of closing of the unvested Finisar options exchanged for options held by Demeter's employees. The $13.3 million of deferred compensation will be amortized over the remaining vesting period of approximately four years.

    Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets and deferred compensation, will be amortized on a straight-line basis over its estimated remaining useful life of five years.

    In-process research and development represents that portion of the purchase price of an acquisition related to the research and development activities which: (i) have not demonstrated their technological feasibility, and (ii) have no alternative future uses. Accordingly, the Company recognized an expense of $6.0 million during the quarter ended January 31, 2001 in conjunction with the completion of this acquisition.

    The following pro forma results of operations combines the results of operations of the Company and Sensors and Demeter, excluding the charge for acquired in-process research and development attributable to Sensors and Demeter, as if the acquisition occurred at the beginning of each period presented (in thousands, except per share data):

 
    
   Nine months ended
January 31,
  
 
   Year ended
April 30,
2000
  
 
   2000
   2001
  
                     
Revenue   $ 78,401   $ 56,202   $ 145,343  
   
 
 
 
Net income (loss)   $ (96,893 ) $ (73,151 ) $ (89,533 )
   
 
 
 
Net income (loss) per share:                    
  Basic   $ (0.75 ) $ (0.61 ) $ (0.54 )
   
 
 
 
  Diluted   $ (0.75 ) $ (0.61 ) $ (0.54 )
   
 
 
 

12. Other Pending Acquisitions (unaudited)

    On November 21, 2000, the Company entered into an agreement to acquire Transwave Fiber, Inc. ("Transwave"), a privately-held company located in Fremont, California. Established in February 2000, Transwave has applied its core competencies in fusion couplers, crystal processing and instrumentation technologies to develop a broad line of passive optical products for data communications and telecommunications applications.

    Under the terms of the agreement, Transwave stockholders will be entitled to receive up to approximately 3.2 million shares of Finisar common stock including shares issuable upon exercise of options to be assumed in the transaction. One-third of the shares issued in the transaction will be deposited in an escrow and will be released to the former shareholders of Transwave upon the

F–32

achievement of certain financial and technical milestones during a three-year period following the completion of the merger. The transaction will be accounted for under the purchase method of accounting.

    On February 14, 2001 and March 19, 2001 the agreement was amended to provide for the issuance of shares of the Company's Series A Preferred Stock to the stockholders of Transwave. The Series A Preferred Stock is convertible into the same number of shares of common stock that would have been issued under the original agreement and will be automatically converted into common stock upon the approval of additional authorized common shares by the stockholders of Finisar.

    The transaction closed on May 3, 2001.

    On November 21, 2000, the Company entered into an agreement to acquire Shomiti Systems, Inc. ("Shomiti"), a privately-held company located in San Jose, California. Established in 1995, Shomiti is a technology leader in designing products which measure the performance of Ethernet networks in order to enhance their quality of service (QoS). Shomiti's line of products are currently being deployed for measuring and monitoring 10-100 megabit and Gigabit Ethernet local area networks (LANs) and e-commerce storage server farms.

    Under the terms of the agreement, Shomiti stockholders will be entitled to receive up to approximately 3.8 million shares of Finisar common stock including shares issuable upon exercise of options to be assumed in the transaction. The transaction will be accounted for under the purchase method of accounting.

    On February 7, 2001, the agreement was amended to provide for the issuance of shares of the Company's Series A Preferred Stock to the stockholders of Shomiti. The Series A Preferred Stock is convertible into the same number of shares of common stock that would have been issued under the original agreement and will be automatically converted into common stock upon the approval of additional authorized common shares by the stockholders of Finisar.

    The transaction closed on March 23, 2001.

13. Purchase of Buildings

    On November 14, 2000 the Company purchased a 92,000 square foot facility in Sunnyvale, California, consisting of three buildings, for $32.5 million cash plus closing costs. The facility is currently under lease to a tenant through November 13, 2002 at which time the tenant has an option to renew the lease at fair market value for an additional five years.

14. Subsequent Events

    On March 2, 2001, the Company completed the acquisition of Medusa Technologies, Inc. ("Medusa"), a privately-held company located near Austin, Texas. Established in June 1997, Medusa

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provides training and testing services focusing on Fibre Channel and other networking technologies. Under the terms of the agreement, Medusa stockholders received approximately $7.0 million in cash. The transaction will be accounted for under the purchase method of accounting.

    On February 20, 2001, the Company entered into an agreement to acquire Marlow Industries, Inc. ("Marlow"), a privately-held company located in Dallas, Texas. Founded in 1973, Marlow is a leader in the design and manufacture of thermoelectric coolers for a variety of telecommunications applications as well as for defense, space, photonics (infrared sensing) and medical applications.

    Under the terms of the agreement, Marlow stockholders will be entitled to receive $30 million in cash and approximately 13.0 million shares of Finisar common stock including shares issuable upon the exercise of options to be assumed in the transaction. The transaction will be accounted for under the purchase method of accounting. The acquisition is expected to close during the quarter ending July 31, 2001 and is subject to approval by Marlow's stockholders, the notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act, the approval by Finisar's stockholders of an increase in Finisar's authorized common stock and other customary conditions.

    On February 27, 2001, the Company completed the sale of technology and other assets associated with its Opticity product line to ONI Systems, Inc. At the same time, Finisar entered into a supply agreement for certain optical components for ONI's new ONLINE2500™ product incorporating the technology to be purchased from Finisar.

    Under the terms of the agreement, upon closing, ONI Systems, Inc., paid the Company $5 million in cash and 488,624 shares of ONI common stock having a value of approximately $16.3 million based on a closing price of $33.438 per share. Up to an additional $25 million in cash is payable to the Company upon the achievement of certain post-closing development milestones.

    In March 2001, the Company entered into an agreement to acquire and operate a facility in Malaysia at an estimated cost of $10.0 million for the purposes of manufacturing a portion of its products in order to reduce costs and better protect its intellectual property.

F–34

FINANCIAL STATEMENTS

SENSORS UNLIMITED, INC.

As of December 31, 1999 and 1998 and for the years then ended

F–35

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders of
Sensors Unlimited, Inc.:

    We have audited the accompanying balance sheets of Sensors Unlimited, Inc. (a New Jersey corporation) as of December 31, 1999 and 1998, and the related statements of income, changes in stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

    We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sensors Unlimited, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

Roseland, New Jersey
January 28, 2000

F–36

SENSORS UNLIMITED, INC.

BALANCE SHEETS AS OF

DECEMBER 31, 1999 AND 1998

 
   1999
   1998
  
ASSETS  
CURRENT ASSETS:              
  Cash   $ 371,673   $ 7,911  
  Accounts receivable, less allowance for doubtful accounts of $40,000 and $10,000 in 1999 and 1998, respectively (Note 1)     1,809,325     956,272  
  Unbilled costs (Note 1)     464,524     354,949  
  Inventory (Note 1)     696,093     431,181  
  Prepaid expenses     24,763     20,118  
   
 
 
        Total current assets     3,366,378     1,770,431  

PROPERTY AND EQUIPMENT, net (Notes 1 and 2)
 
 
848,214
 
 
594,913
 

OTHER ASSETS
 
 
242,325
 
 
22,151
 
   
 
 
        Total assets   $ 4,456,917   $ 2,387,495  
   
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 

CURRENT LIABILITIES:
 
 
 
 
 
 
 
  Short-term borrowings and current maturities of long-term debt (Note 3)   $ 111,535   $ 122,948  
  Accounts payable     918,535     803,719  
  Accrued expenses     338,126     310,712  
  Deferred revenue (Note 1)     41,477     170,624  
   
 
 
        Total current liabilities     1,409,673     1,408,003  

LONG-TERM DEBT (Note 3)
 
 
43,816
 
 
987,824
 
   
 
 
        Total liabilities     1,453,489     2,395,827  
   
 
 

COMMITMENTS (Note 6)
 
 
 
 
 
 
 

STOCKHOLDERS' EQUITY (DEFICIT) (Note 4):
 
 
 
 
 
 
 
  Preferred stock, $.01 par value, 2,000,000 shares authorized, none issued or outstanding     —     —  
  Common stock, $.01 par value, 5,000,000 shares authorized, 750,833 and 750,000 shares issued and outstanding as of December 31, 1999 and 1998, respectively     22,033     22,000  
  Retained earnings (deficit)     2,984,921     (26,806 )
  Treasury stock, 219 shares at cost     (3,526 )   (3,526 )
   
 
 
        Total stockholders' equity (deficit)     3,003,428     (8,332 )
   
 
 
        Total liabilities and stockholders' equity (deficit)   $ 4,456,917   $ 2,387,495  
   
 
 

The accompanying notes to financial statements are an integral part of these balance sheets.

F–37

SENSORS UNLIMITED, INC.

STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

 
   1999
   1998
REVENUES (Note 1):            
  Net product sales   $ 8,402,623   $ 2,790,703
  Contract revenues     3,939,758     2,992,617
   
 
      12,342,381     5,783,320
   
 

OPERATING EXPENSES:
 
 
 
 
 
 
  Cost of product sales     2,380,632     1,053,264
  Cost of contract revenues     2,933,042     1,981,562
  Research and development expense     383,904     341,710
  Selling, general and administrative expense     3,233,201     2,290,825
   
 
      8,930,779     5,667,361
   
 
        Operating income     3,411,602     115,959

OTHER EXPENSE—Interest expense, net (Note 3)
 
 
75,700
 
 
104,038
   
 
        Income before income tax expense     3,335,902     11,921

INCOME TAX EXPENSE (Note 1)
 
 
284,675
 
 
200
   
 
        Net income   $ 3,051,227   $ 11,721
   
 

Net income per common share
 
 
 
 
 
 
       
Basic
 
$
4.01
 
$
0.02
   
 
        Diluted   $ 3.05   $ 0.01
   
 

Shares used in computing net income per share
 
 
 
 
 
 
       
Basic
 
 
750,198
 
 
749,781
   
 
        Diluted     988,564     964,864
   
 

The accompanying notes to financial statements are an integral part of these statements.

F–38

SENSORS UNLIMITED, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

 
   Common Stock
    
    
    
  
 
   Retained Earnings (Deficit)
   Treasury Stock
   Total Stockholders' Equity (Deficit)
  
 
   Shares
   Amounts
  
BALANCE, December 31, 1997   750,000   $ 22,000   $ (38,527 ) $ (3,526 ) $ (20,053 )
  Net income   —     —     11,721     —     11,721  
   
 
 
 
 
 
BALANCE, December 31, 1998   750,000     22,000     (26,806 )   (3,526 )   (8,332 )
  Distributions paid to stockholders   —     —     (39,500 )   —     (39,500 )
  Exercise of stock options   833     33     —     —     33  
  Net income   —     —     3,051,227     —     3,051,227  
   
 
 
 
 
 
BALANCE, December 31, 1999   750,833   $ 22,033   $ 2,984,921   $ (3,526 ) $ 3,003,428  
   
 
 
 
 
 

The accompanying notes to financial statements are an integral part of these statements.

F–39

SENSORS UNLIMITED, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998

 
   1999
   1998
  
CASH FLOWS FROM OPERATING ACTIVITIES:              
  Net income   $ 3,051,227   $ 11,721  
  Adjustments to reconcile net income to net cash provided by operating activities—              
      Depreciation     218,389     198,308  
      Provision for bad debts     43,060     —  
      Provision for obsolescence     53,567     —  
      Change in assets and liabilities—              
        Increase in accounts receivable     (896,113 )   (298,466 )
        Increase in unbilled costs     (109,575 )   (72,980 )
        Increase in inventory     (318,479 )   (150,152 )
        (Increase) decrease in prepaid expenses     (4,645 )   20,903  
        Increase in other assets     (60,174 )   (12,433 )
        Increase in accounts payable     114,816     338,724  
        Increase (decrease) in accrued expenses     27,414     (31,735 )
        (Decrease) increase in deferred revenue     (129,147 )   49,290  
   
 
 
          Net cash provided by operating activities     1,990,340     53,180  
   
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:              
  Purchases of property and equipment     (471,690 )   (142,569 )
  Deposit for construction     (160,000 )   —  
   
 
 
      (631,690 )   (142,569 )
   
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:              
  Net borrowings (repayments) under subordinated convertible promissory note     (776,000 )   186,000  
  Net repayments under line of credit     (74,000 )   (6,000 )
  Repayment of notes payable     (105,421 )   (112,670 )
  Exercise of stock options     33     —  
  Distributions paid to stockholders     (39,500 )   —  
   
 
 
          Net cash (used in) provided by financing activities     (994,888 )   67,330  
   
 
 
          Net increase (decrease) in cash     363,762     (22,059 )
CASH, beginning of year     7,911     29,970  
   
 
 
CASH, end of year   $ 371,673   $ 7,911  
   
 
 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:              
  Cash paid for—              
    Interest   $ 68,249   $ 104,038  
    Income taxes     274,675     200  
   
 
 

The accompanying notes to financial statements are an integral part of these statements.

F–40

SENSORS UNLIMITED, INC.

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1999 AND 1998

1. The Company and Summary of Significant Accounting Policies

The Company

    Sensors Unlimited, Inc. (the "Company") was established in 1991 to capitalize on advances in III-V compound materials technology for telecommunications and imaging applications in the 1.0 micrometer—1.2 micrometer infrared spectrum. The Company performs applied research and development and manufacturing of state-of-the-art Indium Gallium Arsenide (InGaAs) photodetector arrays and cameras. The Company is recognized as a leader in the field of detector arrays for wavelength division multiplexing channel monitors, cameras and imaging products. The arrays are used in dense wavelength division multiplexing (DWDM) fiber optic systems addressing the demand for bandwidth on the Internet.

Use of Estimates

    The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue

    Revenue derived from sales of products is recognized upon shipment, passage of title and when all significant obligations of the Company have been satisfied. Revenue derived from research and development contracts is recognized in the same period as the professional services are rendered, related costs are incurred and significant contract terms have been satisfied.

    Revenue from research and development contracts that include performance milestones is recognized in accordance with the terms of the respective contracts. Revenue from achievement of milestone events is recognized when all parties concur that the scientific results stipulated in the agreement have been met. Unbilled costs represent revenues provided in excess of amounts billed. Deferred revenue represents billings in excess of costs and earnings and customer advances.

Allowance for Doubtful Accounts

    The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables as well as historical collection information. In determining the amount of the allowance, management is required to make certain estimates and assumptions regarding the timing and amount of collection.

F–41

Inventory

    Inventory is stated at the lower of cost (moving average method) or market. The following is a summary of inventory at December 31, 1999 and 1998—

 
   1999
   1998
  
Raw materials and spare parts   $ 652,476   $ 400,669  
Finished goods     103,617     70,512  
   
 
 
      756,093     471,181  
Inventory reserve     (60,000 )   (40,000 )
   
 
 
    $ 696,093   $ 431,181  
   
 
 

Property and Equipment

    Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the respective assets, which range from three to seven years.

    The Company reviews the recoverability of its long-lived assets when events or changes in circumstances arise in order to identify business conditions which may indicate a possible impairment. The Company believes that there have been no such events or changes in circumstances. The assessment for potential impairment is based primarily on the Company's ability to recover the unamortized balance of its long-lived assets from expected future cash flows from its operations on an undiscounted basis.

Income Taxes

    The Company has elected to be treated as an "S" corporation for Federal income tax purposes. The stockholders are liable for income taxes on the Company's taxable income, as it passes through to the stockholders' individual income tax returns. During 1999 and 1998, the Company has provided for state income taxes at statutory rates. Effective January 1, 2000, the Company has elected to be taxed as an "S" corporation in the State of New Jersey and will pay a reduced (2%) state corporate income tax on its taxable income. Deferred state income taxes for differences in timing in reporting income for financial statement and tax purposes are not significant.

    During 1999 and 1998, the Company utilized approximately $94,000 and $58,000, respectively, of state net operating loss carryforwards to offset taxable income. At December 31, 1999, all state net operating loss carryforwards have been utilized.

    Subsequent to the year-ended December 31, 1999, the Company anticipates making distributions to stockholders to cover their income taxes relating to 1999 Company earnings.

Stock-based Compensation

    The Financial Accounting Standards Board has issued Statement No. 123, "Accounting for Stock-Based Compensation," which requires companies to measure employee stock compensation plans based on the fair value method using an option pricing model or to continue to apply APB No. 25,

F–42

"Accounting for Stock Issued to Employees," and provide pro forma footnote disclosures under the fair value method. The Company continues to apply APB No. 25 and provides pro forma footnote disclosures.

Net Income Per Share

    Basic net income per share is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding. Diluted net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding, adjusted for the incremental dilution of outstanding stock options (238,366 and 215,083 in 1999 and 1998, respectively).

Concentrations

    In 1999 and 1998, approximately 32% and 52%, respectively, of revenues were derived under contracts with agencies within the U. S. Government. In addition, approximately 6% of 1999 revenues and 9% of 1998 revenues were derived from export sales.

    During 1999 and 1998, sales to one customer approximated 44% and 13% of revenues, respectively. Accounts receivable from this customer as of December 31, 1999 and 1998 approximated $1,181,000 and $285,000, respectively.

2. Property and Equipment, Net

    Property and equipment as of December 31, 1999 and 1998 consists of the following—

 
   1999
   1998
             
Laboratory equipment   $ 1,195,346   $ 851,405
Computer equipment and software     234,473     192,731
Furniture and fixtures     177,032     100,125
Leasehold improvements     137,001     127,901
   
 
      1,743,852     1,272,162
Less—Accumulated depreciation     895,638     677,249
   
 
    $ 848,214   $ 594,913
   
 

F–43

3. Borrowings

    Borrowings as of December 31, 1999 and 1998 consist of the following—

 
   1999
   1998
             
Equipment loan   $ 148,975   $ 236,607
Note payable     6,376     24,165
Subordinated convertible promissory note     —     776,000
Lines of credit     —     74,000
   
 
      155,351     1,110,772
Less—Current maturities     111,535     122,948
   
 
    $ 43,816   $ 987,824
   
 

    On October 5, 1999, a bank extended a $1,900,000 line of credit to the Company, secured by substantially all Company assets and partially guaranteed by the Company's president and primary stockholder. The proceeds are restricted for use by the Company solely for the purchase of equipment related to the Company's business and to finance the construction of additional space within the Company's place of business (see Note 5). The line of credit terminates on April 15, 2000, and is expected to be converted into a promissory note payable. As of December 31, 1999, there were no amounts outstanding under the line of credit.

    Pursuant to a subordinated convertible promissory note dated March 5, 1997, the Company borrowed $800,000 from its president, and primary stockholder, and utilized the proceeds to repay a note payable due April 30, 1997 to a bank. The subordinated convertible promissory note was convertible into the Company's common stock on a mandatory basis upon the consummation of an initial equity financing by the Company, such number of shares being equal to the outstanding principal and interest under the note outstanding divided by the price per share paid in connection with the initial equity financing. The note was also convertible at the option of the holder at any time into shares of Company common stock, cash or any combination thereof. During 1999, the Company repaid the balance on the subordinate convertible promissory note. On August 6, 1999, the credit agreement was amended to allow borrowings in amounts up to $300,000.

    On March 6, 1997, a bank extended a $300,000 line of credit to the Company, secured by substantially all Company assets and guaranteed by the Company's president. On August 6, 1999, the line of credit was increased to $1,000,000, and was amended to bear interest at the bank's base rate, as defined, plus 1% (9.5% as of December 31, 1999). As of December 31, 1999 and 1998, $0 and $74,000 was outstanding under the line of credit, respectively. During 1999, all amounts outstanding were repaid by the Company. This facility matures on April 30, 2000 and it is the Company's intent to renew the facility.

    On August 31, 1995, the Company entered into a note payable agreement with a bank for $500,000. On March 31, 1998, the Company refinanced the remaining note balance of $315,476. The refinanced note requires 36 monthly installments of $8,763 plus interest at the prime rate plus 1.5% (10% as of December 31, 1999). The principal balance outstanding was $148,975 and $236,607 as of December 31, 1999 and 1998, respectively.

F–44

    The Company's debt agreements contain covenant restrictions, which, among other things, require minimum financial ratios and the maintenance of minimum net worth, as defined.

    On April 17, 1995, the Company entered into a note payable with a third party for $75,000. The note has an annual interest rate of 11.0% and requires 60 monthly installments of $1,631 which commenced May 1, 1995. The principal balance outstanding was $6,376 and $24,165 as of December 31, 1999 and 1998, respectively.

    The future principal amounts due under the aforementioned loans are as follows—

2000   $ 111,535
2001     43,816
   
    $ 155,351
   

4. Stock Option Plan

    The Company established the 1993 Stock Option Plan ("1993 Plan") to offer employees and consultants to the Company, incentive to enhance the long-term objectives of the Company. The 1993 Plan includes both incentive and nonqualified stock options. 230,000 shares of the Company's common stock have been reserved for issuance under the 1993 Plan. Options are issued at the discretion of the Board of Directors and at such amounts that the Board of Directors has determined is the fair value at the date of grant. Options vest 25% on the first anniversary of the grant and then ratably over 36 months following the first anniversary.

    During 1997, the Company established the 1997 Stock Option Plan ("1997 Plan") to attract and retain personnel, to provide additional incentive to employees, nonemployee members of the Board and consultants of the Company. The 1997 Plan includes both incentive and nonqualified stock options. 150,000 shares of the Company's common stock has been reserved for issuance under the 1997 Plan. A committee appointed by the Board of Directors determines option grants, their related fair value at the date of grant, the related exercise prices and the vesting period.

    In accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (FAS 123), the fair value of option grants is estimated on the date of grant using the Black-Scholes option-pricing model for proforma footnote purposes with the following assumptions used for grants in all years-dividend yield of 0%, risk-free interest rate of 6% and expected option life

F–45

of 10 years. The weighted average fair value of options granted during 1999 and 1998 was $2.23 and $0.74, respectively. The activity and options outstanding under the Plans are as follows—

 
   Number of Shares
   Weighted
Average
Exercise
Price
           
Outstanding, December 31, 1997 (191,480 exercisable)—   243,000     0.19
  Granted   27,500     1.65
  Forfeited   (13,000 )   1.65
   
 
Outstanding, December 31, 1998 (214,438 exercisable)—   257,500   $ 0.27
  Granted   18,000     1.65
  Exercised   (1,000 )   0.04
  Forfeited   (11,000 )   1.65
   
 
Outstanding, December 31, 1999   263,500   $ 0.31
   
 
Exercisable, December 31, 1999   229,563   $ 0.16
   
 

    The following table summarizes information about stock options outstanding at December 31, 1999—

Exercise Prices
   Number Outstanding at December 31, 1999
   Weighted Average Remaining Life
   Weighted Average Exercise Price
   Number Exercisable at December 31, 1999
$0.04   219,000   3.0   $ 0.04   212,854
1.65   44,500   6.6     1.65   16,709
0.04 to 1.65   263,500   3.6     0.31   229,563

    Subsequent to December 31, 1999, the Company granted stock options to purchase 99,000 shares of the Company's common stock at an exercise price of $5.00, the estimated fair value at the date of grant.

    As permitted by FAS 123, the Company has chosen to continue accounting for stock options at their intrinsic value. Accordingly, no compensation expense has been recognized for its stock option compensation plans. Had the fair value method of accounting been applied to the Company's stock option plans, the tax-effected impact would be as follows—

 
   1999
   1998
Net income as reported   $ 3,051,227   $ 11,721
Estimated fair value of the year's option grants, net of tax     11,156     5,928
   
 
Net income adjusted   $ 3,040,071   $ 5,793
   
 

    This proforma impact only takes into account options granted since January 1, 1995 and is likely to increase in future years as additional options are granted and amortized over the vesting period.

F–46

5. Commitments

    In January 1996, the Company signed a Patent and Technical information License Agreement with a third party research provider. The Agreement grants the Company a nonexclusive, worldwide license relating to certain technology for a period of twelve years. The Company is obligated to pay to the third party research provider a royalty equal to specified percentages of net product sales, as defined. Royalty rates are as follows—

Net Product Sales
   Rate
Up to $1,000,000   10%
$1,000,000 - $3,000,000   8%
$3,000,000 - $5,000,000   6%
$5,000,000 - $10,000,000   4%
In excess of $10,000,000   3%

    Royalty expense under this agreement was approximately $23,000 and $25,000 in 1999 and 1998, respectively.

    The Company rents office space under a noncancellable lease agreement that expires January 1, 2001. The future minimum lease obligations under the agreement are as follows—

2000   $ 173,000

    During 1999 and 1998, rent expense approximated $173,000 and $136,000, respectively.

    On November 4, 1999, the Company entered into an $800,000 agreement with a contractor for the construction of additional space within the Company's place of business to be completed in 2000. During 1999, the Company paid a $160,000 down payment on the construction which is included in other assets as of December 31, 1999.

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F–48

UNAUDITED INTERIM FINANCIAL STATEMENTS

SENSORS UNLIMITED, INC.

As of September 30, 2000 and for the nine months ended September 30, 2000 and 1999

F–49

SENSORS UNLIMITED, INC.

UNAUDITED BALANCE SHEET

SEPTEMBER 30, 2000

(in thousands)

ASSETS  
Current assets:        
  Cash   $ 427  
  Accounts receivable, net     3,695  
  Accounts receivable, other     357  
  Inventory     1,615  
  Prepaid expenses     194  
   
 
Total current assets     6,288  
Property and equipment, net     4,464  
Other assets     85  
   
 
Total assets   $ 10,837  
   
 

LIABILITIES AND STOCKHOLDERS' EQUITY
 

Current liabilities:
 
 
 
 
  Short-term borrowings and current maturities of long-term debt   $ 1,141  
  Accounts payable     1,504  
  Accrued compensation     553  
  Other accrued liabilities     501  
  Dividend payable     5,723  
  Income tax payable     40  
   
 
Total current liabilities     9,462  
Long term debt     1,515  
Stockholders' deficit:        
  Preferred stock     —  
  Common stock     382  
  Accumulated deficit     (522 )
   
 
Total stockholders' deficit     (140 )
   
 
Total liabilities and stockholders' equity   $ 10,837  
   
 

See accompanying note to unaudited financial statements.

F–50

SENSORS UNLIMITED, INC.

UNAUDITED STATEMENTS OF OPERATIONS

NINE MONTHS ENDED SEPTEMBER 30

(in thousands, except per share data)

 
   2000
   1999
Revenue   $ 14,597   $ 5,087
Cost of revenue     5,228     1,626
   
 
Gross profit     9,369     3,461
Operating expenses:            
  Research and development     1,338     —
  Sales and marketing     1,738     629
  General and administrative     1,551     562
   
 
Total operating expenses     4,627     1,191
   
 
Operating income     4,742     2,270
Interest expense     36     73
   
 
Income before income tax expense     4,706     2,197
Income tax expense     100     100
   
 
Net income   $ 4,606   $ 2,097
   
 
Net income (loss) per common share            
    Basic   $ (4.50 ) $ 2.75
   
 
    Diluted   $ (4.50 ) $ 2.09
   
 
Shares used in computing net income (loss) per share            
    Basic     780     750
   
 
    Diluted     780     989
   
 

See accompanying note to unaudited financial statements.

F–51

SENSORS UNLIMITED, INC.

UNAUDITED STATEMENT OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30

(in thousands)

 
   2000
   1999
  
Operating Activities:              
  Net income   $ 4,606   $ 2,097  
  Adjustments to reconcile net income to net cash provided by operating activities:              
    Depreciation and amortization     439     141  
    Changes in operating assets and liabilities:              
      Accounts receivable     (1,430 )   (86 )
      Accounts receivable, other     (348 )   (526 )
      Inventory     (919 )   (135 )
      Prepaid expenses     (169 )   (34 )
      Other assets     157     —  
      Accounts payable     571     (182 )
      Accrued compensation     401     (135 )
      Other accrued liabilities     298     (25 )
      Income tax payable     30     —  
   
 
 
Net cash provided by operating activities     3,636     1,115  
   
 
 
Investing Activities:              
  Purchases of property and equipment     (4,055 )   (221 )
   
 
 
Financing Activities:              
  Net borrowings under line of credit     800     —  
  Net borrowings under notes payable     1,702     (724 )
  Proceeds from exercise of stock options     363     —  
  Dividends payable     5,723     —  
  Distributions paid to stockholders     (8,113 )   (34 )
   
 
 
Net cash provided by financing activities     475     (758 )
   
 
 
Net increase in cash     56     136  
Cash, beginning of period     371     8  
   
 
 
Cash, end of period   $ 427   $ 144  
   
 
 

See accompanying note to unaudited financial statements.

F–52

SENSORS UNLIMITED, INC.

NOTE TO UNAUDITED FINANCIAL STATEMENTS

SEPTEMBER 30, 2000

1.  Basis of Presentation

    The accompanying unaudited condensed financial statements as of September 30, 2000, and for the nine months period ended September 30, 2000 and 1999 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position at September 30, 2000 and the operating results for the nine months ended September 30, 2000 and 1999 and the cash flows for the nine months ended September 30, 2000 and 1999. These unaudited condensed financial statements should be read in conjunction with the Company's audited financial statements and notes for the years ended December 31, 1999 and 1998 included elsewhere in this proxy statement.

    The results of operations for the nine months ended September 30, 2000 and 1999 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending December 31, 2000.

F–53

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F–54

FINANCIAL STATEMENTS

DEMETER TECHNOLOGIES, INC.

As of October 31, 2000 and for the period from inception (June 22, 2000) to October 31, 2000

F–55


REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

     The Board of Directors and Stockholders
Demeter Technologies, Inc.

    We have audited the accompanying balance sheet of Demeter Technologies, Inc. as of October 31, 2000, and the related statements of operations, stockholders' equity, and cash flows for the period from inception (June 22, 2000) to October 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

    We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Demeter Technologies, Inc. at October 31, 2000, and the results of its operations and its cash flows for the period from inception (June 22, 2000) to October 31, 2000, in conformity with accounting principles generally accepted in the United States.

/s/ ERNST & YOUNG LLP

Palo Alto, California
January 23, 2001

F–56

DEMETER TECHNOLOGIES, INC.

BALANCE SHEET

October 31, 2000

Assets  
Current assets:        
  Cash and cash equivalents   $ 564,333  
  Short-term investments     3,371,655  
  Accounts receivable (net allowance for doubtful accounts of $1,646)     20,960  
  Inventories     233,026  
  Prepaid expenses and other current assets     107,706  
   
 
Total current assets     4,297,680  
Property, equipment, and improvements, net     608,550  
   
 
Total assets   $ 4,906,230  
   
 

Liabilities and Stockholders' Equity
 
Current liabilities:        
  Accounts payable   $ 527,042  
  Payable to American Xtal Technology, Inc.     827,725  
  Payable to private stockholders     175,000  
  Other accrued liabilities     209,877  
   
 
Total current liabilities     1,739,644  
Commitments        
Stockholders' equity:        
  Preferred stock, $0.001 par value, 40,000,000 shares authorized:        
    Convertible Series A, 20,000,000 shares designated, $0.001 par value, 14,000,701 shares issued and outstanding; aggregate liquidation preference of $8,000,000     14,000  
  Common stock, $0.001 par value; 40,000,000 shares authorized, 4,000,000 shares issued and outstanding     4,000  
  Additional paid-in capital     17,992,000  
  Stock subscription receivable     (4,050,000 )
  Deferred stock compensation     (7,529,000 )
  Purchased technology     (1,653,000 )
  Accumulated other comprehensive income     33,919  
  Accumulated deficit     (1,645,333 )
   
 
Total stockholders' equity     3,166,586  
   
 
Total liabilities and stockholders' equity   $ 4,906,230  
   
 

See accompanying notes.

F–57

DEMETER TECHNOLOGIES, INC.

STATEMENT OF OPERATIONS

Period from inception (June 22, 2000) to October 31, 2000

Revenues   $ 53,754  
   
 

Operating expenses:
 
 
 
 
  Cost of revenues     115,625  
  Research and development     518,259  
  General and administrative     649,849  
  Amortization of deferred stock compensation     371,000  
  Amortization of purchased technology     57,000  
   
 
Total operating expenses     1,711,733  
Loss from operations     (1,657,979 )
Interest and other income     12,646  
   
 
Net loss   $ (1,645,333 )
   
 

See accompanying notes.

F–58

DEMETER TECHNOLOGIES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY

Period from inception (June 22, 2000) to October 31, 2000

 
   Series A Convertible
Preferred Stock
    
    
    
    
    
    
    
    
    
  
 
   Common Stock
    
    
    
    
   Accumulated
Other
Comprehensive
Income
    
    
  
 
   Additional
Paid-In
Capital
   Stock
Subscription
Receivable
   Deferred
Stock
Compensation
   Contributed
Technology
   Accumulated
Deficit
   Total
Stockholders'
Equity
  
 
   Shares
   Amount
   Shares
   Amount
  
Issuance of 4,000,000 shares of common stock at $0.10 per share   —   $ —   4,000,000   $ 4,000   $ 396,000   $ —   $ —   $ —   $ —   $ —   $ 400,000  
Issuance of shares of Series A preferred stock at $0.5714 per share   14,000,701     14,000   —     —     7,986,000     (4,050,000 )   —     —     —     —     3,950,000  
Issuance of warrant to purchase up to 4,500,000 shares of Series A convertible preferred stock in exchange for purchased technology   —     —   —     —     1,710,000     —     —     (1,710,000 )   —     —     —  
Deferred stock compensation   —     —   —     —     7,900,000     —     (7,900,000 )   —     —     —     —  
Amortization of deferred stock compensation   —     —   —     —     —     —     371,000     —     —     —     371,000  
Amortization of purchased technology   —     —   —     —     —     —     —     57,000     —     —     57,000  
Unrealized gain on short-term investments   —     —   —     —     —     —     —     —     33,919     —     33,919  
Net loss   —     —   —     —     —     —     —     —     —     (1,645,333 )   (1,645,333 )
                                                           
 
Comprehensive loss                                                             (1,611,414 )
   
 
 
 
 
 
 
 
 
 
 
 
Balance at October 31, 2000   14,000,701   $ 14,000   4,000,000   $ 4,000   $ 17,992,000   $ (4,050,000 ) $ (7,529,000 ) $ (1,653,000 ) $ 33,919   $ (1,645,333 ) $ 3,166,586  
   
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes.

F–59

DEMETER TECHNOLOGIES, INC.

STATEMENT OF CASH FLOWS

Period from inception (June 22, 2000) to October 31, 2000

Operating activities        
Net loss   $ (1,645,333 )
Adjustments to reconcile net income to net cash used in operating activities:        
  Depreciation and amortization     6,655  
  Amortization of deferred stock compensation     371,000  
  Amortization of purchased technology     57,000  
  Changes in operating assets and liabilities:        
    Accounts receivable     (20,960 )
    Inventories     (233,026 )
    Prepaid expenses and other current assets     (107,706 )
    Accounts payable     527,042  
    Payable to American Xtal Technologies, Inc.     827,725  
    Other accrued liabilities     209,877  
   
 
Net cash used in operating activities     (7,726 )
   
 

Investing activities
 
 
 
 
Purchase of property and equipment     (615,205 )
Purchase of short-term investments     (3,337,736 )
   
 
Net cash used in investing activities     (3,952,941 )
   
 

Financing activities
 
 
 
 
Proceeds from issuance of Series A convertible preferred stock     3,950,000  
Proceeds from issuance of common stock     400,000  
Payable to private stockholders     175,000  
   
 
Net cash provided by financing activities     4,525,000  
   
 
Net increase in cash and cash equivalents and cash and cash equivalents end of period   $ 564,333  
   
 

See accompanying notes.

F–60

DEMETER TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

October 31, 2000

1.  Summary of Significant Accounting Policies

Description of Business

    Demeter Technologies, Inc. (the Company) was incorporated in the state of Delaware on June 22, 2000 to engage in the development of long wavelength Fabry Perot (FP) and Distributed Feedback (DFB) lasers for datacom and telecommunications applications.

    In June, 2000, the founders of the Company were issued 4,000,000 shares of common stock in exchange for cash of $400,000. In August, 2000, the Company issued 14,000,701 shares of Series A convertible preferred stock at $0.5714 per share (see Note 6). Each preferred stockholder paid approximately one half in cash and one half was recorded as a subscription receivable. Concurrently with the Series A convertible preferred stock, the Company issued a warrant for 4,500,000 shares of Series A convertible preferred stock (see Note 6) to American Xtal Technologies, Inc. (AXT) in exchange primarily for technology related to FP lasers. AXT also leases certain facilities and equipment to the Company (see Note 5). The president of the Company is the brother of the president of AXT.

Use of Estimates

    The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates.

Cash and Cash Equivalents

    The Company considers all highly liquid investments purchased with original maturity from the date of purchase of three months or less to be cash equivalents.

Short-Term Investments

    In accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company has classified its short-term investments as available-for-sale. Available-for-sale securities are stated at market value and unrealized holding gains and losses, net of the related tax effect, are excluded from earnings and are reported as a separate component of stockholders' equity until realized. A decline in the market value of the security below cost that is deemed other than temporary is charged to earnings, resulting in the establishment of a new cost basis for the security. The cost of short-term investments sold is based on specific identification. The fair value of short-term investments is based on quoted market prices. The difference between market value and cost of these securities at October 31, 2000 was an unrealized gain of $33,919.

Inventories

    Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.

Property and Equipment

    Property and equipment are stated at cost, net of accumulated depreciation and amortization. Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, generally two to seven years.

F–61

Revenue Recognition

    Revenue is recognized at the time of product shipment and no significant obligations remain, net of allowance for estimated returns. Warranty expenses are also estimated and provided for at the time of shipment.

Advertising Costs

    Advertising costs are expensed as incurred. Advertising costs were not material for the period ending October 31, 2000.

Concentration of Credit Risk

    Financial instruments which potentially subject the Company to concentrations of credit risk include cash, cash equivalents, short-term investments, and accounts receivable. The Company places its cash, cash equivalents, and short-term investments with high-credit quality financial institutions. Such investments are generally in excess of FDIC insurance limits. Concentrations of credit risk, with respect to accounts receivable, exist to the extent of amounts presented in the financial statements. Accounts receivable from two customers represented 66% and 21% of the total balance at October 31, 2000. Generally, the Company does not require collateral or other security to support customer receivables. The Company performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses based on historical experience and other information available to management. Losses to date have been within management's expectations.

Current Vulnerabilities Due to Certain Concentrations

    During the period from inception (June 22, 2000) to October 31, 2000, revenues from two customers represented 50% and 31% of total revenues.

Research and Development

    Research and development expenditures are charged to operations as incurred.

Stock-Based Compensation

    The Company accounts for employee stock options and common stock purchase right grants in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and has adopted the disclosure-only alternative of Statement of Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).

Comprehensive Income (Loss)

    Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) requires unrealized gains or losses on the Company's available-for-sale investments to be included in other comprehensive income. The net unrealized gain on available-for-sale securities for the period from inception (June 22, 2000) to October 31, 2000 was $33,919.

F–62

2.  Short-Term Investments

    As of October 31, 2000, short-term investments consist of certificates of deposit with a fair value of $3,371,655 and an amortized cost of $3,337,736. The average maturity of the short-term investments was approximately two months and the weighted-average effective interest rate was 6%.

3.  Inventories

    Inventories consist of the following:

 
   October 31,
2000
Raw materials   $ 188,380
Work in-process     18,560
Finished goods     26,086
   
    $ 233,026
   

4.  Property, Equipment, and Improvements

    Property and equipment consists of the following:

 
   October 31,
2000
Computers, machinery, and equipment   $ 304,894
Furniture and fixtures     32,065
Software     36,799
Construction in progress     241,447
   
      615,205
Less accumulated depreciation and amortization     6,655
   
Property and equipment, net   $ 608,550
   

    Construction in progress consists of leasehold improvements not placed into service. No depreciation or amortization was recorded on these assets.

5.  Operating Lease Commitments

    The Company leases its facilities and equipment under various agreements with AXT expiring August 2003 and August 2002, respectively. Rent expense was approximately $117,000 for the period ended October 31, 2000. The Company has the option to extend the term of its operating leases for three additional years for leased facilities and for two additional years for leased equipment. The Company also has an option to purchase certain of the equipment for the depreciated value of the

F–63

equipment owned by AXT and at the buy-out value of the equipment leased by AXT. At October 31, 2000, minimum rental payments under operating leases are as follows:

Year ended October 31,      
  2001   $ 488,428
  2002     426,813
  2003     152,535
   
    $ 1,067,776
   

    AXT is currently constructing improvements at the leased facilities. AXT is funding the entire cost of such improvements; however, the Company is obligated to reimburse AXT on demand for any portion of such cost of improvements which exceeds $1,150,000. In addition, the Company shall pay AXT additional monthly rent equal to the total amount of AXT's depreciation costs of such improvements plus the interest cost to AXT on any funds borrowed for such purpose or the interest cost on any funds used to build such improvements (based on 10% per annum simple interest, regardless of how AXT finances such improvements), calculated on a monthly basis; the Company shall continue to pay such additional rent monthly until AXT has recovered from the Company the entire building costs of such improvements (up to $1,150,000).

6.  Stockholders' Equity

Common Stock and Preferred Stock

    Following the Company's incorporation in June 2000, the Company is authorized to issue 80,000,000 shares consisting of 40,000,000 shares of common stock, par value $0.001 per share and 40,000,000 shares of preferred stock, par value $0.001. The board of directors has the authority to issue the undesignated preferred stock in one or more series and to fix the rights, preferences, privileges, and restrictions thereof.

Series A Convertible Preferred Stock

    On August 10, 2000, the Company designated 20,000,000 shares as Series A convertible preferred stock, and in August 2000, the Company issued 14,000,701 shares of Series A convertible preferred stock at $0.5714 per share, resulting in cash proceeds of approximately $4,000,000 and a receivable of $4,000,000.

    The holders of shares of Series A preferred stock are entitled to receive dividends, out of assets legally available therefore, prior and in preference to any declaration or payment of any dividend (payable other than in common stock or other securities and rights convertible into or entitling the holders thereof to receive, directly or indirectly, additional shares of common stock) on the common stock, at the rate of 8% of the liquidation preference per share per annum for the Series A preferred stock, payable when, as, and if declared by the board of directors. Such dividends will not be cumulative. No dividends have been declared.

    Each share of Series A convertible preferred stock is convertible, at the option of the holder, at any time, into common stock at the current conversion rate (currently one-for-one). Conversion is

F–64

automatic upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, which results in a price per share of not less than five times the then applicable conversion price and gross offering proceeds of not less than $10,000,000 or upon the approval of the holders of at least a majority of the outstanding shares of the preferred stock. The preferred stock has voting rights on an as-if-converted to common stock basis.

    Series A convertible preferred stockholders are entitled to receive, upon liquidation, an amount per share equal to the issuance price, plus all declared but unpaid dividends. Thereafter, the remaining assets and funds, if any, shall be distributed pro rata among the common stockholders and Series A convertible preferred stockholders on an as-if-converted basis.

Warrants and Related Purchased Technology

    On August 10, 2000, the Company granted a warrant to AXT to purchase up to 4,500,000 shares of the Company's Series A convertible preferred stock at $0.5714 per share. The warrant may be exercised in whole or in part at any time, and will expire the later of (i) August 10, 2005 and (ii) the closing of a qualified public offering or the sale of substantially all of the assets of the Company or the merger or consolidation with a public company. The value of the warrant was estimated using the Black-Scholes option pricing model with the following assumptions: weighted-average, risk-free interest rate of 5%, estimated life of 5 years, volatility of 0.8%, and no dividend yield. The warrant was primarily issued for access to certain technology related to FP lasers. The Company has recorded the $1,710,000 estimated fair value of the warrant as a contra-equity amount and is being amortized to income over the 5-year estimated life of the warrant.

2000 Stock Plan

    In September 2000, the Company adopted the 2000 Stock Plan (the Plan) which provides for the issuance of common stock options and common stock purchase rights to employees and consultants of the Company of up to 3,000,000 shares of the Company's common stock. The Plan permits the Company to (i) grant incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, and (ii) nonstatutory stock options, which are not intended to qualify as incentive stock options. Options generally vest 25% upon completion of one year of service and 1/48 per month thereafter. Options expire after 10 years.

    During the period from inception (June 22, 2000) to October 31, 2000, the Company granted options for 1,137,000 shares of common stock at an exercise price of $0.25 per share. None of these options were exercised or canceled during the period from inception (June 22, 2000) to October 31, 2000 and none of the options were exercisable as of October 31, 2000. The weighted-average deemed fair value of the options granted during the period from inception (June 22, 2000) to October 31, 2000 was $7.64 per share. The Company also reserved for issuance 1,048,000 options at an exercise price of $0.25 per share to certain individuals, not yet employees with the Company, with vesting commencing the first day of employment with the Company. The weighted-average remaining contractual life of the options outstanding as of October 31, 2000 was 9.8 years. As of October 31, 2000, 815,000 shares of common stock were available for future grants.

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Deferred Stock Compensation

    In connection with the grant of stock options to employees, the Company recorded deferred stock compensation of $7,900,000 for the period from inception (June 22, 2000) through October 31, 2000, representing the difference between the deemed fair value of the Company's common stock for accounting purposes and the option exercise price of these options at the date of grant. Deferred stock compensation is presented as a reduction of stockholders' equity, with graded amortization recorded over the four-year vesting period. The amortization expense relates to options awarded to employees in all operating expense categories. The Company will recognize additional deferred compensation for the options reserved for issuance to certain individuals who have not yet commenced employment with the Company.

Accounting for Stock-Based Compensation

    Pro forma information regarding net income is required by SFAS 123 as if the Company had accounted for its employee stock options granted under the fair value method of SFAS 123. The fair value for the Company's stock option grants was estimated at the date of grant using the minimum value option valuation model. The minimum value option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's stock-based awards have characteristics significantly different from those of traded options and because changes in the subject input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessary provide a reliable single measure of the fair value of its stock-based awards. The fair value of these options was estimated at the date of grant using the minimum value method option pricing model with the following weighted-average assumptions: risk-free interest rates of 5%; no dividend yield; and a weighted-average expected life of the option of five years.

    For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. For the period from inception (June 22, 2000) to October 31, 2000 the pro forma net loss was $(1,795,333).

Shares Reserved

    Common stock subject to future issuance is as follows:

 
   October 31,
2000
Conversion of Series A convertible preferred stock   14,000,701
Exercise of outstanding options   1,137,000
Shares reserved for outstanding options   1,048,000
Common stock available for grant under stock option plan   815,000
Common stock reserved for exercise of warrant for Company's Series A convertible preferred stock   4,500,000
   
    21,500,701
   

F–66

7.  Income Taxes

    There is no provision for U.S. federal, U.S. state or foreign income taxes as the Company has incurred operating losses since inception for all jurisdictions.

    Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

    Significant components of the Company's deferred tax assets are as follows:

 
   October 31,
2000
  
Deferred tax assets:        
  Net operating loss carryforwards   $ 300,000  
  Other     200,000  
   
 
Total deferred tax assets     500,000  
Valuation allowance     (500,000 )
   
 
Net deferred tax assets   $ —  
   
 

    Realization of the deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.

    As of October 31, 2000, the Company has net operating loss carryforwards for federal income tax purposes of approximately $800,000, which expire in 2020. The Company also had net operating loss carryforwards for state income tax purposes of approximately $800,000 expiring in 2008. Utilization of the Company's net operating loss may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss before utilization.

8.  Segments and Geographic Information

    The Company operates in one reportable segment, the design, manufacture, and marketing of lasers for datacom and telecommunications applications. During the period from inception (June 22, 2000) to October 31, 2000, 10%, 50% and 40% of the Company's revenues were from United States, Taiwan, and UK based entities, respectively.

9.  Subsequent Events

    On November 21, 2000, all of the stockholders' of the Company sold their ownership interest to Finisar Corporation (Finisar). Finisar will record the transaction using the purchase method of accounting. Pursuant to the Agreement and Plan of Reorganization, Finisar issued 6,020,012 shares of its common stock in exchange for the outstanding shares of Demeter common and preferred stock and the outstanding warrant. In addition, Finisar assumed options to purchase the Company's common stock and reserved 566,573 shares of Finisar common stock for issuance upon the exercise of the assumed options.

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F–68

UNAUDITED PRO FORMA INFORMATION

FINISAR CORPORATION, SENSORS UNLIMITED, INC.,
DEMETER TECHNOLOGIES, INC. AND MEDUSA TECHNOLOGIES, INC.

As of January 31, 2001 and for the year ended
April 30, 2000 and for the nine months
ended January 31, 2001

F–69


FINISAR CORPORATION, SENSORS UNLIMITED, INC.,
DEMETER TECHNOLOGIES, INC. AND MEDUSA TECHNOLOGIES, INC.

INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION

    The Unaudited Pro Forma Condensed Statement of Operations for the year ended April 30, 2000 and the nine months ended January 31, 2001 and the Unaudited Pro Forma Condensed Balance Sheet as of January 31, 2001 are based on the historical financial statements of Finisar Corporation ("Finisar"), Sensors Unlimited, Inc. ("Sensors"), Demeter Technologies, Inc. ("Demeter") and Medusa Technologies Inc. ("Medusa"), after giving effect to the acquisition of Sensors, Demeter and Medusa under the purchase method of accounting and the assumptions and adjustments described in the accompanying Notes to the Unaudited Pro Forma Condensed Financial Statements. The Unaudited Pro Forma Condensed Statements of Operations are presented as if the combinations had taken place on May 1, 1999.

    The Unaudited Pro Forma Condensed Statement of Operations for the nine months ended January 31, 2001 combines the historical nine months ended January 31, 2001 for Finisar (which includes four months of operations of Sensors and three months of operations of Demeter), the historical five months ended September 30, 2000 for Sensors, the historical period from June 22, 2000 (the date of incorporation) to October 31, 2000 for Demeter and the historical nine months ended January 31, 2000 for Medusa. The Unaudited Pro Forma Condensed Statement of Operations for the year ended April 30, 2000 combines the historical year ended April 30, 2000 for Finisar, the twelve months ended March 31, 2000 for Sensors, the twelve months ended April 30, 2000 for Medusa and, since Demeter was not incorporated until after April 30, 2000, only amortization of the purchase price adjustments for the twelve months ended April 30, 2000 for Demeter. Since the acquisitions of Sensors and Demeter occurred prior to January 31, 2001, the Unaudited Pro Forma Condensed Balance Sheet is presented to give effect to the acquisition of Medusa as if it occured on January 31, 2001 and combines the balance sheet of Finisar as of January 31, 2001, which includes the purchases of Sensors and Demeter, with the balance sheet of Medusa as of January 31, 2001.

    The Unaudited Pro Forma Condensed Financial Statements should be read in conjunction with the historical financial statements of Finisar, Sensors and Demeter included elsewhere in this proxy statement. The pro forma information does not purport to be indicative of the results that would have been reported if the above transaction had been in effect for the period presented or which may result in the future.

F–70

FINISAR, SENSORS, DEMETER AND MEDUSA

UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS

Year ended April 30, 2000

(in thousands, except per share data)

 
   Finisar
   Sensors
   Demeter
   Medusa
    
    
    
    
  
 
   Pro Forma Adjustments
    
  
 
   Year Ended
April 30, 2000
   12 Months Ended
March 31, 2000
   12 Months Ended
April 30, 2000
   12 Months Ended
April 30, 2000
   Combined
Pro Forma
  
 
   Sensors
   Demeter
   Medusa
  
Revenue   $ 67,147   $ 11,254   $ —   $ 1,510   $ —   $ —   $ —   $ 79,911  
Cost of revenues     34,190     3,472     —     674     —     —     —     38,336  
Amortization of acquired developed technology     —     —     —     —     10,965  (A)   6,046  (B)   174  (C)   17,185  
   
 
 
 
 
 
 
 
 
Gross profit     32,957     7,782     —     836     (10,965 )   (6,046 )   (174 )   24,390  

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Research and development     13,806     690     —     344     —     —     —     14,840  
  Sales and marketing     7,122     1,196     —     47     —     —     —     8,365  
  General and administrative     3,516     993     —     270     —     —     —     4,779  
  Amortization of deferred stock compensation     5,530     —     —     —     2,915  (A)   3,325  (B)   16  (C)   11,786  
  Amortization of intangibles     —     —     —     —     59,567  (A)   30,507  (B)   1,347  (C)   91,421  
   
 
 
 
 
 
 
 
 
Total operating expenses     29,974     2,879     —     661     62,482     33,832     1,363     131,191  
   
 
 
 
 
 
 
 
 
Income (loss) from operations     2,983     4,903     —     175     (73,447 )   (39,878 )   (1,537 )   (106,801 )
Interest income (expense), net     3,252     (31 )   —     (3 )   —     —     —     3,218  
Other income (expense), net     (99 )   —     —     (7 )   —     —     —     (106 )
   
 
 
 
 
 
 
 
 
Income (loss) before income taxes     6,136     4,872     —     165     (73,447 )   (39,878 )   (1,537 )   (103,689 )
Provision for income taxes     3,255     284     —     54     (6,308 )(A)   (3,832 )(B)   (192)  (C)   (5,562)  (E)
                              1,177  (D)                  
   
 
 
 
 
 
 
 
 
Net income (loss)   $ 2,881   $ 4,588   $ —   $ 111   $ (68,316 ) $ (36,046 )   (1,345 ) $ (98,127 )
   
 
 
 
 
 
 
 
 
Net income (loss) per share:                                                  
Basic   $ 0.03                                       $ (0.76 )
   
                                     
 
Diluted   $ 0.02                                       $ (0.76 )
   
                                     
 
Shares used in computing net income (loss) per share:                                                  
Basic     113,930                                         129,431  (F)
   
                                     
 
Diluted     144,102                                         129,431  (F)
   
                                     
 

See accompanying notes to Finisar, Sensors, Demeter and Medusa
unaudited pro forma condensed financial statements.

F–71

FINISAR, SENSORS, DEMETER AND MEDUSA

UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS

Nine months ended January 31, 2001

(in thousands, except per share data)

 
   Finisar
   Sensors
   Demeter
   Medusa
    
    
    
    
  
 
   Pro Forma Adjustments
    
  
 
   9 Months Ended
Jan 31, 2001
   5 Months Ended
Sep 30, 2000
   From
June 22 to
Oct 31, 2000
   9 Months Ended
Jan 31, 2001
   Combined
Pro Forma
  
 
   Sensors
   Demeter
   Medusa
  
Revenue   $ 136,566   $ 8,723   $ 54   $ 2,104   $ —   $ —   $ —   $ 147,447  
Cost of revenues     79,436     3,454     116     717     —     —     —     83,723  
Amortization of acquired developed technology     5,167     —     —     —     4,569  (A)   3,023  (B)   131  (C)   12,890  
   
 
 
 
 
 
 
 
 
Gross profit     51,963     5,269     (62 )   1,387     (4,569 )   (3,023 )   (131)  (C)   50,834  

Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Research and development     20,890     1,110     518     293     —     —     —     22,811  
  Sales and marketing     11,304     1,214     —     126     —     —     —     12,644  
  General and administrative     6,427     1,044     650     333     —     —     —     8,454  
  Amortization of deferred stock compensation     5,343     —     371     —     1,214  (A)   1,663  (B)   12  (C)   8,603  
  Amortization of intangibles     27,482     —     57     —     24,820  (A)   15,254  (B)   1,010  (C)   68,623  
  Acquired in-process research and development     28,797     —     —     —     —     —     —     28,797  
  Other acquisition costs     1,127     —     —     —     —     —     —     1,127  
   
 
 
 
 
 
 
 
 
Total operating expenses     101,370     3,368     1,596     752     26,034     16,917     1,022     151,059  
   
 
 
 
 
 
 
 
 
Income (loss) from operations     (49,407 )   1,901     (1,658 )   635     (30,603 )   (19,940 )   (1,153 )   (100,225 )
Interest income (expense), net     11,659     (41 )   13     12     —     —     —     11,643  
Other income (expense), net     454     —     —     16     —     —     —     470  
   
 
 
 
 
 
 
 
 
Income (loss) before income taxes     (37,294 )   1,860     (1,645 )   663     (30,603 )   (19,940 )   (1,153 )   (88,112 )
Provision for income taxes     5,897     100     —     227     (2,628)
458		  (A)
 (D)		   (1,916)  (B)   (144)  (C)   1,994  (E)
   
 
 
 
 
 
 
 
 
Net income (loss)   $ (43,191 ) $ 1,760   $ (1,645 ) $ 436   $ (28,433 ) $ (18,024 ) $ (1,009 ) $ (90,106 )
   
 
 
 
 
 
 
 
 
Net income (loss) per share:                                                  

Basic
 
$
(0.27
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(0.54
)
   
                                     
 
Diluted   $ (0.27 )                                     $ (0.54 )
   
                                     
 
Shares used in computing net income (loss) per share:                                                  
Basic     157,205                                         166,598  (F)
   
                                     
 
Diluted     157,205                                         166,598  (F)
   
                                     
 

See accompanying notes to Finisar, Sensors, Demeter and Medusa
unaudited pro forma condensed financial statements.

F–72

FINISAR AND MEDUSA

UNAUDITED PRO FORMA CONDENSED BALANCE SHEET

January 31, 2001

(in thousands)

 
   Finisar
   Medusa
   Pro Forma
Adjustments
   Combined
Pro Forma
  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
                           
Assets  
Current assets:                          
  Cash and cash equivalents   $ 28,501   $ 491   $ (7,000 )(C) $ 21,992  
  Short-term investments     171,498     —     —     171,498  
  Accounts receivable—trade, net     41,758     276     —     42,034  
  Accounts receivable, other     13,715     —     —     13,715  
  Inventories     51,039     —     —     51,039  
  Income tax receivable     37,734     —     —     37,734  
  Deferred income taxes     1,877     —           1,877  
  Prepaid expenses     2,912     15     —     2,927  
   
 
 
 
 
Total current assets     349,034     782     (7,000 )   342,816  

Other assets
 
 
15,626
 
 
—
 
 
—
 
 
15,626
 
Property, equipment and improvements, net     66,008     156     —     66,164  
Purchased intangible assets     86,999     —     1,880  (C)   88,879  
Goodwill     413,065     —     5,296  (C)   418,361  
   
 
 
 
 
Total assets   $ 930,732   $ 938   $ 176   $ 931,846  
   
 
 
 
 

Liabilities and Stockholders' Equity
 
Current liabilities:                          
  Accounts payable   $ 20,263   $ 14   $ —   $ 20,277  
  Accrued compensation     3,646     —     —     3,646  
  Other accrued liabilities     7,778     —     —     7,778  
  Income tax payable     1,072     266     —     1,338  
  Deferred revenue     —     300     —     300  
  Short-term debt and long-term debt, current portion     306     —     —     306  
  Capital lease obligations, current portion     519     —     —     519  
   
 
 
 
 
Total current liabilities     33,584     580     —     34,164  

Long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred income taxes     42,094     —     778  (C)   42,872  
Long-term debt     1,425     —     —     1,425  
Other long-term liabilities     1,375     —     —     1,375  
   
 
 
 
 
Total long-term liabilities     44,894     —     778     45,672  
   
 
 
 
 

Stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Common stock and additional paid-in capital     942,350     2     96  (C)   942,446  
                  (2 )(C)      
  Notes receivable from stockholders     (2,269 )   (275 )   —     (2,544 )
  Deferred stock compensation     (26,106 )   —     (65 )(C)   (26,171 )
 
Accumulated other comprehensive income
 
 
900
 
 
—
 
 
—
 
 
900
 
  Retained earnings (accumulated deficit)     (62,621 )   631     (631 )(C)   (62,621 )
   
 
 
 
 
Total stockholders' equity     852,254     358     (602 )   852,010  
   
 
 
 
 
Total liabilities and stockholders' equity   $ 930,732   $ 938   $ 176   $ 931,846  
   
 
 
 
 

See accompanying notes to Finisar, Sensors, Demeter and Medusa
unaudited pro forma condensed financial statements.

F–73

NOTES TO FINISAR, SENSORS, DEMETER AND MEDUSA

UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS

    (A) On August 16, 2000 Finisar and Sensors entered into an Agreement and Plan of Reorganization pursuant to which Finisar acquired Sensors. The transaction closed on October 17, 2000. Sensors is headquartered in Princeton, New Jersey and is a leading supplier of optical components that monitor the performance of dense wavelength division multiplexing or DWDM, systems. Finisar designated September 30, 2000 as the acquisition date for accounting purposes.

    Pursuant to the reorganization agreement, Finisar issued 18,962,141 shares of its common stock in exchange for the outstanding shares of Sensors common stock. In addition, Finisar assumed options to purchase Sensors common stock and reserved 381,417 shares of Finisar common stock for issuance upon the exercise of the assumed options. At the closing of the merger transaction, the assumed Sensor options converted into Finisar options vested to the extent of the greater of (i) 25% of the total number of shares subject to the option or (ii) the vested percentage of the Sensors option at the closing of the transaction, up to a maximum of 50% of the total number of shares subject to the option. The unvested portion of each assumed option will vest in three approximately equal annual installments on each of the first three anniversaries of the date of closing of the transaction, subject to the option holder's continued service with Finisar or a subsidiary.

    At the closing of the transaction, certificates representing 9,481,109 shares of Finisar common stock were issued to the former stockholders of Sensors (the "Initial Consideration") and 9,481,032 shares of common stock, or approximately one-half of the shares issued pursuant to the transaction, were deposited into escrow with U.S. Bank Trust, National Association (the "Deferred Consideration"). One-third of the shares deposited in escrow will be released on each of the first three anniversaries of October 17, 2000, the closing date, subject to the achievement of certain development milestones. If the milestones are not achieved, the escrow shares will be cancelled and returned to the status of authorized but unissued shares. Further, one-third of the escrow shares that would otherwise be delivered to the principal shareholders of Sensors on the third anniversary of the closing of the transaction will be subject to claims for indemnification by Finisar under the reorganization agreement and the procedures specified in the escrow agreement. Those shares will remain in escrow until all pending claims for indemnification have been resolved.

    In addition to the Initial Consideration and Deferred Consideration, on each of the first three anniversaries of the closing of the transaction, Finisar will issue and deliver to the former shareholders of Sensors, on a pro rata basis, additional shares of Finisar common stock (valued on the basis of the average closing trading price per share of such stock on the Nasdaq National Market for the ten trading days preceding the applicable payment date) (the "Additional Consideration"). These shares of Finisar common stock, with an estimated value of $48 million, will be distributed as follows:

F–74

    Only the Initial Consideration has been recorded for accounting purposes since the payment of the Deferred and Additional Consideration is contingent upon future events that are not assured of occurring beyond a reasonable doubt. The Deferred Consideration, if any, will be recorded as additional purchase cost at the then current market price of the common stock when the milestones are attained. The Additional Consideration, if any, will be recorded as additional purchase cost at the then current market price of common stock on the first, second and third anniversaries of the closing of the transaction. Accordingly, Finisar's initial cost to acquire Sensors is calculated to be $355.0 million using a Finisar common stock price of $33.47, which is the average of the closing market prices of Finisar's common stock for a period from three days before through three days after August 16, 2000, the day the transaction was announced. The fair value of the assumed stock options of $12.7 million, as well as estimated direct transaction expenses of $25.0 million, have been included as a part of the total initial purchase cost. Sensors currently operates as a wholly-owned subsidiary of Finisar.

    The cost to acquire Sensors has been allocated to the assets acquired and liabilities assumed according to their respective fair values, with the excess purchase price being allocated to goodwill. The fair value of the acquired assets and liabilities is based upon an independent valuation.

    The estimated total initial purchase cost of Sensors is as follows (in thousands):

Value of securities issued   $ 317,342
Assumption of Sensors common stock options     12,675
Estimated transaction costs and expenses     25,025
   
    $ 355,042
   

    The preliminary purchase price allocation is as follows (in thousands):

 
   Amount
   Useful Life
in Years
   Annual
Amortization
  
Net tangible assets of Sensors   $ 353            
Intangible assets acquired:                  
  Developed technology     54,825   5   $ 10,965  
  In-process research and development     22,764   N/A     N/A  
  Assembled workforce     1,539   3     513  
  Customer base     1,901   3     634  
  Tradename     3,722   5     744  
  Goodwill     288,380   5     57,676  
Deferred income tax     (27,186 ) 3-5     (6,308 )
Deferred compensation     8,744   3     2,915  
   
     
 
Total preliminary purchase price allocation   $ 355,042       $ 67,139  
   
     
 

    An independent valuation specialist performed an allocation of the total purchase price of Sensors to its individual assets. The purchase price was allocated to Sensors' tangible assets, specific intangible assets such as assembled workforce, customer base, tradename, and developed technology and to in-process research and development.

F–75

    The acquired developed technology, which is comprised of products that are already technologically feasible, mainly includes optical components that monitor the performance of dense wavelength division multiplexing networks. Sensors' technology enables telecommunications companies to optimize the use of existing bandwidth in fiber optic networks. Finisar will amortize the acquired developed technology of approximately $54.8 million on a straight-line basis over an average estimated remaining useful life of five years.

    The acquired assembled workforce is comprised of all the skilled employees of Sensors and includes the estimated cost to replace existing employees, including recruiting and training costs and loss of productivity costs. Finisar will amortize the value assigned to the assembled workforce of approximately $1.5 million on a straight-line basis over an average estimated useful life of three years.

    The acquired customer base is based on historical costs incurred and is comprised of Sensors management's estimation of resources that have been devoted to the development of the relationships with key customers. Finisar will amortize the value assigned to customer relationships of approximately $1.9 million on a straight-line basis over an average estimated useful life of three years.

    The acquired tradename is recognized for the intrinsic value of the Sensors name and products in the marketplace. Finisar will amortize the value assigned to the tradename of approximately $3.7 million on a straight-line basis over an average estimated useful life of five years.

    Deferred compensation expense is recognized for the intrinsic value on the date of closing of the unvested Finisar options exchanged for options held by Sensors' employees. The $8.7 million of deferred compensation will be amortized over the remaining vesting period of approximately three years.

    Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets and deferred compensation, will be amortized on a straight-line basis over its estimated remaining useful life of five years.

    In-process research and development represents that portion of the purchase price of an acquisition related to the research and development activities which: (i) have not demonstrated their technological feasibility, and (ii) have no alternative future uses. Accordingly, Finisar recognized an expense of $22.8 million during the quarter ended October 31, 2000 in conjunction with the completion of this acquisition.

    (B) On November 21, 2000 Finisar completed the acquisition of Demeter, a privately-held company located in El Monte, California. Demeter Technologies was founded in June 2000 and is focused on the development of long wavelength Fabry Perot and distributed feedback lasers for data communications and telecommunications applications. Finisar designated November 1, 2000 as the acquisition date for accounting purposes.

    Pursuant to the reorganization agreement, Finisar issued 6,020,012 shares of its common stock in exchange for the outstanding shares of Demeter capital stock. In addition, Finisar assumed options to purchase Demeter common stock and reserved 566,573 shares of Finisar common stock for issuance upon the exercise of the assumed options. The assumed options generally vest to the extent of 25% of the total number of shares subject to the option at the end of one year after the date of grant, with the remainder vesting in 36 equal monthly installments, subject to the optionholder's continued service with Finisar or a subsidiary.

    At the closing of the transaction, certificates representing 601,993 shares of Finisar common stock were deposited into escrow with the U.S. Bank Trust, National Association. The escrow shares will be

F–76

subject to claims for indemnification by Finisar under the reorganization agreement and the procedures specified in the escrow agreement. Those shares will remain in escrow until all pending claims for indemnification, if any, have been resolved.

    Finisar's cost to acquire Demeter is calculated to be $187.3 million using a Finisar common stock price of $28.05, which is the average of the closing market prices of Finisar's common stock for a period from three days before through three days after November 21, 2000, the day the transaction was announced. The fair value of the assumed stock options of $15.4 million, as well as estimated direct transaction expenses of $3.0 million, have been included as a part of the total purchase cost. Demeter currently operates as a wholly-owned subsidiary of Finisar.

    The cost to acquire Demeter has been allocated to the assets acquired and liabilities assumed according to their respective fair values, with the excess purchase price being allocated to goodwill. The fair value of the acquired assets and liabilities is based upon an independent valuation.

    The estimated total purchase cost of Demeter is as follows (in thousands):

Value of securities issued   $ 168,882
Assumption of Demeter common stock options     15,438
Estimated transaction costs and expenses     3,000
   
    $ 187,320
   

    The preliminary purchase price allocation is as follows (in thousands):

 
   Amount
   Useful Life
in Years
   Annual
Amortization
  
Net tangible assets of Demeter   $ 3,217            
Intangible assets acquired:                  
  Developed technology     30,231   5   $ 6,046  
  In-process research and development     6,033   N/A     N/A  
  Assembled workforce     384   3     128  
  Customer base     247   3     82  
  Goodwill     151,484   5     30,297  
Deferred income tax     (17,577 ) 3-5     (3,832 )
Deferred compensation     13,301   4     3,325  
   
     
 
Total preliminary purchase price allocation   $ 187,320       $ 36,046  
   
     
 

    An independent valuation specialist performed an allocation of the total purchase price of Demeter to its individual assets. The purchase price was allocated to Demeter's tangible assets, specific intangible assets such as assembled workforce, customer base and developed technology and to in-process research and development.

    The acquired developed technology, which is comprised of products that are already technologically feasible, mainly includes long wavelength Fabry Perot and distributed feedback lasers for data communications and telecommunications applications. Finisar will amortize the acquired developed technology of approximately $30.2 million on a straight-line basis over an average estimated remaining useful life of five years.

F–77

    The acquired assembled workforce is comprised of all the skilled employees of Demeter and includes the estimated cost to replace existing employees, including recruiting and training costs and loss of productivity costs. Finisar will amortize the value assigned to the assembled workforce of approximately $0.4 million on a straight-line basis over an average estimated useful life of three years.

    The acquired customer base is based on historical costs incurred and is comprised of Demeter management's estimation of resources that have been devoted to the development of the relationships with key customers. Finisar will amortize the value assigned to customer relationships of approximately $0.2 million on a straight-line basis over an average estimated useful life of three years.

    Deferred compensation expense is recognized for the intrinsic value on the date of closing of the unvested Finisar options exchanged for options held by Demeter's employees. The $13.3 million of deferred compensation will be amortized over the remaining vesting period of approximately four years.

    Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets and deferred compensation, will be amortized on a straight-line basis over its estimated remaining useful life of five years.

    In-process research and development represents that portion of the purchase price of an acquisition related to the research and development activities which: (i) have not demonstrated their technological feasibility, and (ii) have no alternative future uses. Accordingly, Finisar recognized an expense of $6.0 million during the quarter ended January 31, 2001 in conjunction with the completion of this acquisition.

    (C) On March 2, 2001 Finisar completed the acquisition of Medusa, a privately-held company located in Georgetown, Texas. Medusa was founded in June 1997 and is a provider of training and testing services focusing on Fibre Channel and other networking technologies. Medusa currently operates as a wholly-owned subsidiary of Finisar.

    Pursuant to the reorganization agreement, Finisar assumed options to purchase Medusa common stock and reserved 8,012 shares to Finisar common stock for issuance upon the exercise of the assumed options. The assumed options generally vest to the extent of 25% of the total number of shares subject to the option at the date of grant, with the remainder vesting in 48 equal monthly installments, subject to the optionholder's continued service with Finisar or a subsidiary.

    At the closing of the transaction, $616,000 was deposited into escrow with the U.S. Bank Trust, National Association. The escrow cash will be subject to claims for indemnification by Finisar under the reorganization agreement and the procedures specified in the escrow agreement. The cash will remain in escrow until all pending claims for indemnification, if any, have been resolved.

    The cost to acquire Medusa has been allocated to the assets acquired and liabilities assumed according to their respective fair values, with the excess purchase price being allocated to goodwill. The fair value of the acquired assets and liabilities is based upon an independent valuation.

    The estimated total purchase cost of Medusa is as follows (in thousands):

 
    
Cash including estimated transaction costs and expenses   $ 7,000
Assumption of Medusa common stock options     96
   
    $ 7,096
   

F–78

    The preliminary purchase price allocation as of January 31, 2001 is as follows (in thousands):

 
   Amount
   Useful Life
in Years
   Annual
Amortization
  
Net tangible assets of Medusa   $ 633            
Intangible assets acquired:                  
  Developed technology     870   5   $ 174  
  Assembled workforce     490   3     163  
  Customer base     160   3     53  
  Tradename     360   5     72  
  Goodwill     5,296   5     1,059  
Deferred income tax     (778 ) 3-5     (192 )
Deferred compensation     65   4     16  
   
     
 
Total preliminary purchase price allocation   $ 7,096       $ 1,345  
   
     
 

    An independent valuation specialist performed an allocation of the total purchase price of Medusa to its individual assets. The purchase price was allocated to Medusa tangible assets, specific intangible assets such as assembled workforce, customer base, tradename and to developed technology and to in-process research and development.

    The acquired developed technology, which is comprised of products that are already technologically feasible, mainly relates to a mechanism (some times called an engine) for extracting information from data collected by a Finisar Fibre Channel analyzer and generates protocol statistics. These statistics present the information in visual format which is easier to understand. This product can be used by developers, integrators, and system administers to determine operational characteristics and adherence to the standard of Fibre Channel products. Finisar will amortize the acquired developed technology of approximately $0.9 million on a straight-line basis over an average estimated remaining useful life of five years.

    The acquired assembled workforce is comprised of all the skilled employees of Medusa and includes the estimated cost to replace existing employees, including recruiting and training costs and loss of productivity costs. Finisar will amortize the value assigned to the assembled workforce of approximately $0.5 million on a straight-line basis over an average estimated useful life of three years.

    The acquired customer base is based on historical costs incurred and is comprised of Medusa management's estimation of resources that have been devoted to the development of the relationships with key customers. Finisar will amortize the value assigned to customer relationships of approximately $0.2 million on a straight-line basis over an average estimated useful life of three years.

    The acquired tradename is recognized for the intrinsic value of the Medusa name and products in the marketplace. Finisar will amortize the value assigned to the tradename of approximately $0.4 million on a straight-line basis over an average estimated remaining useful life of five years.

    Deferred compensation expense is recognized for the intrinsic value on the date of closing of the unvested Finisar options exchanged for options held by Medusa's employees. The $0.1 million of deferred compensation will be amortized over the remaining vesting period of approximately four years.

    Goodwill, which represents the excess of the purchase price of an investment in an acquired business over the fair value of the underlying net identifiable assets and deferred compensation, will be amortized on a straight-line basis over its estimated useful life of five years.

F–79

    (D) Historically, Sensors elected to be treated as an "S" corporation for Federal income tax purposes; therefore the Sensors stockholders were liable for income taxes on Sensors' taxable income. The pro forma provision for income taxes includes estimated income taxes on Sensor's income at a tax rate of 30%.

    (E) The pro forma combined provision for income taxes does not represent the amounts that would have resulted had Finisar, Sensors, Demeter and Medusa filed consolidated income tax returns during the periods presented.

    (F) The pro forma basic and diluted net earnings per share for the year ended April 30, 2000 are based on the weighted average number of shares of Finisar common stock outstanding, the initial 9,481,109 shares issued by Finisar in the Sensors transaction and the 6,020,012 shares issued by Finisar in the Demeter transaction. The pro forma basic and diluted net earnings per share for the nine months ended January 31, 2001 are based on the weighted average number of shares of Finisar common stock outstanding, 5,313,589 shares (representing the difference between the shares issued by Finisar in the Sensors transaction and the amount already included in the weighted average number of shares of Finisar common stock outstanding) for the Sensors transaction and 4,079,495 shares (representing the difference between the shares issued by Finisar in the Demeter transaction and the amount already included in the weighted average number of shares of Finisar common stock outstanding) for the Demeter transaction.

F–80

FINANCIAL STATEMENTS

SHOMITI SYSTEMS, INC.

As of September 30, 2000 and for
the year then ended
(information as of October 1, 1999 and for each
of the two years in the period ended October 1, 1999 is unaudited)

F–81


REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Shomiti Systems, Inc.

    We have audited the accompanying balance sheet of Shomiti Systems, Inc. as of September 30, 2000, and the related statements of operations, shareholders' equity (net capital deficiency) and cash flows for the year ended September 30, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

    We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2000 and the results of its operations and its cash flows for the year ended September 30, 2000, in conformity with accounting principles generally accepted in the United States.

Palo Alto, California
April 25, 2001

F–82

SHOMITI SYSTEMS, INC.

BALANCE SHEET

(in thousands)

 
   September 30,
2000
   October 1,
1999
(unaudited)
  
Assets  
Current assets:              
  Cash and cash equivalents   $ 353   $ 1,160  
  Accounts receivable, net of allowance for doubtful accounts of $139 (2000), and $115 (1999)     3,089     2,405  
  Inventories     943     612  
  Prepaid expenses and other current assets     171     176  
   
 
 
Total current assets     4,556     4,353  
Property and equipment, net     874     851  
Restricted cash     250     —  
Other assets     123     136  
   
 
 
Total assets   $ 5,803   $ 5,340  
   
 
 

Liabilities, Mandatorily Redeemable Preferred Stock and Shareholders' Equity
 
Current liabilities:              
  Accounts payable   $ 1,734   $ 357  
  Accrued liabilities     1,344     1,175  
  Capital lease obligations, current portion     181     433  
  Notes payable     1,421     —  
   
 
 
Total current liabilities     4,680     1,965  
Capital lease obligations, long-term portion     282     463  
   
 
 
      4,962     2,428  
   
 
 
Commitments and Contingency              
Mandatorily redeemable convertible preferred stock, no par value, 7,615 shares authorized:              
  Series A, 2,315 shares designated; 2,300 shares issued and outstanding; redemption value $1,150     1,136     1,132  
  Series B, 1,900 shares designated; 1,660 shares issued and outstanding; redemption value $3,796     3,779     3,775  
  Series C, 3,400 shares designated; 3,161 shares issued and outstanding; redemption value $15,107     14,850     14,759  
   
 
 
      19,765     19,666  
   
 
 
Shareholders' equity (net capital deficiency):              
  Common stock, no par value; 30,000 shares authorized; 4,148 (2000) and 4,108 (1999) shares issued and outstanding     197     178  
  Additional paid-in capital     836     —  
  Deferred stock compensation     (742 )   —  
  Accumulated deficit     (19,215 )   (16,932 )
   
 
 
Total other shareholders' equity (net capital deficiency)     (18,924 )   (16,754 )
   
 
 
Total liabilities, mandatorily redeemable preferred stock and other shareholders' equity (net capital deficiency)   $ 5,803   $ 5,340  
   
 
 

See accompanying notes.

F–83

SHOMITI SYSTEMS, INC.

STATEMENT OF OPERATIONS

(in thousands except per share data)

 
   Fiscal Years Ended
  
 
   September 30,
2000
   October 1,
1999
(unaudited)
   October 2,
1998
(unaudited)
  
Revenues:                    
  Hardware sales   $ 11,373   $ 7,102   $ 4,907  
  Software license fees     2,260     1,623     1,091  
   
 
 
 
Total revenues     13,633     8,725     5,998  
   
 
 
 
Cost of sales                    
  Hardware     3,514     2,492     1,730  
  Software     183     47     25  
   
 
 
 
Total cost of sales     3,697     2,539     1,755  
   
 
 
 
Gross profit     9,936     6,186     4,243  
   
 
 
 
Operating expenses:                    
  Research and development     4,708     4,300     3,978  
  Sales and marketing     5,485     4,357     4,446  
  General and administrative     1,841     1,366     1,322  
   
 
 
 
Total operating expenses     12,034     10,023     9,746  
   
 
 
 
Operating loss     (2,098 )   (3,837 )   (5,503 )
Interest income     17     145     304  
Interest expense     (202 )   (258 )   (278 )
   
 
 
 
Net loss   $ (2,283 ) $ (3,950 ) $ (5,477 )
   
 
 
 
Net loss per share—basic and diluted   $ (0.55 ) $ (0.97 ) $ (1.46 )
   
 
 
 
Shares used in per share calculation—basic and diluted     4,140     4,075     3,742  
   
 
 
 

See accompanying notes.

F–84

SHOMITI SYSTEMS, INC.

STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

(in thousands)

 
   Common Stock
    
    
    
    
    
  
 
    
    
   Notes
Receivable
from
Shareholders
    
    
  
 
   Additional
Paid-in Capital
   Deferred
Stock
Compensation
   Accumulated
Deficit
   Total Shareholders
Equity (Net Capital Deficiency)
  
 
   Shares
   Amount
  
Balance at October 3, 1997 (unaudited)   4,362   $ 117   $ —   $ —   $ (67 ) $ (7,505 ) $ (7,455 )
Issuance of common stock pursuant to exercise of stock options (unaudited)   294     55     —     —     —     —     55  
Repurchase of common stock (unaudited)   (690 )   (84 )   —     —     58     —     (26 )
Net loss and comprehensive loss (unaudited)   —     —     —     —     —     (5,477 )   (5,477 )
   
 
 
 
 
 
 
 
Balance at October 2, 1998 (unaudited)   3,966     88     —     —     (9 )   (12,982 )   (12,903 )
Issuance of common stock pursuant to exercise of stock options (unaudited)   234     90     —     —     —     —     90  
Repurchase of common stock (unaudited)   (92 )   —     —     —     9     —     9  
Net loss and comprehensive loss (unaudited)   —     —     —     —     —     (3,950 )   (3,950 )
   
 
 
 
 
 
 
 
Balance at October 1, 1999 (unaudited)   4,108     178     —     —     —     (16,932 )   (16,754 )
Issuance of common stock pursuant to exercise of stock options   40     19     —     —     —     —     19  
Deferred stock compensation   —     —     836     (836 )   —     —     —  
Amortization of deferred stock compensation   —     —     —     94     —     —     94  
Net loss and comprehensive loss   —     —     —     —     —     (2,283 )   (2,283 )
   
 
 
 
 
 
 
 
Balance at September 30, 2000   4,148   $ 197   $ 836   $ (742 ) $ —   $ (19,215 ) $ (18,924 )
   
 
 
 
 
 
 
 

See accompanying notes.

F–85

SHOMITI SYSTEMS, INC.

STATEMENT OF CASH FLOWS

(in thousands)

 
   Fiscal Years Ended
  
 
   September 30,
2000
   October 1,
1999
(unaudited)
   October 2,
1998
(unaudited)
  
Operating Activities                    
Net loss   $ (2,283 ) $ (3,950 ) $ (5,477 )
Adjustments to reconcile net loss to net cash used in operating activities:                    
    Depreciation and amortization     602     608     581  
    Amortization of deferred stock-based compensation     94     —     —  
    Accretion of redeemable convertible preferred stock     99     99     98  
Changes in assets and liabilities:                    
      Accounts receivable     (684 )   (1,979 )   648  
      Inventories     (331 )   477     (256 )
      Prepaid expenses and other assets     18     247     (172 )
      Restricted cash     (250 )   —     —  
      Accounts payable     1,377     161     (730 )
      Accrued liabilities     169     (77 )   401  
   
 
 
 
Net cash used in operating activities     (1,189 )   (4,414 )   (4,907 )
   
 
 
 
Investing activities                    
Purchase of property and equipment     (625 )   (164 )   (887 )
   
 
 
 
Net cash used in investing activities     (625 )   (164 )   (887 )
   
 
 
 
Financing activities                    
Principal payments on capital lease obligations     (433 )   (515 )   (347 )
Proceeds from capital lease financing     —     108     757  
Proceeds from issuance of mandatorily redeemable convertible preferred stock     —     —     7,096  
Proceeds from issuance of common stock     19     90     55  
Proceeds from notes payable     1,421     —     —  
Repurchase of common stock     —     9     (26 )
   
 
 
 
Net cash provided by (used in) financing activities     1,007     (308 )   7,535  
   
 
 
 
Net increase (decrease) in cash and cash equivalents     (807 )   (4,886 )   1,741  
Cash and cash equivalents, beginning of period     1,160     6,046     4,305  
   
 
 
 
Cash and cash equivalents, end of period   $ 353   $ 1,160   $ 6,046  
   
 
 
 
Supplemental disclosure of cash flow information                    
  Cash paid for interest   $ 199   $ 158   $ 122  
   
 
 
 

See accompanying notes.

F–86

SHOMITI SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

(Information as of October 1, 1999 and for the years ended

October 1, 1999 and October 2, 1998 is unaudited)

1.  Summary of Significant Accounting Policies

Description of Business

    Shomiti Systems, Inc. (the "Company") was incorporated in California on July 13, 1995. The Company designs, develops, markets and supports silicon accelerated local area network ("LAN") management hardware and software products for effective analysis, monitoring and management of Fast Ethernet, switched Ethernet, and other fast LANs. The Company's hardware products are manufactured by an independent third party.

Basis of Presentation

    The Company has incurred losses from operations totaling $2,283,000, and $3,950,000 (unaudited) for the years ended September 30, 2000, and October 1, 1999, respectively, and had an accumulated deficit of $18,036,000 at September 30, 2000. Subsequent to September 30, 2000, (see Note 10) the Company received proceeds of $4,000,000 on the issuance of promissory notes payable to Finisar Corporation in order to fund working capital. Such amount is due and payable on demand by Finisar Corporation. The Company was also in default at September 30, 2000, with certain financial covenants in its Revolving Credit and Security Agreement with Comerica Bank. In November 2000, proceeds from the borrowings were used to repay the Revolving Credit and Security Agreement in full. Based on management's financial projections, the Company will require additional cash from similar or other private placements of debt or equity to meet the Company's projected working capital and other cash requirements for fiscal 2001. On March 23, 2001, the Company was acquired by Finisar Corporation (see Note 10).

Unaudited Financial Information

    The financial information at October 1, 1999 and for the fiscal years ended October 1, 1999 and October 2, 1998 is unaudited but, in the opinion of management, has been prepared on the same basis as the audited financial statements and includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of its financial position at such date and its operating results and cash flows for those fiscal years.

Accounting period

    During fiscal 2000, the Company changed its fiscal year from the 52 or 53 week accounting period ending on the Friday that is nearest to the last day of September to the 52 or 53 week accounting period ending on the Saturday that is nearest to the last day of September. Accordingly, fiscal 2000 comprises the period from October 2, 1999 to September 30, 2000. Fiscal 1999 comprises the 52 week period ended on October 1, 1999. Fiscal 1998 comprises the 52 week period ended on October 2, 1998. The change in accounting period resulted in an increase in net revenues and net income in fiscal 2000 of approximately $370,000 and $302,000, respectively.

Use of estimates

    The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts

F–87

reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash equivalents

    The Company considers all highly liquid investments with an original maturity from the date of purchase of three months or less to be cash equivalents. At September 30, 2000 and October 1, 1999, cash equivalents include $152,399 and $951,381 (unaudited) of money market funds, the fair value of which approximates the carrying value.

Restricted cash

    At September 30, 2000, $250,000 of cash was restricted from withdrawal and held by a bank as a certificate of deposit to guarantee the Company's property lease agreements.

Fair value of financial instruments

    The Company's financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, are carried at cost, which approximates fair value because of the short-term nature of those instruments. The carrying value of the Company's borrowings approximate their fair value given their market rates of interest and maturity schedules. The Company does not hold or issue financial instruments for trading purposes.

Concentrations of credit risk

    Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable which are generally not collateralized. The Company places its cash and cash equivalents with financial institutions and money market funds. With respect to accounts receivable, the Company performs ongoing credit evaluations of its customers' financial condition and maintains an allowance for doubtful accounts based upon the expected collectibility of total accounts receivable. To date, the Company has not experienced material losses resulting from uncollectible receivables.

    Export sales, principally to Europe and Asia, are generally transacted in U.S. dollars and represent 7% and 11% of sales in fiscal 2000. One customer represented 14% of gross accounts receivable at September 30, 2000 and represented 21% of sales for the fiscal year then ended.

Revenue recognition

    Revenue from hardware product sales is recognized upon transfer of title, which generally occurs upon shipment, provided no significant obligations remain and collectibility is probable. The Company provides to certain resellers limited rights of return when specific conditions exist. Reserves for estimated warranty repairs and product returns are recorded when revenue is recognized. Such reserves are estimated based on historical rates of returns and allowances and other related factors. Revenues from annual maintenance contracts are recognized ratably over the term of the contract.

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    The Company recognizes software license revenue in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions. Software license revenues are recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collectibility is probable, and delivery and customer acceptance of the software products, if required under the terms of the contract, have occurred. When contracts contain multiple elements and vendor specific objective evidence exists for all undelivered elements, the Company accounts for the delivered elements in accordance with the "Residual Method" prescribed by SOP 98-9. Maintenance revenues are recognized ratably over the term of the maintenance contract, which is generally twelve months. Maintenance contracts include the right to unspecified upgrades on a when-and-if available basis, and ongoing support. In instances where vendor obligations remain, revenues are deferred until the obligation has been satisfied.

Inventories

    Inventories, which are principally comprised of finished goods, are stated at the lower of cost (determined on a first-in, first-out basis) or market.

Property and equipment

    Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, generally three years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining lease term. The cost of equipment acquired under capital leases is amortized over its useful life or the lease term, whichever is shorter. Repair and maintenance costs are charged to expense as incurred.

Research and development costs

    Expenditures for research and development are charged to operations as incurred.

    Software development costs are capitalized after technological feasibility has been established. Development costs incurred during the period between achievement of technological feasibility, which the Company defines as the establishment of a working model, until the general availability of such software to customers, has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs as of September 30, 2000.

Stock-based compensation

    The Company accounts for stock-based employee arrangements in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Accordingly, the Company recognizes no compensation expense for stock options granted to employees with an exercise price equal or in excess

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of the fair value of the shares on the date of grant. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Investments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods, or Services." Stock awards are valued using the Black-Scholes option pricing model and are expensed over the period of service provided.

Comprehensive income

    To date, the Company has not engaged in any transactions that are required to be reported in comprehensive income (loss) as compared to its reported net income (loss). Accordingly, net loss is equal to comprehensive loss for all periods presented.

Income taxes

    Deferred income tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

Advertising

    The Company expenses advertising costs as they are incurred. Advertising expenses have not been material.

Long-lived assets

    In accordance with Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of" ("FAS 121"), the Company identifies and records impairment losses, as circumstances dictate, on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. No such impairments have been identified with respect to the Company's long-lived assets, which consist primarily of computer equipment, furniture and leasehold improvements.

Internal use software

    The American Institute of Certified Public Accountants Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1") requires the capitalization of certain costs associated with internal-use software, and defines the characteristics of internal use software. Capitalized internal-use software development costs associated with the Company's information systems are included in property and equipment and are amortized on a straight-line basis over the estimated useful lives of the related software applications of up to three years.

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Segment information

    The Company follows Statement of Financial Accounting Standard No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards for reporting financial information about operating segments in financial statements, as well as additional disclosures about products and services, geographic areas, and major customers. The Company operates in one operating segment, and has operations primarily in the United States, Europe and Asia (see "Concentrations of Credit Risk" above).

Net loss per share

    Basic and diluted net loss per share are presented in conformity with the Statement of Financial Accounting Standard No. 128, "Earnings Per Share" ("SFAS No. 128") for all periods presented. In accordance with SFAS No. 128, basic and diluted net loss per share has been computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted net loss per share is computed giving effect to all dilutive potential common stock, including options, common stock and preferred shares. Options and preferred shares were not included in the computation of diluted net loss per share in the periods reported because the effect would be antidilutive. Weighted average antidilutive securities which are excluded in the diluted net loss per share calculation for the periods are as follows:

 
   Year ended September 30, 2000
   Year ended October 1, 1999 (unaudited)
   Year ended October 2, 1998 (unaudited)
Common stock options   1,313,397   916,768   299,490
Convertible preferred stock   7,121,000   7,121,000   7,121,000
Preferred warrants   56,388   54,721   54,721
   
 
 

 
 
 
 
 
 
 
    8,490,785   8,092,489   7,475,211
   
 
 

Recent accounting pronouncements

    In June 1998, the Financial Accounting Standards Board released Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes the accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value.

    In July 1999, FAS No. 137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Data of FASB Statement 133 ("FAS 137") was issued. FAS 137 deferred the effective date of FAS 133 until the first fiscal quarter of fiscal years beginning after June 15, 2000. The Company will adopt FAS 133 effective October 1, 2000. The Company does not expect the adoption of

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FAS 133 to have a material impact to its financial position or results of operations since the Company currently does not invest in derivative instruments or engage in hedging activities.

    In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company will be required to adopt SAB 101 in its fiscal quarter beginning July 1, 2001. The Company believes that its current revenue recognition policy complies with SAB 101.

    In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB Opinion No. 25, ("FIN 44"). FIN 44 clarifies the application of APB Opinion No. 25 and, among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a non-compensatory plan; the accounting consequence of various modifications to the terms of the previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The application of FIN 44 has not had a material impact on the Company's financial position or results of operations.

2.  Balance Sheet Components

 
   September 30,
2000
   October 1,
1999 (unaudited)
  
Property and equipment (in thousands):              
  Computer equipment and machinery   $ 2,232   $ 1,698  
  Purchased software     621     578  
  Furniture and fixtures     183     124  
  Leasehold improvements     —     11  
   
 
 
      3,036     2,411  
  Less: Accumulated depreciation and amortization     (2,162 )   (1,560 )
   
 
 
    Total   $ 874   $ 851  
   
 
 

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    At September 30, 2000 and October 1, 1999, assets with original cost of approximately $2,023,000 and $1,977,000 (unaudited) and related accumulated depreciation of $1,813,000 and $1,408,000 (unaudited) were held under capital leases.

 
   September 30,
2000
   October 1,
1999 (unaudited)
Accrued liabilities (in thousands):            
  Accrued compensation   $ 477   $ 513
  Accrued sales and marketing costs     441     112
  Other     558     550
   
 
    $ 1,476   $ 1,175
   
 

3.  Notes payable

    In November 1999, the Company entered into a Revolving Credit and Security Agreement with Comerica Bank that was further modified in April 2000 (together, the "Comerica Agreement"). Interest on borrowings under the Comerica Agreement was set at the bank's prime rate plus 0.5% per annum and at September 30, 2000, $1,275,000 was outstanding under this agreement.

    As set out in the Comerica Agreement, the Company was required to maintain certain financial ratios and covenants. At September 30, 2000, the Company was not in compliance with these financial ratios and covenants. In November 2000, the Company repaid borrowings under the Comerica Agreements in full and the agreement was subsequently terminated.

    Also as part of the Revolving Credit and Security Agreement, Comerica may, at its sole discretion permit advances of up to $250,000, regardless of the Borrowing Base. Such amounts may be repaid and reborrowed prior to the Revolving Credit Maturity Date. On November 12, 1999, an advance of $146,000 was made to the Company. This advance matured on November 30, 2000 and was repaid in full by the Company. Interest on this advance was set at the bank's prime rate plus 1%. At September 30, 2000, $146,000 was outstanding pursuant to this advance.

4.  Mandatorily Redeemable Convertible Preferred Stock

    The Company has authorized 7,615,000 shares of mandatorily redeemable convertible preferred stock ("Preferred Stock"), of which 2,315,000 shares were designated as Series A, 1,900,000 shares were designated as Series B, and 3,400,000 shares were designated as Series C.

    The rights, privileges and restrictions of Series A, B and C Preferred Stock are set forth in the Company's amended and restated Certificate of Incorporation and are summarized as follows:

Dividends

    The holders of Series A, Series B and Series C Preferred Stock are entitled to receive noncumulative dividends at the per annum rate of $0.05, $0.235 and $0.478, respectively, when and if

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declared by the Board of Directors. The Company shall make no distribution to holders of common stock until Series A, Series B and Series C dividends have been paid. No dividends were declared through September 30, 2000.

Liquidation

    In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A, Series B and Series C Preferred Stock are entitled to a distribution in preference to holders of common stock equal to $0.50 per share, $2.285 per share and $4.78 per share, respectively, plus all declared and unpaid dividends. If the assets and funds distributed among the holders of the Series A, Series B and Series C Preferred Stock are insufficient to permit the payment to such holders of the full preferential amount, then all the Company's assets and funds shall be distributed among the holders of the Series A, Series B and Series C Preferred Stock in proportion to the full preferential amount each such holder is otherwise entitled to receive. After payment has been made to the holders of Series A, Series B and Series C Preferred Stock of the full preferential amounts, the remaining assets will be distributed ratably among the holders of Series A, Series B Series C Preferred Stock and common stock based on the number of shares of common stock into which the outstanding preferred shares are convertible, up to a maximum distribution of $2.50, $6.855 and $12.68 per share for Series A, Series B and Series C Preferred Stock, respectively.

Preferential rights

    The holders of Series C Preferred Stock have an additional preference over the holders of Series A, Series B Preferred Stock and common stock in the event that a liquidation, dissolution or winding up of the Company includes a material contingency payment that exceeds fifty percent of the aggregate assets and/or proceeds available for distribution to the then holders of the outstanding shares of Preferred and Common Stock without regard to the contingency ("Gross Proceeds"). At the time that assets and/or proceeds are first distributed ("First Distribution"), such assets are first distributed to the holders of Series C Preferred Stock in an amount equal to what they would have been entitled if the Gross Proceeds were distributed at such a time, up to a maximum of $12.68 per share. If the First Distribution fails to provide what the Series C shareholders would have received had there been no material contingency, then the entire First Distribution is distributed to the holders of Series C Preferred Stock up to a maximum of $12.68 per share. Any such payments to the holders of Series C Preferred Stock are deducted from amounts, if any, which may be payable to the holders of Series C Preferred Stock from the contingent payment.

Redemption

    At the option of the holders of Series A, Series B and Series C Preferred Stock, the Company must redeem in whole all of the then outstanding preferred shares. The redemption requires a minimum two-thirds approval of the holders of Series A, Series B and Series C Preferred Stock, which must be obtained during the period of January 1, 2002 until no later than December 31, 2003. The redemption prices for the Series A, Series B and Series C Preferred Stock are $0.50, $2.285 and $4.78 per share, respectively, and must be paid in three equal annual installments, with the first payment

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being due no later than 120 days following receipt by the Company of the shareholder's redemption call. Accretion related to the Preferred Stock of $98,000 (unaudited), $99,000 (unaudited) and $99,000 has been recorded in the fiscal years 1998, 1999 and 2000 to bring the carrying value of Preferred Stock to its redemption value.

Conversion

    Shares of Series A, Series B and Series C Preferred Stock are convertible, at the option of the holder, into common stock on a 1-for-1 basis subject to adjustment based on a formula for certain future issues of common stock or common stock equivalents. Conversion of Series A, Series B and Series C Preferred Stock into common stock is at the option of the holders, and is automatic upon the closing of an underwritten public offering of the Company's common stock at a price no less than $10.00 per share and in which the aggregate net proceeds exceed $15,000,000. The Company has reserved 7,121,000 shares of common stock for such conversion. The holders of Series A, Series B and Series C Preferred Stock are entitled to a number of votes equal to the number of shares of common stock into which the Series A, Series B and Series C Preferred Stock are convertible.

5.  Warrants

    In connection with certain capital leases, the Company issued warrants to purchase shares of Preferred Stock to the lessors as follows:

 
   Date
Issued
   Shares
   Exercise
Price
Series A   September 1995   15,000   $ 0.50
Series B   April 1996   15,316   $ 2.285
Series C   April 1997   12,363   $ 4.78
Series C   May 1998   7,061     4.78

    The warrants are exercisable for ten years after date of issuance or five years after the Company's initial public offering, whichever is longer. No warrants had been exercised as of September 30, 2000. The value of the warrants on the date of grant was not material to the financial statements.

    In January 1999, the Company entered into a distribution agreement with a distributor. Under the agreement, the Company is required to issue warrants to purchase up to 990,000 shares of common stock at an exercise price to be determined, subject to certain sales targets being met. As of September 30, 2000, the distributor had not met any of the sales targets and no warrants have been issued.

    In June 2000, the Company issued 5,000 warrants to Comerica Bank to purchase shares of Series C preferred stock at an exercise price of $4.78 per share. These warrants are due to expire on June 28, 2007. As of September 30, 2000, none of these warrants had been exercised. The value of the warrants on the date of grant was not material to the financial statements.

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6.  Common Stock and Stock Options

Common Stock

    The company has authorized 30,000,000 shares of common stock.

    In August 1995, the Board of Directors and shareholders adopted the 1995 Stock Plan (the "Plan"). Under the Plan, as amended, incentive stock options and nonqualified stock options to purchase up to 3,583,334 shares of common stock may be granted to employees and consultants of the Company. The exercise price of incentive stock options must not be less than the fair value at the date of grant and may be granted to employees only. The exercise price of nonqualified options must not be less than 85% of fair value at the date of grant and may be granted to employees and consultants. Options generally vest ratably over four years and expire ten years from the date of grant. As of September 30, 2000, the Company has 1,114,445 options available for grant under the Plan.

    Transactions under the Plan are summarized as follows (in thousands, except per share amounts):

 
   Years Ended
 
    
    
   October 1, 1999 (unaudited)
    
    
 
   September 30, 2000
   October 2, 1998 (unaudited)
 
    
   Weighted
Average
Exercise
Price
    
   Weighted
Average
Exercise
Price
 
   Shares
   Shares
   Shares
   Weighted Average Exercise Price
Outstanding at beginning of period   1,555   $ 0.59   2,115   $ 0.55   1,290   $ 0.31
  Granted   728   $ 0.99   855   $ 0.73   2,162   $ 0.50
  Exercised   (40 ) $ 0.50   (234 ) $ 0.39   (294 ) $ 0.19
  Canceled   (714 ) $ 0.70   (1,181 ) $ 0.49   (1,043 ) $ 0.33
   
       
       
     
Outstanding at period end   1,529   $ 0.75   1,555   $ 0.59   2,115   $ 0.55
   
       
       
     
Options exercisable at period end   550   $ 0.61   502   $ 0.48   819   $ 0.47
   
       
       
     
Weighted average fair value of options granted at fair market value during the year       $ 1.00       $ 0.73       $ 0.11
Weighted average fair value of options granted at less than fair market value during the year       $ 1.97         —         —

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    The following table summarizes information about stock options outstanding at September 30, 2000 (in thousands, except per share amounts):

Options Outstanding
    
    
  Options Exercisable
 
    
   Average Remaining Contractual Life (Years)
    
Exercise
Price
   Number Outstanding
   Weighted Average Exercise Price
   Number Exercisable
   Weighted Average Exercise Price
$ 0.05   8   6   $ 0.05   8   $ 0.05
  0.25   11   6     0.25   11     0.25
  0.50   741   7.5     0.50   395     0.50
  1.00   769   9.2     1.00   136     1.00
     
           
     
      1,529   8.3   $ 0.75   550   $ 0.61
     
           
     

Deferred Stock Compensation

    In connection with the grant of stock options to employees, the Company recorded deferred stock compensation of $836,000 for the year ended September 30, 2000, representing the difference between the deemed fair value of the Company's common stock for accounting purposes and the option exercise price of these options at the date of grant. Deferred stock compensation is presented as a reduction of shareholders' equity. Deferred compensation is being amortized to income over a four year vesting period using the graded vesting method. The Company has recorded $94,000 as a charge to general and administrative expense on the income statement for the year ended September 30, 2000.

Fair value disclosure

    Had compensation cost for the Company's stock-based compensation plan been determined on fair value at the grant dates for the awards using the minimum value method prescribed by SFAS No. 123, the Company's pro forma net loss would not be materially different from the historical amount reported. Therefore, such pro forma information is not separately presented herein. Future pro forma net income (loss) may be materially different from actual amounts reported.

7.  401(k) Plan

    Effective July 1, 1996, the Company adopted the Shomiti Systems Incorporated 401(k) Plan that qualifies as a deferred salary arrangement under Section 401 of the Internal Revenue Code. Under the 401(k) Plan, participating employees may defer a portion of their pretax earnings not to exceed $10,000 for the calendar year ended December 31, 2000. The Company, at its discretion, may make contributions for the benefit of eligible employees. In the fiscal year ended September 30, 2000, the Company made no contributions to the 401(k) Plan.

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8.  Income Taxes

    Due to operating losses and the inability to recognize the benefits therefrom, there is no provision for income taxes for the years ended September 30, 2000, October 1, 1999 and October 2, 1998.

    Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows (in thousands):

 
   September 30, 2000
   October 1, 1999
(unaudited)
  
Deferred tax assets:          
  Net operating losses   6,600   5,900  
  Research credit carryforwards   800   600  
  Capitalized research and development expenses   500   300  
  Other individually immaterial items   500   500  
   
 
 
  Total deferred tax assets   8,400   7,300  
   
 
 

Valuation allowance
 
(8,400
)
(7,300
)
   
 
 
Net deferred tax assets   —   —  
   
 
 

    Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance increased by $1,100,000, $2,300,000 and $1,000,000 during 2000, 1999 and 1998, respectively.

    As of September 30, 2000, the Company had net operating loss carryforwards for federal income tax purposes of approximately $17,900,000 which expire at various dates beginning in 2010 through 2020, if not utilized.

    Utilization of the Company's net operating losses and credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses and credit carryforwards before utilization.

9.  Lease Commitments

    The Company has entered into master lease agreements with two leasing companies for the acquisition of equipment. These agreements provide for reimbursement to the Company of up to a total of $2,350,000 for qualified equipment purchases. During fiscal 2000, the Company did not receive any reimbursements under these agreements. The lease terms range from 36 months to 42 months and require the Company to pay sales taxes, property taxes, insurance and maintenance costs. The Company paid interest of $110,043 in fiscal 2000 under these agreements.

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    The Company leases its facility under a noncancelable operating lease, which expires in April 2002. Rent expense was $395,232, $396,000 (unaudited) and $388,000 (unaudited) for fiscal 2000, 1999 and 1998, respectively.

    Future minimum lease payments under noncancelable leases at September 30, 2000 were as follows (in thousands):

Fiscal Year Ending
   Capital
   Operating
2001   $ 205   $ 425
2002     17     243
2003     266     —
   
 
Total minimum lease payments     488   $ 668
         
Less: Amount representing interest     (25 )    
   
     
Present value of capital lease obligations     463      
Less: Current portion     (181 )    
   
     
Long-term portion of capital lease obligations   $ 282      
   
     

10. Contingency

    In late January 2001, Shomiti received a letter from Acterna Corporation advising Shomiti that Acterna is the owner of United States patent 5,878,030 (the " '030 Patent"), which generally relates to a test access port for facilitating the attachment of a local area network analyzer to the data transmission path of a local area network. In the letter, Acterna asserted that certain of Shomiti's products infringe the '030 Patent. On March 9, 2001, Shomiti's attorneys at that time responded that, based on their review, they did not believe that Shomiti's products infringed any of the claims in the '030 Patent. On March 19, 2001, Acterna re-asserted its belief that certain of Shomiti's products infringe the '030 Patent and indicated a willingness to resolve the matter through a one-time payment in the range of $1.5 million. The parties have continued to engage in discussions and have requested additional information from each other.

    Shomiti believes that it has strong defenses against Acterna's claims and intends to vigorously defend its position. However, the matter is in a preliminary stage and its outcome cannot be predicted with certainty. If a lawsuit is filed, the litigation process is inherently uncertain. Patent litigation is particularly complex and can extend for a protracted time, which can substantially increase the cost of such litigation. Litigation can also divert the efforts and attention of key management and technical personnel. In order to avoid the uncertainty of litigation and the time and expense associated with litigation, the parties may decide to explore a resolution of the claim through a license from Acterna. There can be no assurance that Shomiti would be able to negotiate a license with Acterna or that the terms of such a license, including any payments that would be required under the license, would be acceptable to Shomiti. In the event Shomiti obtains a license from Acterna, the royalty payments thereunder would increase Shomiti's cost of revenues and decrease Shomiti's gross profit. If Shomiti is required to pay significant monetary damages, is enjoined from selling any of its products or is required

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to make substantial royalty payments pursuant to any such license agreement, its business would be significantly harmed.

11.  Subsequent Events

    The Company borrowed under promissory notes payable the principal sums of $500,000, $2,000,000 and $1,500,000 in October 2000, November 2000 and January 2001, respectively, from Finisar Corporation ("Finisar"). Interest on these borrowings accrues at rates ranging from 6.5% and 10% per annum, and the borrowings together with accrued interest are due on demand. The promissory notes payable are secured by all accounts receivable and inventory.

    On February 7, 2001, the Company entered into an Amended and Restated Agreement and Plan of Reorganization with Finisar, whereby Finisar will acquire all of the outstanding shares of stock and assume all stock options of the Company. The acquisition closed on March 23, 2001.

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UNAUDITED CONDENSED INTERIM FINANCIAL STATEMENTS

SHOMITI SYSTEMS, INC.

As of December 31, 2000 and September 30, 2000 and for
the three months ended December 31, 2000 and 1999

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SHOMITI SYSTEMS, INC.

UNAUDITED CONDENSED BALANCE SHEET

(in thousands)

 
   December 31, 2000
   September 30, 2000
  
Assets  
Current assets:              
  Cash and cash equivalents   $ 322   $ 353  
  Accounts receivable, net     2,524     3,089  
  Inventory     1,450     943  
  Prepaid expenses and other current assets     105     171  
   
 
 
Total current assets     4,401     4,556  
Property and equipment, net     870     874  
Restricted cash     250     250  
Other assets     121     123  
   
 
 
Total assets   $ 5,642   $ 5,803  
   
 
 

Liabilities, Mandatorily Redeemable Preferred Stock and Shareholders' Equity
 

Current liabilities:
 
 
 
 
 
 
 
  Accounts payable   $ 1,631   $ 1,734  
  Accrued liabilities     1,426     1,344  
  Capital lease obligations, current portion     116     181  
  Notes payable     2,500     1,421  
   
 
 
Total current liabilities     5,673     4,680  
Capital lease obligation, long-term portion     282     282  
   
 
 
      5,955     4,962  
Mandatorily redeemable convertible preferred stock     19,765     19,765  

Shareholders' equity (net capital deficiency):
 
 
 
 
 
 
 
  Common stock     207     197  
  Additional paid-in capital     1,537     836  
  Deferred stock compensation     (1,362 )   (742 )
  Accumulated deficit     (20,460 )   (19,215 )
   
 
 
Total shareholders' equity (net capital deficiency)     (20,078 )   (18,924 )
   
 
 
Total liabilities, mandatorily redeemable preferred stock and other shareholders' equity (net capital deficiency)   $ 5,642   $ 5,803  
   
 
 

See accompanying note to unaudited financial statements.

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SHOMITI SYSTEMS, INC.

UNAUDITED CONDENSED STATEMENTS OF OPERATIONS

THREE MONTHS ENDED DECEMBER 31

(in thousands, except per share data)

 
   2000
   1999
  
Revenue     3,484     3,037  
Cost of sales     1,120     733  
   
 
 
Gross profit     2,364     2,304  
   
 
 
Operating expenses:              
  Research and development     1,322     1,036  
  Sales and marketing     1,954     1,175  
  General and administrative     309     371  
   
 
 
Total operating expenses     3,585     2,582  
   
 
 
Operating loss     (1,221 )   (278 )
Interest expense, net     24     44  
   
 
 
Net loss   $ (1,245 ) $ (322 )
   
 
 
Net loss per share—basic and diluted     (0.30 )   (0.08 )
   
 
 
Shares used in per share calculation—basic and diluted     4,158     4,127  
   
 
 

See accompanying note to unaudited financial statements.

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SHOMITI SYSTEMS, INC.

UNAUDITED CONDENSED STATEMENT OF CASH FLOWS

THREE MONTHS ENDED DECEMBER 31

(in thousands)

 
   2000
   1999
  
Operating Activities              
Net loss   $ (1,245 ) $ (322 )
Adjustments to reconcile net income to net cash provided by operating activities:              
  Depreciation and amortization     194     152  
Changes in operating assets and liabilities:              
    Accounts receivable     565     (483 )
    Inventory     (507 )   35  
    Prepaid expenses and other assets     68     (22 )
    Accounts payable     (103 )   326  
    Accrued liabilities     82     (81 )
   
 
 
Net cash used in operating activities     (946 )   (395 )
   
 
 
Investing Activities              
Purchases of property and equipment     (109 )   (183 )
   
 
 
Financing Activities              
Principal payments on capital lease obligations     (65 )   (163 )
Proceeds from issuance of common stock     10     13  
Proceeds from notes payable     1,079     1,000  
   
 
 
Net cash provided by financing activities     1,024     850  
   
 
 
Net increase (decrease) in cash and cash equivalents     (31 )   272  
Cash and cash equivalents, beginning of period     353     1,160  
   
 
 
Cash and cash equivalents, end of period   $ 322   $ 1,432  
   
 
 

See accompanying note to unaudited financial statements.

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SHOMITI SYSTEMS, INC.

NOTE TO UNAUDITED CONDENSED FINANCIAL STATEMENTS

DECEMBER 31, 2000

1.  Basis of Presentation

    The accompanying unaudited condensed financial statements as of December 31, 2000, and for the three months period ended December 31, 2000 and 1999 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the financial position at December 31, 2000 and the operating results for the three months ended December 31, 2000 and 1999 and the cash flows for the three months ended December 31, 2000 and 1999. These unaudited condensed financial statements should be read in conjunction with the Company's audited financial statements and notes for the years ended September 30, 2000, 1999 and 1998 included elsewhere in this proxy statement.

    The results of operations for the three months ended December 31, 2000 and 1999 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ending September 30, 2001.

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CONSOLIDATED FINANCIAL STATEMENTS

TRANSWAVE FIBER, INC.

As of December 31, 2000 and for the period from inception (February 7, 2000) to December 31, 2000

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Transwave Fiber, Inc.

    We have audited the accompanying consolidated balance sheet of Transwave Fiber, Inc. as of December 31, 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for the period from inception (February 7, 2000) to December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

    We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

    In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transwave Fiber, Inc. at December 31, 2000, and the consolidated results of its operations and its cash flows for the period from inception (February 7, 2000) to December 31, 2000, in conformity with accounting principles generally accepted in the United States.

Palo Alto, California
February 7, 2001, except Note 9, as to which the date is
March 19, 2001

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TRANSWAVE FIBER, INC.

CONSOLIDATED BALANCE SHEET

December 31, 2000

Assets        
Current assets:        
  Cash and cash equivalents   $ 214,366  
  Accounts receivable     79,485  
  Inventories     151,503  
  Prepaid expenses and other current assets     70,412  
   
 
Total current assets     515,766  
Equipment and improvements, net     479,214  
   
 
Total assets   $ 994,980  
   
 
Liabilities and shareholders' equity        
Current liabilities:        
  Accounts payable   $ 169,605  
  Payable to Finisar Corporation     200,000  
  Other accrued liabilities     105,456  
   
 
Total current liabilities     475,061  
Commitments        
Shareholders' equity:        
  Preferred stock, 7,982,000 shares authorized:        
    Convertible Series A, no par value, 7,442,000 shares designated, 7,442,000 shares issued and outstanding; aggregate liquidation preference of $930,250     923,752  
    Convertible Series B, no par value, 540,000 shares designated, 540,000 shares issued and outstanding; aggregate liquidation preference of $540,000     536,587  
  Common stock, no par value, 19,772,000 shares authorized, 8,250,000 shares issued and outstanding     46,250  
  Additional paid-in capital     17,882,963  
  Stock subscription receivable     (40,000 )
  Deferred stock compensation     (15,531,863 )
  Accumulated deficit     (3,297,770 )
   
 
Total shareholders' equity     519,919  
   
 
Total liabilities and shareholders' equity   $ 994,980  
   
 

See accompanying notes.

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TRANSWAVE FIBER, INC.

CONSOLIDATED STATEMENT OF OPERATIONS

Period from inception (February 7, 2000) to December 31, 2000

Revenues   $ 115,290  
Cost of revenues     (100,246 )
   
 
Gross profit     15,044  
Operating expenses:        
  Research and development     626,512  
  Sales and marketing     19,494  
  General and administrative     324,566  
  Amortization of deferred stock compensation     2,351,100  
   
 
Total operating expenses     3,321,672  
   
 
Loss from operations     (3,306,628 )
Interest expense     (606 )
Interest and other income     9,464  
   
 
Net loss   $ (3,297,770 )
   
 
Net loss per share—basic and diluted   $ (0.40 )
   
 
Shares used in computing net loss per share—basic and diluted     8,171,818  
   
 

See accompanying notes.

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TRANSWAVE FIBER, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Period from inception (February 7, 2000) to December 31, 2000

 
   Series A Convertible
Preferred Stock
   Series B Convertible
Preferred Stock
   Common Stock
    
    
    
    
    
  
 
   Additional
Paid-In
Capital
   Stock
Subscription
Receivable
   Deferred
Stock
Compensation
   Accumulated
Deficit
   Total
Shareholders'
Equity
  
 
   Shares
   Amount
   Shares
   Amount
   Shares
   Amount
  
Issuance of common stock at $0.005 per share   —   $ —   —   $ —   8,000,000   $ 40,000   $ —   $ —   $ —   $ —   $ 40,000  
Exercise of options at $0.025 per share   —     —   —     —   250,000     6,250     —     —     —     —     6,250  
Issuance of Series A convertible preferred stock at $0.125 per share (net of share issuance costs of $6,498)   7,442,000     923,752   —     —   —     —     —     —     —     —     923,752  
Issuance of Series B convertible preferred stock at $1.00 per share (net of share issuance costs of $3,413)   —     —   540,000     536,587   —     —     —     (40,000 )   —     —     496,587  
Deferred stock compensation   —     —   —     —   —     —     17,882,963     —     (17,882,963 )   —     —  
Amortization of deferred stock compensation   —     —   —     —   —     —     —     —     2,351,100     —     2,351,100  
Net loss and comprehensive loss   —     —   —     —   —     —     —     —     —     (3,297,770 )   (3,297,770 )
   
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2000   7,442,000   $ 923,752   540,000   $ 536,587   8,250,000   $ 46,250   $ 17,882,963   $ (40,000 ) $ (15,531,863 ) $ (3,297,770 ) $ 519,919  
   
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes.

F–111


TRANSWAVE FIBER, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

Period from inception (February 7, 2000) to December 31, 2000

Operating activities        
Net loss   $ (3,297,770 )
Adjustments to reconcile net loss to net cash used in operating activities:        
  Depreciation     38,824  
  Amortization of deferred stock compensation     2,351,100  
  Changes in operating assets and liabilities:        
    Accounts receivable     (79,485 )
    Inventories     (151,503 )
    Prepaid expenses and other current assets     (70,412 )
    Accounts payable     169,605  
    Other accrued liabilities     105,456  
   
 
Net cash used in operating activities     (934,185 )
   
 
Investing activities        
Purchase of equipment and improvements     (518,038 )
   
 
Net cash used in investing activities     (518,038 )
   
 
Financing activities        
Proceeds from issuance of Series A convertible preferred stock, net of issuance cost     923,752  
Proceeds from issuance of Series B convertible preferred stock, net of issuance cost     496,587  
Proceeds from issuance of common stock     46,250  
Proceeds from borrowing from Finisar     200,000  
   
 
Net cash provided by financing activities     1,666,589  
   
 
Net increase in cash and cash equivalents and cash and cash equivalents at end of period   $ 214,366  
   
 
Supplemental disclosures of cash flow information        
Cash paid for interest   $ —  
   
 
Cash paid for taxes   $ —  
   
 

See accompanying notes.

F–112

TRANSWAVE FIBER, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2000

1. Summary of Significant Accounting Policies

Description of Business

    Transwave Fiber, Inc. (the Company) was incorporated in the state of California on February 7, 2000 and specializes in providing solutions to long haul and metropolitan area networks with a focus on manufacturing fiber optical components.

Basis of Presentation

    These consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary registered in The People's Republic of China (the PRC) and were prepared in accordance with accounting principles generally accepted in the United States. Intercompany balances and transactions have been eliminated on consolidation.

    As of December 31, 2000, the Company had an accumulated deficit of approximately $3,297,770. The Company expects to continue to generate losses until it successfully completes development and market introduction of its complete product line. The Company's ability to meet obligations in the ordinary course of business is dependent on its ability to raise additional financing to meet its business plan objectives and, ultimately, to fund its operations from revenues. The Company is in the process of being acquired by Finisar Corporation (see Note 9). Should the disposal not be consummated, management believes that it will be able to obtain additional funding required in the year ended December 31, 2001 through the sale of debt or equity securities to existing and new investors.

Use of Estimates

    The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from these estimates.

Cash and Cash Equivalents

    The Company considers all highly liquid investments purchased with original maturity from the date of purchase of three months or less to be cash equivalents.

Inventories

    Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market.

Equipment and Improvements

    Equipment and improvements are stated at cost, net of accumulated depreciation. Equipment and improvements are depreciated on a straight-line basis over the estimated useful lives of the assets, generally five to seven years.

Revenue Recognition

    Revenue is recognized at the time of product shipment and no significant obligations remain, net of allowance for estimated returns.

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Advertising Costs

    Advertising costs are expensed as incurred. Advertising costs were not material for the period ended December 31, 2000.

Concentration of Credit Risk

    Financial instruments which potentially subject the Company to concentrations of credit risk include cash, cash equivalents, and accounts receivable. The Company places its cash and cash equivalents with high-credit quality financial institutions. Such investments are generally in excess of FDIC insurance limits. Concentrations of credit risk, with respect to accounts receivable, exist to the extent of amounts presented in the consolidated financial statements. Accounts receivable from two customers represented 65% and 35% of the total balance at December 31, 2000. Generally, the Company does not require collateral or other security to support customer receivables. The Company performs periodic credit evaluations of its customers and maintains an allowance for potential credit losses based on historical experience and other information available to management. The Company has not experienced any loss from collection of customer receivables for the period from inception (February 7, 2000) to December 31, 2000.

Current Vulnerabilities Due to Certain Concentrations

    During the period from inception (February 7, 2000) to December 31, 2000, revenues from two customers represented 67% and 33% of total revenues.

Research and Development

    Research and development expenditures are charged to operations as incurred.

Stock-Based Compensation

    The Company accounts for employee stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and has adopted the disclosure-only alternative of Statement of Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123).

Net Loss per Share

    The Company computes net loss per share in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). SFAS 128 requires the presentation of basic earnings (loss) per share and diluted earnings (loss) per share, if more dilutive, for all periods presented. In accordance with SFAS 128, basic net loss per share has been computed using the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per share has not been presented separately as, given our net loss position, the result would be anti-dilutive.

    Had the Company been in a net income position, diluted earnings per share would have been presented separately and would have included the shares used in the computation of basic net loss per

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share as well as the effect of stock options (under the treasury method) and convertible preferred stock (on an if-converted basis) outstanding during the period.

2. Inventories

    Inventories consist of the following:

 
   December 31,
2000
Raw materials   $ 123,198
Work-in-process     697
Finished goods     27,608
   
    $ 151,503
   

3. Equipment and Improvements, Net

    Equipment and improvements consist of the following:

 
   December 31,
2000
  
Computer equipment   $ 13,461  
Machinery and equipment     503,248  
Furniture and fixtures     1,329  
   
 
      518,038  
Less accumulated depreciation     (38,824 )
   
 
Equipment and improvements, net   $ 479,214  
   
 

4. Operating Lease Commitments

    The Company's operating lease rental for its facilities amounted to $31,246 during the period. At December 31, 2000, minimum rental payment under operating leases are as follows:

Year ending December 31,      
  2001   $ 55,044
  2002     64,492
  2003     21,317
   
    $ 140,853
   

5. Payable to Finisar Corporation

    The amount due to Finisar Corporation is unsecured, bears interest at 6.5% per annum, and is payable on demand.

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6. Shareholders' Equity

Common Stock and Preferred Stock

    Following the Company's incorporation in February 2000, the Company is authorized to issue 27,754,000 shares consisting of 19,772,000 shares of common stock and 7,982,000 shares of preferred stock, 7,442,000 of which has been designated as Series A preferred stock and 540,000 has been designated as Series B preferred stock.

    On June 30, 2000, the shareholders of the Company approved a two-for-one stock split of its common stock and its Series A convertible preferred stock. Accordingly, all share and per share data has been restated to reflect this event.

Series A and Series B Convertible Preferred Stock

    The holders of shares of Series A and Series B convertible preferred stock are entitled to receive dividends, out of assets legally available, prior and in preference to any declaration or payment of any dividend (payable other than in common stock or other securities and rights convertible into or entitling the holders thereof to receive, directly or indirectly, additional shares of common stock) on the common stock, at the rate of $0.006 and $0.05 per share per annum for the Series A and Series B convertible preferred stock, respectively, payable when, as, and if declared by the board of directors. Such dividends will not be cumulative. No dividends have been declared.

    Each share of Series A and Series B convertible preferred stock is convertible, at the option of the holder, at any time, into common stock at the current conversion rate (currently one-for-one). Conversion is automatic upon the closing of an underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, which results in a price per share of not less than $8.00 and gross offering proceeds of not less than $20,000,000 or upon the approval of the holders of at least a majority of the outstanding shares of the convertible preferred stock. The convertible preferred stock has voting rights on an as-if-converted to common stock basis.

    Series A and Series B convertible preferred shareholders are entitled to receive, upon liquidation, an amount per share equal to the issuance price ($0.125 for holders of Series A and $1.00 for holders of Series B), plus all declared but unpaid dividends. Thereafter, the remaining assets and funds, if any, shall be distributed pro rata among the common shareholders and Series A and Series B convertible preferred shareholders on an as-if-converted basis.

    In connection with the issuance of the Series B preferred stock to employees, the Company recorded a noncash stock compensation charge of $1,933,200 for the period to accrete the value of the preferred stock to its fair value. This noncash stock compensation charge was recognized at the date of issuance which was the period in which the shares became eligible for conversion.

2000 Stock Option Plan

    In June 2000, the Company adopted a 2000 Stock Option Plan (the Plan) which provides for the issuance of common stock options to employees and consultants of the Company of up to 3,790,000 shares of the Company's common stock as of December 31, 2000. The Plan permits the Company to (i) grant incentive stock options within the meaning of Section 422 of the Internal Revenue Code of

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1986, and (ii) nonstatutory stock options, which are not intended to qualify as incentive stock options. Options expire after 10 years from the grant date.

    During the period from inception (February 7, 2000) to December 31, 2000, the Company granted options for 3,653,400 shares of common stock at an exercise price of $0.025 per share. On the grant date, 250,000 of these options for shares of common stock were exercised. The remaining 3,403,400 options were neither exercised nor canceled through December 31, 2000. None of the outstanding options as of December 31, 2000 become exercisable until the occurrence of the completion of Finisar Corporation's merger with the Company (the Closing) (see Note 9). The weighted-average deemed fair value of the options granted during the period from inception (February 7, 2000) to December 31, 2000 was $4.37 per share. The weighted-average remaining contractual life of the options outstanding as of December 31, 2000 was 9.7 years. As of December 31, 2000, options for 136,600 shares of common stock were available for future grants.

    On January 29, 2001, 70,000 options for shares of common stock were canceled due to an employee's termination of employment and 70,000 stock options were granted to another employee at an exercise price of $0.025 per share and will be vested upon the occurrence of the Closing.

Deferred Stock Compensation

    In connection with the grant of stock options to employees, the Company recorded deferred stock compensation of $6,815,075 for the period from inception (February 7, 2000) through December 31, 2000, representing the difference between the deemed fair value of the Company's common stock for accounting purposes and the option exercise price of these options at the date of grant. Deferred stock compensation is presented as a reduction of shareholders' equity. The Company has recorded $233,100 as a charge to the income statement. The remaining deferred stock compensation of $6,581,975 relates to options which become exercisable only on or after the completion of Finisar Corporation's merger with the Company. Therefore, recognition and final measurement of compensation expense is deferred until at least the merger is consummated.

    The Company recorded deferred stock compensation of $9,134,688 in connection with stock options granted to certain consultants (nonemployees) for their services rendered to the Company, representing the fair value of the Company's stock options granted to these consultants using the Black-Scholes option valuation model which is based on the following weighted-average assumptions: risk-free interest rate of 6% per annum; no dividend yield; expected volatility of 91%; and a weighted-average expected life of the option of 10 years. Deferred stock compensation is recorded at the earlier of the date at which a commitment for performance by these consultants to earn the stock options is reached or the date at which these consultants' performance is complete, and is charged to income statement when their services are rendered. Accordingly, $184,800 was charged to the income statement as services were considered to have been rendered prior to December 31, 2000. The remaining deferred compensation of $8,949,888 related to options which become exercisable only on or after the completion of Finisar Corporation's merger with the Company. Therefore, recognition and final measurement of compensation expense is deferred until at least the merger is consummated.

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Accounting for Stock-Based Compensation

    Pro forma information regarding net income is required by SFAS 123 as if the Company had accounted for its employee stock options granted under the fair value method of SFAS 123. The fair value for the Company's stock options granted was estimated at the date of grant using the minimum value option valuation model. The minimum value option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions. Because the Company's stock-based awards have characteristics significantly different from those of traded options and because changes in the subject input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessary provide a reliable single measure of the fair value of its stock-based awards. The fair value of these options was estimated at the date of grant using the minimum value method option pricing model with the following weighted-average assumptions: risk-free interest rate of 5% per annum; no dividend yield; and a weighted-average expected life of the option of one year.

    For purposes of pro forma disclosures, the effect of applying the fair value method to the Company's employee stock options awards did not result in a pro forma net loss that was materially different from historical amounts reported. Therefore, such pro forma information is not separately presented herein. Future pro forma net income (loss) may be materially different from actual amounts reported.

Shares Reserved

    Common stock subject to future issuance is as follows:

 
   December 31,
2000
Exercise of outstanding options   3,403,400
Common stock available for grant under stock option plan   136,600
Conversion of Series A convertible preferred stock   7,442,000
Conversion of Series B convertible preferred stock   540,000
   
    11,522,000
   

7. Income Taxes

    There is no provision for U.S. federal, U.S. state or foreign income taxes as the Company has incurred operating losses since inception for all jurisdictions.

    There is no provision for the PRC corporate income tax for the Company's subsidiary because it has no accessible income. The loss of this subsidiary attributable to the Company's loss for the period was $166,493.

    Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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    Significant components of the Company's deferred tax assets are as follows:

 
   December 31,
2000
  
Deferred tax assets:        
  Net operating loss carryforwards   $ 368,000  
  Other     11,000  
   
 
Total deferred tax assets     379,000  
Valuation allowance     (379,000 )
   
 
Net deferred tax assets   $ —  
   
 

    Realization of the deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance.

    As of December 31, 2000, the Company has net operating loss carryforwards for federal income tax purposes of approximately $920,000, which expire in 2020. Utilization of the Company's net operating loss may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss before utilization.

8. Segments and Geographic Information

    The Company operates in one reportable segment, the design, manufacture, and marketing of fiber optical components. During the period from inception (February 7, 2000) to December 31, 2000, 100% of the Company's revenues were from the United States.

9. Subsequent Events

    On January 31, 2001, the Company entered into another unsecured loan agreement with Finisar Corporation for the amount of $130,000, which bears interest at 6.5% per annum and is payable on demand. During the period from inception through December 31, 2000, the Company sold products to Finisar Corporation representing 67% of the Company's revenue. As at December 31, 2000, Finisar Corporation represented 65% of the Company's accounts receivable balance.

    On November 20, 2000, the Company and certain of the shareholders of the Company entered into a definitive agreement to sell their ownership interest to Finisar Corporation.

    Under the terms of the agreement, the Company's shareholders will be entitled to receive up to approximately 3.2 million shares of Finisar Corporation's common stock including shares issuable upon exercise of options to be assumed in the transaction. Of the shares issued in the transaction, 1/3 will be deposited in an escrow and will be released to the Company's shareholders upon the achievement of certain financial and technical milestones during a three-year period following the completion of the merger. The transaction will be accounted for under the purchase method of accounting. The transaction is expected to close during April 2001 and is subject to approval by the Company's shareholders and other customary conditions.

F–119

    On February 14, 2001 and March 19, 2001 the agreement was amended to provide for the issuance of shares of the Finisar Corporation's Series A Preferred Stock to the shareholders of the Company. The Series A Preferred Stock is convertible into the same number of shares of common stock that would have been issued under the original agreement and will be automatically converted into common stock upon the approval of additional authorized common shares by the stockholders of Finisar Corporation.

    The transaction closed on May 3, 2001 (unaudited).

F–120

CONSOLIDATED FINANCIAL STATEMENTS

MARLOW INDUSTRIES, INC. AND SUBSIDIARIES

As of January 28, 2001, and January 30, 2000

Together with Report of Independent Public Accountants

F–121


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Marlow Industries, Inc.:

    We have audited the accompanying consolidated balance sheets of Marlow Industries, Inc. (a Texas corporation) and subsidiaries as of January 28, 2001, and January 30, 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three fiscal years ended January 28, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

    We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Marlow Industries, Inc. and subsidiaries as of January 28, 2001, and January 30, 2000, and the results of their operations and their cash flows for each of the three fiscal years ended January 28, 2001, in conformity with accounting principles generally accepted in the United States.

Dallas, Texas,
May 4, 2001

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MARLOW INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 
   January 28,
2001
   January 30,
2000
  
ASSETS              
CURRENT ASSETS:              
  Cash and cash equivalents   $ 861,577   $ 1,764,756  
  Accounts receivable, net of allowance for doubtful accounts of $110,000 in 2001 and $80,000 in 2000     8,303,376     4,907,019  
  Inventories, net     6,229,653     3,565,012  
  Deferred income taxes     771,000     642,000  
  Deferred acquisition cost     569,461     —  
  Prepaid expenses     141,264     96,107  
   
 
 
    Total current assets     16,876,331     10,974,894  
PROPERTY AND EQUIPMENT, at cost, less accumulated depreciation of $12,527,751 in 2001 and $11,037,888 in 2000     7,531,529     3,896,714  
OTHER ASSETS     212,798     244,370  
   
 
 
    $ 24,620,658   $ 15,115,978  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
CURRENT LIABILITIES:              
  Revolving line of credit   $ 450,000   $ —  
  Current maturities of long-term debt and capital lease obligations     968,000     602,000  
  Trade accounts payable     3,902,036     1,563,950  
  Accrued salaries and wages     2,790,866     1,834,816  
  Other accrued liabilities     1,366,707     660,572  
  Income taxes payable     634,734     233,763  
   
 
 
    Total current liabilities     10,112,343     4,895,101  
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, excluding current maturities     2,499,759     1,626,450  
DEFERRED INCOME TAXES     529,000     425,000  
   
 
 
    Total liabilities     13,141,102     6,946,551  
   
 
 
STOCKHOLDERS' EQUITY:              
  Common shares of $.10 par value; 1,000,000 shares authorized, 772,000 shares issued in 2001 and 2000     77,200     77,200  
  Additional paid-in capital     356,993     354,823  
  Retained earnings     11,238,535     8,127,662  
   
 
 
      11,672,728     8,559,685  
  Less—Cost of common shares in treasury, 29,150 shares in 2001 and 63,650 shares in 2000     (193,172 )   (390,258 )
   
 
 
    Total stockholders' equity     11,479,556     8,169,427  
   
 
 
    $ 24,620,658   $ 15,115,978  
   
 
 

The accompanying notes are an integral part of these consolidated financial statements.

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MARLOW INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 
   Fiscal Year Ended
  
 
   January 28,
2001
   January 30,
2000
   January 31,
1999
  
NET SALES   $ 50,150,280   $ 32,731,842   $ 28,449,477  
COST OF SALES     34,439,301     21,674,114     19,576,934  
   
 
 
 
    Gross profit     15,710,979     11,057,728     8,872,543  
   
 
 
 
OPERATING EXPENSES:                    
  Selling expenses     4,053,864     3,033,675     2,671,234  
  Administrative expenses     3,780,922     2,817,892     2,315,704  
  Research, development, and engineering expenses     3,187,493     2,355,452     1,968,725  
   
 
 
 
      11,022,279     8,207,019     6,955,663  
   
 
 
 
    Operating income     4,688,700     2,850,709     1,916,880  
   
 
 
 
OTHER INCOME (EXPENSES):                    
  Interest income     61,598     23,147     17,720  
  Interest expense     (299,481 )   (241,079 )   (419,489 )
  Miscellaneous, net     (15,944 )   (13,420 )   (4,982 )
   
 
 
 
      (253,827 )   (231,352 )   (406,751 )
   
 
 
 
    Net income before taxes     4,434,873     2,619,357     1,510,129  
PROVISION FOR INCOME TAXES     1,324,000     779,000     407,000  
   
 
 
 
NET INCOME   $ 3,110,873   $ 1,840,357   $ 1,103,129  
   
 
 
 
NET INCOME PER COMMON SHARE:                    
  Basic   $ 4.38   $ 2.61   $ 1.56  
   
 
 
 
  Diluted   $ 4.09   $ 2.48   $ 1.50  
   
 
 
 
WEIGHTED AVERAGE SHARES OUTSTANDING:                    
  Basic     710,909     705,375     705,350  
   
 
 
 
  Diluted     760,834     742,969     737,194  
   
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

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MARLOW INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

 
   Shares
   Par
Value
   Paid-In
Capital
   Retained
Earnings
   Treasury
Stock
   Total
  
BALANCE, January 31, 1998   772,000   $ 77,200   $ 348,199   $ 5,184,176   $ (391,207 ) $ 5,218,368  
  Issuance of treasury stock for stock options exercised   —     —     3,474     —     2,809     6,283  
  Purchase of shares into treasury   —     —     —     —     (8,880 )   (8,880 )
  Net income   —     —     —     1,103,129     —     1,103,129  
   
 
 
 
 
 
 
BALANCE, January 31, 1999   772,000     77,200     351,673     6,287,305     (397,278 )   6,318,900  
  Issuance of treasury stock for stock options exercised   —     —     3,150     —     7,020     10,170  
  Net income   —     —     —     1,840,357     —     1,840,357  
   
 
 
 
 
 
 
BALANCE, January 30, 2000   772,000     77,200     354,823     8,127,662     (390,258 )   8,169,427  
  Issuance of treasury stock for stock options exercised   —     —     (116,356 )   —     197,086     80,730  
  Issuance of stock options below fair value   —     —     118,526     —     —     118,526  
  Net income   —     —     —     3,110,873     —     3,110,873  
   
 
 
 
 
 
 
BALANCE, January 28, 2001   772,000   $ 77,200   $ 356,993   $ 11,238,535   $ (193,172 ) $ 11,479,556  
   
 
 
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F–125

MARLOW INDUSTRIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 
   Fiscal Year Ended
  
 
   January 28,
2001
   January 30,
2000
   January 31,
1999
  
CASH FLOWS FROM OPERATING ACTIVITIES:                    
  Net income   $ 3,110,873   $ 1,840,357   $ 1,103,129  
  Adjustments to reconcile net income to net cash provided by operating activities—                    
    Depreciation     1,574,109     1,413,476     1,298,660  
    Gain on disposition of equipment     (5,000 )   —     (6,500 )
    Deferred income taxes     (25,000 )   (199,000 )   (155,000 )
    Issuance of options below fair value     118,526     —     —  
  Changes in operating assets and liabilities—                    
    Increase in receivables     (3,396,357 )   (1,306,778 )   (425,996 )
    (Increase) decrease in inventories     (2,664,641 )   137,501     818,657  
    (Increase) decrease in prepaid expenses and other assets     (583,046 )   58,871     29,983  
    Increase (decrease) in trade accounts payable     2,338,086     562,210     (252,592 )
    Increase (decrease) in income taxes payable     400,971     (271,038 )   368,891  
    Increase in accrued liabilities     1,662,185     848,982     659,336  
   
 
 
 
      Net cash provided by operating activities     2,530,706     3,084,581     3,438,568  
   
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:                    
  Capital expenditures     (5,208,923 )   (1,206,019 )   (978,625 )
  Proceeds from sale of equipment     5,000     —     6,500  
   
 
 
 
      Net cash used in investing activities     (5,203,923 )   (1,206,019 )   (972,125 )
   
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:                    
  Principal payments on long-term debt     (544,784 )   (471,676 )   (403,281 )
  Principal payments under capital lease obligations     (108,458 )   (160,469 )   (299,054 )
  Proceeds from addition of long-term debt     1,892,550     —     209,903  
  Net proceeds from (payments on) revolving line of credit     450,000     —     (1,850,000 )
  Purchases of treasury stock     —     —     (8,880 )
  Proceeds from exercise of options     80,730     10,170     6,283  
   
 
 
 
      Net cash provided by (used in) financing activities     1,770,038     (621,975 )   (2,345,029 )
   
 
 
 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS     (903,179 )   1,256,587     121,414  
CASH AND CASH EQUIVALENTS, beginning of year     1,764,756     508,169     386,755  
   
 
 
 
CASH AND CASH EQUIVALENTS, end of year   $ 861,577   $ 1,764,756   $ 508,169  
   
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION:                    
  Cash paid for interest   $ 280,440   $ 234,936   $ 425,848  
  Cash paid for income taxes   $ 948,029   $ 1,249,038   $ 228,164  

The accompanying notes are an integral part of these consolidated financial statements.

F–126

MARLOW INDUSTRIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 28, 2001, JANUARY 30, 2000, AND JANUARY 31, 1999

1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization

    Marlow Industries, Inc. (the "Company") was incorporated in 1973 for the purpose of designing, developing, manufacturing, and marketing products based on thermoelectric technology. The Company's headquarters are located in Dallas, Texas, but it distributes its products worldwide.

    The Company's products are used in telecommunication, defense, medical equipment, and commercial cooling applications. The products use thermoelectric technology to cool electronic components and in other temperature stabilization applications. The Company's sales are generally to large multinational businesses. The majority of the Company's sales are in the United States.

    In fiscal years 2001, 2000 and 1999 approximately 22%, 11% and 12%, respectively, of the Company's net sales was derived from a single customer.

Principles of Consolidation

    The statements include the accounts of the Company and its wholly owned subsidiaries, Marlow Industries International, Inc., a Foreign Sales Corporation (FSC), CMC Leasing Company, and Marlow Industries Asia, Inc. All significant intercompany accounts and transactions have been eliminated.

Basis of Presentation

    The Company's fiscal year ends on the Sunday nearest to January 31. Fiscal years 2001, 2000 and 1999 include 52 weeks. Fiscal year 2001 ended on January 28, 2001, fiscal year 2000 ended on January 30, 2000 and fiscal year 1999 ended on January 31, 1999. The Company's policy relating to reporting periods does not have a significant effect on comparability of the fiscal period results.

Use of Estimates

    The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

    The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Inventories

    Inventories are stated at the lower of cost or market. Cost is determined using the last-in first-out (LIFO) method on substantially all inventories. Cost of other inventories, approximately $31,000, $85,000 and $42,000 at January 28, 2001, January 30, 2000 and January 31, 1999, respectively, is determined using the first-in, first-out (FIFO) method. The cost of the Company's inventories includes material, labor and overhead.

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Deferred Acquisition Costs

    The Company has capitalized in Deferred acquisition costs approximately $569,000 of legal fees incurred as of January 28, 2001, relating to the anticipated merger with Finisar Corporation ("Finisar") (see Note 11). Under the terms of the agreement, these costs are to be paid from the proceeds of the transaction. However, in the event that the Company terminates the agreement, these costs must be expensed at that time.

Revenue Recognition

    The Company recognizes revenue as products are shipped or engineering services are completed.

Depreciation

    Depreciation of property and equipment is provided over the estimated useful lives of the respective assets ranging from 4-20 years using the straight-line method.

Accounting for the Impairment of Long-Lived Assets

    Long-lived assets and certain identifiable intangibles held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company was not subject to any such events or changes in circumstances as of January 28, 2001.

Income Taxes

    The Company uses the liability approach of accounting for income taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Research, Development, and Engineering

    Research, development, and engineering costs are expensed as incurred. Engineering costs were $1,964,218, $1,441,431 and $1,224,518 in 2001, 2000 and 1999, respectively.

New Accounting Pronouncements

    In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133—"Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives in the statement of financial position and measure those instruments at fair value. In 1999, the FASB issued SFAS No. 137—"Accounting for Derivative Instruments and Hedging

F–128

Activities—Deferral of the Effective Date of FASB Statement No. 133—an amendment of FASB Statement No. 133," which defers the effective date of SFAS No. 133 for one year. The Company must implement SFAS No. 133 for fiscal year 2002. The Company currently does not hold any derivative instruments. Thus, this pronouncement will have no material effect on the financial statements.

    In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 provides guidance on applying GAAP to revenue recognition issues in the financial statements. The Company has adopted the provisions of SAB No. 101. The adoption of SAB No. 101 did not have a material impact on the results of operations.

    In May 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-10 "Accounting for Shipping and Handling Fees and Costs." This pronouncement provides accounting guidance for the income statement classification for shipping and handling fees and costs by companies that record revenue based on the gross amount billed to customers. EITF No. 00-10 requires that all amounts billed to a customer in a sale transaction related to shipping and handling, if any, represent net sales earned for the goods provided and should be classified as revenue. This EITF was effective in the fourth quarter of fiscal year 2001. Adoption of this pronouncement had no material impact on the consolidated financial statements.

    In 1999, the FASB issued an exposure draft for a proposed SFAS accounting for business combinations and intangible assets. This exposure draft, among other things, eliminates the pooling of interests business combinations, eliminates the amortization of goodwill, and provides for assessing the carrying value of goodwill on an impairment approach. The final version of the proposed SFAS is currently expected to be released in the second or third calendar quarter of 2001. The provisions of this proposed standard would be effective for fiscal quarters beginning after the issuance of a final SFAS. The adoption of this standard, as it is proposed, will not have any impact on the Company's financial statements but could be applicable for the pending acquisition accounting (See Note 11).

2.  INVENTORIES:

    A summary of inventories follows:

 
   January 28,
2001
   January 30,
2000
  
Finished goods   $ 1,153,548   $ 485,630  
Work-in-process     4,055,575     2,855,415  
Raw materials, purchased parts, and manufactured components     1,295,046     737,547  
   
 
 
      6,504,169     4,078,592  
Reserve to state inventories principally at LIFO cost     (274,516 )   (513,580 )
   
 
 
    $ 6,229,653   $ 3,565,012  
   
 
 

    During 2000 and 1999, certain inventory quantities carried at LIFO were reduced. This reduction resulted in a liquidation of LIFO inventory quantities carried at different costs prevailing in prior years

F–129

as compared with the cost of 2000 and 1999 purchases, the effect of which was immaterial to the financial statements.

3.  PROPERTY AND EQUIPMENT:

    A summary of property and equipment, at cost, follows:

 
   January 28,
2001
   January 30,
2000
  
Land   $ 299,241   $ 299,241  
Buildings and improvements     2,203,964     2,114,891  
Furniture and equipment     15,067,286     11,300,158  
Leasehold improvements     2,344,526     1,073,132  
Automobiles     144,263     147,180  
   
 
 
      20,059,280     14,934,602  
Less—Accumulated depreciation     (12,527,751 )   (11,037,888 )
   
 
 
    $ 7,531,529   $ 3,896,714  
   
 
 

4.  DEBT:

Revolving Line of Credit

    The Company has a line of credit with a bank, in the amount of $3,500,000, with outstanding balances of $450,000 and $0 as of January 28, 2001 and January 30, 2000, respectively. The line is renewable annually and contains several restrictive covenants, the most significant of which requires the Company to maintain minimum net worth and working capital levels, restricts the payment of cash dividends, and limits the incurrence of additional indebtedness. At January 28, 2001 the Company was in compliance with all covenants of the agreement. The agreement provides for interest payable monthly at the bank's prime rate, which was 9.0% as of January 28, 2001. The effective rate was 10.7% during fiscal year ended January 28, 2001. In addition, the Company must pay a commitment fee, which is calculated as 0.25% of the unused portion of the line of credit on a daily basis. All accounts receivable, inventories, and a second lien on the Company's building are pledged as collateral under this agreement.

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Long-Term Debt

    A summary of long-term debt follows:

 
   January 28,
2001
   January 30, 2000
  
Term note to bank, bearing interest at 8.5%, due in monthly installments through June 2003, secured by all assets of the Company   $ 1,537,223   $ 2,082,007  
Less—Current maturities     (596,000 )   (551,000 )
   
 
 
  Long-term debt, excluding current maturities   $ 941,223   $ 1,531,007  
   
 
 

    Maturities of long-term debt for the next three fiscal years are approximately $596,000, $649,000, and $292,000, respectively.

Capitalized Lease Obligations

    The future minimum lease payments as of January 28, 2001, under capitalized lease obligations are as follows:

2002   $ 539,044  
2003     518,589  
2004     477,678  
2005     477,678  
2006 and thereafter     386,490  
   
 
Total minimum lease payments     2,399,479  
Amounts representing interest     (468,943 )
   
 
Present value of net lease payments     1,930,536  
Current maturities     (372,000 )
   
 
Long-term capital lease obligations   $ 1,558,536  
   
 

    Assets recorded under capitalized lease obligations are included within property and equipment and consist of the following:

 
   January 28,
2001
   January 30, 2000
  
Equipment   $ 3,022,253   $ 1,130,452  
Accumulated depreciation     (1,062,300 )   (718,417 )
   
 
 
    $ 1,959,953   $ 412,035  
   
 
 

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5.  OPERATING LEASES:

    The Company conducts certain manufacturing operations on premises leased under operating leases. Total payments under these leases were approximately $572,000, $418,000 and $316,000 for the years ended January 28, 2001, January 30, 2000 and January 31, 1999, respectively. The future minimum lease payments are as follows:

2002   $ 714,526
2003     708,780
2004     649,740
2005     649,740
2006     649,740
Thereafter     3,059,193

6.  INCOME TAXES:

    The Company's deferred tax assets and liabilities at January 28, 2001, and January 30, 2000, were as follows:

 
   2001
   2000
Deferred tax assets            
  Vacation Accrual   $ 288,000   $ 181,000
  Excess and Obsolete Inventory Reserves     342,000     256,000
  Other     141,000     205,000
   
 
      771,000     642,000
   
 
Deferred tax liabilities            
  Tax Depreciation in Excess of Book     526,000     423,000
  Other     3,000     2,000
   
 
      529,000     425,000
   
 
Net deferred tax asset   $ 242,000   $ 217,000
   
 

    The Company's provision (benefit) for income taxes for the fiscal years ended January 28, 2001, January 30, 2000 and January 31, 1999, were as follows:

 
   2001
   2000
   1999
  
Current   $ 1,349,000   $ 978,000   $ 562,000  
Deferred     (25,000 )   (199,000 )   (155,000 )
   
 
 
 
    $ 1,324,000   $ 779,000   $ 407,000  
   
 
 
 

    The foreign portion of the provision for income taxes was not material for the fiscal years ended January 28, 2001, January 30, 2000 and January 31, 1999.

F–132

    The Company's effective tax rates were 29.9%, 29.7% and 27% for the years ended January 28, 2001, January 30, 2000 and January 31, 1999. The difference between the federal income tax rate of 34% and the Company's effective tax rate is as follows:

 
   2001
   2000
   1999
  
Income Taxes at Statutory Rates   $ 1,508,000   $ 892,000   $ 513,000  
  Benefit attributable to FSC     (57,000 )   (79,000 )   (58,000 )
  Research and development credit received     (86,000 )   (22,000 )   (32,000 )
  Non-deductible meals and entertainment     7,000     6,000     5,000  
  Other     (48,000 )   (18,000 )   (21,000 )
   
 
 
 
Total Income Tax Provision   $ 1,324,000   $ 779,000   $ 407,000  
   
 
 
 

7.  STOCKHOLDERS' EQUITY:

Stock Options

    Stock options for 87,000 shares have been granted to employees and directors at prices equal to estimated market values on the grant date, and are outstanding at January 28, 2001. Certain options were subject to vesting at January 28, 2001. Options are scheduled to expire as follows:

Shares
   Option Price
   Expire
5,000   $ 4.38   2002
1,000   $ 4.38   2003
8,000   $ 5.03   2006
3,700   $ 6.26   2008
1,200   $ 6.87   2010
15,000   $ 7.40   2010
23,300   $ 7.40   2012
6,500   $ 8.96   2012
23,300   $ 11.53   2012

    The Company follows the intrinsic value based method of accounting prescribed in APB Opinion No. 25 and makes pro forma disclosures of net income as if the fair value based method had been applied. Because the Company does not have a readily available market for its common shares, the Company grants options at exercise prices equal to the book value per share at the date of the grant. Management believes that value is the best estimate of fair value. Had compensation cost for the stock options outstanding as of January 28, 2001, been determined consistent with the fair value-based method of SFAS No. 123, the Company's net income, basic earnings per share, and diluted earnings per share for fiscal year 2001 would have been reduced to $2,994,413, $4.21, and $3.94, respectively, on a pro forma basis. There would have been no effect on the reported amounts of net income or earnings per share for fiscal year 2000 had the provisions of SFAS No. 123 been applied. Had compensation cost for the stock options outstanding as of January 31, 1999, been determined consistent with the SFAS No. 123, the Company's net income, basic earnings per share, and diluted earnings per share would have been reduced to $1,067,213, $1.51, and $1.44, respectively, on a pro forma basis.

F–133

    A summary of the status of the Company's stock options at January 28, 2001, January 30, 2000 and January 31, 1999, and changes during the years then ended is presented in the table and narrative below:

 
   2001
   2000
   1999
 
   Shares
   Weighted
Average
Exercise
Price
   Shares
   Weighted
Average
Exercise
Price
   Shares
   Weighted
Average
Exercise
Price
Outstanding at beginning of year   67,000   $ 4.18   70,000   $ 4.15   58,500   $ 3.37
Granted   54,500     9.34   —     —   15,000     7.40
Exercised   (34,500 )   2.34   (3,000 )   3.40   (1,200 )   5.24
Forfeited   —     —   —     —   (2,300 )   5.05
   
 
 
 
 
 
Outstanding at end of year   87,000   $ 8.14   67,000   $ 4.18   70,000   $ 4.15
   
 
 
 
 
 
Exercisable at end of year   65,900   $ 7.75   67,000   $ 4.18   70,000   $ 4.15
   
 
 
 
 
 

    The fair value of each option grant is estimated on the date of grant as required by SFAS No. 123. For the options granted in fiscal years 2001 and 1999, the fair value of each share was determined using a risk free rate of return based on a 12-year life. The method of accounting under SFAS No. 123 has not been applied to options granted prior to February 1, 1995; therefore, the resulting pro forma compensation expense may not be representative of that to be expected in future years.

8.  NET INCOME PER COMMON SHARE:

    Basic earnings per common share is based on the weighted average number of common shares outstanding during the year. Diluted earnings per share is based on the weighted average number of common shares and stock options outstanding during the year less assumed treasury stock purchases with assumed proceeds from the exercise of options. Stock options used in the calculation of diluted earnings per share were 49,925, 37,594 and 31,844 in fiscal years 2001, 2000 and 1999, respectively.

9.  EMPLOYEE PROFIT SHARING PLAN:

    The Company provides a defined contribution benefit plan to certain qualified employees, to which the Company may make discretionary contributions. The Company contributed and expensed approximately $309,000, $201,000 and $175,000 under the provision of this plan during fiscal years 2001, 2000 and 1999.

10.  RELATED PARTIES:

    During 1985, the Company purchased a split-dollar life insurance policy for an officer of the Company and remitted all premium payments related to the policy. The Company has a receivable from the officer related to the premiums paid on behalf of the officer which totaled approximately $174,000, $166,000 and $158,000 at January 28, 2001, January 30, 2000 and January 31, 1999, respectively.

F–134

11.  SUBSEQUENT EVENT:

    On February 20, 2001, the Company entered into a definitive merger agreement with Finisar Corporation ("Finisar"). Finisar is a publicly-traded company that provides gigabit fiber optic solutions for high speed data networks. Under the terms of the agreement, Marlow shareholders will be entitled to receive $30 million in cash and up to approximately 12.9 million shares of Finisar common stock including shares issuable upon the exercise of options to be assumed in the transaction. The board of directors of each company has approved the definitive merger agreement, and the merger is expected to close during the second quarter of fiscal 2002. However, the Company can terminate the Agreement, prior to closing, if the average closing price of the Finisar common stock for ten consecutive trading days ending one business day prior to the closing date is less than $16.00 per share.

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ANNEX A


FINISAR CORPORATION

CHARTER OF THE AUDIT COMMITTEE OF THE

BOARD OF DIRECTORS

I.
STATEMENT OF POLICY

    This Charter specifies the scope of the responsibilities of the Audit Committee of the Board of Directors of Finisar Corporation (the "Company"), and how the Committee carries out those responsibilities, including the structure, processes, and membership requirements. The primary function of the Committee is to assist the Board of Directors in fulfilling its financial oversight responsibilities by reviewing and reporting to the Board upon (i) the financial reports and other financial information provided by the Company to any governmental body or to the public, (ii) the Company's systems of internal and external controls regarding finance, accounting, legal compliance and ethics that management and the Board have established and (iii) the Company's auditing, accounting and financial reporting processes in general. Consistent with this function, the Committee should encourage continuous improvement of, and should foster adherence to, the Company's financial policies, procedures and practices at all levels. Management is responsible for preparing the Company's financial statements and the independent auditors are responsible for auditing those financial statements. The Committee's primary duties and responsibilities are to:

The Committee will primarily fulfill these responsibilities, and others as may be prescribed by the Board from time to time, by carrying out the activities enumerated in Section IV of this Charter.

II.
ORGANIZATION AND MEMBERSHIP REQUIREMENTS

    The Committee shall be comprised of three or more directors as determined by the Board, each of whom shall be independent directors, and free from any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Committee. A member of the Committee shall be considered independent if, among other things, such Director:

    All members of the Committee must be able to read and understand fundamental financial statements, including a balance sheet, income statement, and cash flow statement or will be able to do so within a reasonable time after their appointment. In addition, at least one member must have past employment experience in finance or accounting, professional certification in accounting, or other comparable experience or background resulting in the individual's financial sophistication, including being or having been a chief executive, chief financial, or other senior officer with financial oversight responsibilities.

    The members of the Committee shall be elected by the Board and shall serve until their successors shall be duly elected and qualified. Unless a chairman is elected by the full Board, the members of the Committee may designate a chairman by majority vote of the full Committee membership.

III.
MEETINGS

    The Committee shall meet at least annually with management and the independent auditors in separate executive sessions to discuss any matters that the Committee or each of these groups believe should be discussed privately. In addition, the Committee should meet with the independent auditors and management on a quarterly basis to review the Company's financial statements consistent with Section IV.A.5. below.

IV.
PROCESSES

    To fulfill its responsibilities and duties the Committee shall:


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A–3

A–4

ANNEX B

AMENDED AND RESTATED

AGREEMENT AND PLAN OF REORGANIZATION

among

FINISAR CORPORATION,
a Delaware corporation
("Finisar"),

SILVER ACQUISITION CORP.,
a California corporation and wholly-owned
subsidiary of Finisar,

and

SHOMITI SYSTEMS, INC.,
a California corporation
("Shomiti")

Dated February 7, 2001


TABLE OF CONTENTS

 
    
    
   Page
ARTICLE I THE MERGER   B-5
    Section 1.1   Effective Time of the Merger   B-5
    Section 1.2   Closing   B-5
    Section 1.3   Effects of the Merger   B-6
    Section 1.4   Directors and Officers   B-6

ARTICLE II CONVERSION OF SECURITIES
 
B-6
    Section 2.1   Certain Definitions   B-6
    Section 2.2   Conversion of Capital Stock   B-9
    Section 2.3   Exchange of Certificates   B-10
    Section 2.4   Escrow   B-12
    Section 2.5   Dissenters' Rights   B-12
    Section 2.6   Contingent Payment   B-13
    Section 2.7   Conversion of Finisar Preferred Stock   B-13
    Section 2.8   Finisar Stockholder Approval   B-13
    Section 2.9   Representations, Warranties, Covenants and Agreements   B-14

ARTICLE III REPRESENTATIONS AND WARRANTIES OF SHOMITI
 
B-14
    Section 3.1   Organization, Standing and Power   B-14
    Section 3.2   Shomiti Capital Structure   B-14
    Section 3.3   Authority; Required Filings and Consents   B-15
    Section 3.4   Financial Statements   B-16
    Section 3.5   Absence of Undisclosed Liabilities   B-16
    Section 3.6   Accounts Receivable   B-16
    Section 3.7   Inventories   B-16
    Section 3.8   Absence of Certain Changes or Events   B-16
    Section 3.9   Taxes   B-17
    Section 3.10   Tangible Assets and Real Property   B-19
    Section 3.11   Intellectual Property   B-19
    Section 3.12   Bank Accounts   B-21
    Section 3.13   Contracts   B-22
    Section 3.14   Labor Difficulties   B-22
    Section 3.15   Trade Regulation   B-22
    Section 3.16   Environmental Matters   B-23
    Section 3.17   Employee Benefit Plans   B-24
    Section 3.18   Compliance with Laws   B-26
    Section 3.19   Employees and Consultants   B-26
    Section 3.20   Litigation   B-26
    Section 3.21   Restrictions on Business Activities   B-26
    Section 3.22   Governmental Authorization   B-26
    Section 3.23   Insurance   B-26
    Section 3.24   Interested Party Transactions   B-26
    Section 3.25   No Existing Discussions   B-27
    Section 3.26   Real Property Holding Corporation   B-27
    Section 3.27   Corporate Documents   B-27
    Section 3.28   No Misrepresentation   B-27

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF FINISAR AND SUB
 
B-28
    Section 4.1   Organization   B-28

B–2

    Section 4.2   Finisar Capital Structure   B-28
    Section 4.3   Authority; No Conflict; Required Filings and Consents   B-29
    Section 4.4   SEC Filings; Financial Statements   B-30
    Section 4.5   Absence of Undisclosed Liabilities   B-30
    Section 4.6   Litigation   B-30
    Section 4.7   No Misrepresentation   B-30

ARTICLE V CONDUCT OF BUSINESS
 
B-31
    Section 5.1   Covenants of Shomiti   B-31
    Section 5.2   Cooperation   B-32

ARTICLE VI ADDITIONAL AGREEMENTS
 
B-33
    Section 6.1   No Solicitation   B-33
    Section 6.2   Consents   B-33
    Section 6.3   Access to Information   B-33
    Section 6.4   Notification of Certain Matters   B-34
    Section 6.5   Legal Conditions to Merger   B-34
    Section 6.6   Public Disclosure   B-34
    Section 6.7   Tax-Free Reorganization   B-34
    Section 6.8   NNM Quotation   B-34
    Section 6.9   Securities Law Matters   B-34
    Section 6.10   HSR Act   B-36
    Section 6.11   Employment Matters   B-36
    Section 6.12   Stock Options   B-37
    Section 6.13   Employee Benefits   B-38
    Section 6.14   Termination of Shomiti 401(k) Plan   B-38
    Section 6.15   Forms 5500   B-38
    Section 6.16   Brokers or Finders   B-38
    Section 6.17   Additional Agreements; Reasonable Efforts   B-38
    Section 6.18   Expenses   B-38
    Section 6.19   Warrant Exercise   B-39
    Section 6.20   Audited Financial Statements   B-39
    Section 6.21   Termination of Rights   B-39

ARTICLE VII CONDITIONS TO MERGER
 
B-39
    Section 7.1   Conditions to Each Party's Obligation to Effect the Merger   B-39
    Section 7.2   Additional Conditions to Obligations of Finisar and Sub   B-40
    Section 7.3   Additional Conditions to Obligations of Shomiti   B-41

ARTICLE VIII TERMINATION AND AMENDMENT
 
B-42
    Section 8.1   Termination   B-42
    Section 8.2   Effect of Termination   B-43
    Section 8.3   Amendment   B-43
    Section 8.4   Extension; Waiver   B-43

ARTICLE IX ESCROW AND INDEMNIFICATION
 
B-43
    Section 9.1   Survival of Representations and Warranties   B-43
    Section 9.2   Indemnification by Shareholders   B-43
    Section 9.3   Procedures for Recovery   B-44
    Section 9.4   Defense of Third Party Claims   B-45
    Section 9.5   Manner of Recovery   B-45
    Section 9.6   Appointment of Shareholders' Representative   B-46

B–3


ARTICLE X GENERAL PROVISIONS
 
B-47
    Section 10.1   Notices   B-47
    Section 10.2   Interpretation   B-48
    Section 10.3   Counterparts   B-49
    Section 10.4   Severability   B-49
    Section 10.5   Entire Agreement   B-49
    Section 10.6   Governing Law   B-49
    Section 10.7   Assignment   B-49
    Section 10.8   Attorneys' Fees   B-49
    Section 10.9   WAIVER OF JURY TRIAL   B-49

EXHIBITS
 
 
 
 

Exhibit A
 
Form of Escrow Agreement
 
 
Exhibit B   Form of Affiliate Agreement    
Exhibit C   Form of Employment Agreement    
Exhibit D   Form of Noncompetition Agreement    
Exhibit E   Form of Opinion of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation    
Exhibit F   Form of Opinion of Gray Cary Ware & Freidenrich LLP    
Exhibit G   Form of Certificate of Designation    

SCHEDULES
 
 
 
 

Schedule 2.6
 
Contingent Payment Schedule
 
 
Schedule 6.9(f)   Shomiti Affiliates    
Schedule 6.11(c)   Amendments to Shomiti Change of Control Agreements    
Schedule 6.11(d)   Shomiti Employees to be Offered Employment    
Schedule 6.12(b)   Exceptions to Section 6.12(b)    
Schedule 6.12(e)   Schedule of New Finisar Options    
Schedule 6.18   Estimated Shomiti Transaction Expenses    
Schedule 6.21(i)   Third Party Agreement    
Schedule 6.21(ii)   Rights Agreement    
Schedule 6.21(iii)   Letter Agreement    
Schedule 7.2(n)   Schedule of Third Party Consents    

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AMENDED AND RESTATED

AGREEMENT AND PLAN OF REORGANIZATION

    THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered into as of February 7, 2001, by and among Finisar Corporation, a Delaware corporation ("Finisar"), Silver Acquisition Corp., a California corporation and wholly-owned subsidiary of Finisar ("Sub"), and Shomiti Systems, Inc., a California corporation ("Shomiti").


RECITALS

    WHEREAS, the Boards of Directors of Finisar, Sub and Shomiti deem it advisable and in the best interests of each corporation and its respective shareholders that Finisar and Shomiti combine in order to advance the long-term business interests of Finisar and Shomiti;

    WHEREAS, Finisar, Shomiti and Sub entered into an Agreement and Plan of Reorganization, dated November 21, 2000 (the "Original Reorganization Agreement");

    WHEREAS, Finisar, Shomiti and Sub desire to amend and restate the Original Reorganization Agreement;

    WHEREAS, the combination of Finisar and Shomiti shall be effected by the terms of this Agreement through a transaction (the "Merger") in which Sub will merge with and into Shomiti, Shomiti will become a wholly-owned subsidiary of Finisar and the shareholders of Shomiti will become shareholders of Finisar; and

    WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").

    NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below, the parties agree as follows:


ARTICLE I

THE MERGER

    Section 1.1  Effective Time of the Merger.  Subject to the provisions of this Agreement, an Agreement and Plan of Merger (the "Agreement of Merger") in such form as is required by the relevant provisions of the California General Corporation Law ("GCL") shall be duly prepared, executed and acknowledged by Sub and by Shomiti as the Surviving Corporation (as defined in Section 1.3(a)) and delivered to the California Secretary of State for filing, along with certificates of officers (the "Officers' Certificates") of the Constituent Corporations (as defined in Section 1.3(a)) on, or as soon as practicable after, the Closing Date (as defined in Section 1.2). The Merger shall become effective upon the filing of the Agreement of Merger and the Officers' Certificates with the California Secretary of State (the "Effective Time").

    Section 1.2  Closing.  The closing of the Merger (the "Closing") will take place at 1:00 p.m., Pacific Time, on a date to be specified by Finisar and Shomiti (the "Closing Date"), which shall be no later than the second business day after satisfaction of the latest to occur of the conditions set forth in Sections 7.1, 7.2(b) (other than the delivery of the officers' certificate referred to therein) and 7.3(b) (other than the delivery of the officers' certificate referred to therein), provided that the other closing conditions set forth in Article VII have been met or waived as provided in Article VII at or prior to the Closing, at the offices of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, CA 94301 unless another date or place is agreed to in writing by Finisar and Shomiti.

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    Section 1.3  Effects of the Merger.  

    Section 1.4  Directors and Officers.  The directors and officers of Sub immediately prior to the Effective Time shall be the initial directors and officers of the Surviving Corporation, each of whom will hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation, in each case until their respective successors are duly elected or appointed.


ARTICLE II

CONVERSION OF SECURITIES

    Section 2.1  Certain Definitions.  For purposes of this Agreement, the following terms shall have the meanings set forth below:

B–6

B–7

B–8

    Section 2.2  Conversion of Capital Stock.  As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of capital stock of Shomiti or capital stock of Sub:

    The number of shares of Finisar Preferred Stock into which each share of Shomiti Capital Stock shall be converted, as specified above, shall be referred to as the "Series A Exchange Ratio," the "Series B Exchange Ratio," the "Series C Exchange Ratio," and the "Common Stock Exchange Ratio," respectively, and collectively, the "Exchange Ratios." The Exchange Ratios shall be adjusted for any stock split, stock dividend or similar transaction effected between the date hereof and the Effective Time.

B–9

    Section 2.3  Exchange of Certificates.  The procedures for exchanging outstanding shares of Shomiti Capital Stock for Finisar Preferred Stock pursuant to the Merger are as follows:

B–10

B–11

    Section 2.4  Escrow.  

    Section 2.5  Dissenters' Rights.  In the event the Merger becomes effective without the approval of the holders of 100% of the outstanding shares of Shomiti Capital Stock, any shares of Shomiti Capital Stock held by shareholders who properly exercise and perfect the dissenters' rights set forth in Chapter 13 of the GCL ("Dissenting Shares") shall not be converted pursuant to Section 2.2, but shall instead be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to the provisions of the GCL. Finisar shall have the right to control all negotiations and proceedings with respect to the determination of the fair value of the Shomiti Capital Stock. Shomiti agrees that, without the prior written consent of Finisar or as required under the GCL, it will not voluntarily make any payment with respect to, or determine or offer to determine, the fair value of the Shomiti Capital Stock. Each holder of Dissenting Shares (a "Dissenting

B–12

Shareholder") who, pursuant to the provisions of the GCL, becomes entitled to payment of the fair value of Shomiti Capital Stock shall receive payment therefor (but only after the fair value therefor shall have been agreed upon or finally determined pursuant to the provisions of the GCL). In the event that any holder of Shomiti Capital Stock fails to make an effective demand for payment or otherwise loses his, her or its status as a Dissenting Shareholder, Finisar shall, as of the later of the Effective Time or the occurrence of such event, and subject to compliance by such Dissenting Shareholder with the requirements of Section 2.3, issue and deliver, upon surrender by such Dissenting Shareholder of his, her or its Certificate(s), the shares of Finisar Capital Stock and cash, including any cash payment in lieu of fractional shares, in each case without interest thereon, to which such Dissenting Shareholder would have been entitled under Section 2.3.

    Section 2.6  Contingent Payment.  To the extent the party identified (and under the agreement described) in Schedule 2.6 hereof shall continue to have any potential rights to purchase shares of Finisar Preferred Stock (the "Third Party Finisar Shares Rights") as of the Effective Time, upon the lapse or termination thereof, Finisar shall cause to be issued to each of the Shomiti Shareholders that number of shares of Finisar Preferred Stock representing the entire lapsed or terminated portion of the Third Party Finisar Shares Rights in accordance with the Shomiti Shareholder's respective contribution to the Escrow on a pro rata basis.

    Section 2.7  Conversion of Finisar Preferred Stock.  

    Section 2.8  Finisar Stockholder Approval.  Finisar shall hold a meeting of its stockholders as soon as practicable, and in any event shall exercise its best efforts to hold such meeting by May 31, 2001, to solicit the approval of a proposal to amend its Certificate of Incorporation to increase the authorized shares of Finisar Common Stock to 1,000,000,000. If Finisar is unable to obtain stockholder approval of such proposal, Finisar shall modify the proposal to reduce the size of the increase such that the proposal would likely be approved by the Finisar stockholders and shall re-solicit the Finisar stockholders for the approval of such proposal, as modified, as soon as practicable thereafter. If Finisar is unable to obtain stockholder approval of the proposal, as modified, Finisar shall be under a continuing obligation to re-solicit approval of its stockholders no less frequently than every three (3) months until the Finisar stockholders shall have approved an increase in the authorized number of shares of Finisar Common Stock sufficient to create a reserve of Finisar Common Stock to allow for the conversion of all shares of the Finisar Preferred Stock issued in the Merger into Finisar Common Stock. Finisar shall file the Certificate of Amendment no later than two (2) business days following stockholder approval of the increase.

B–13

    Section 2.9  Representations, Warranties, Covenants and Agreements.  Solely for the purposes of Articles III, IV, V, VI and VII hereof, the Shomiti Disclosure Schedule and the Finisar Disclosure Schedule (as each is defined herein), the representations and warranties, covenants, agreements and all other provisions contained therein shall be deemed to have been made and entered into as of November 21, 2000 and the phrases "the date hereof" and "the date of this Agreement" therein shall mean November 21, 2000; provided, however, that the representations in Section 4.2(a) hereof are made as of December 31, 2000 (except for those which specifically refer to September 30, 2000).


ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SHOMITI

    Shomiti hereby represents and warrants to Finisar that the statements contained in this Article III are true and correct, except as set forth in the disclosure schedule provided to Finisar on or before the date of this Agreement (the "Shomiti Disclosure Schedule"). The Shomiti Disclosure Schedule shall be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article III and shall qualify only the corresponding Section in this Article III and any other Section hereof where it is reasonably clear, upon a reading of such disclosure without any independent knowledge on the part of the reader regarding the matter disclosed (after review of the entire Shomiti Disclosure Schedule), that the disclosure would apply to such other Section.

    Section 3.1  Organization, Standing and Power.  Shomiti is a corporation duly organized, validly existing and in good standing under the laws of the State of California, has all requisite corporate power to own, lease and operate its properties and to carry on its business as currently being conducted and is duly qualified to transact business and is in good standing in each jurisdiction in which the nature of its operations requires such qualification, except where the failure to so qualify has not and will not have a Material Adverse Effect (as defined in Section 10.2(a)) on Shomiti as it currently conducts its business or currently proposes to conduct its business. Shomiti has delivered true and correct copies of the Articles of Incorporation and Bylaws of Shomiti, each as amended to date, to Finisar. Shomiti is not in violation of any of the provisions of its Articles of Incorporation, Bylaws or other charter documents. Shomiti does not directly or indirectly own any equity or similar interest in, or any interest convertible or exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity.

    Section 3.2  Shomiti Capital Structure.  

B–14

    Section 3.3  Authority; Required Filings and Consents.  

B–15

    Section 3.4  Financial Statements.  Shomiti has delivered to Finisar (i) its quarterly unaudited financial statements for each of the years ended October 1, 1999 and September 30, 2000, and (ii) its monthly unaudited financial statements for the fiscal year ended September 30, 2000 (the "Balance Sheet Date") (collectively, the "Shomiti Financial Statements"). The Shomiti Financial Statements were prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved, except that the Shomiti Financial Statements do not contain footnotes or a statement of cash flows. The Shomiti Financial Statements present fairly in all material respects the financial position of Shomiti as of the respective dates and the results of its operations for the periods indicated, subject to normal year-end audit adjustments. Shomiti maintains, and until the Effective Time will continue to maintain, a standard system of accounting established and administered in accordance with GAAP. Shomiti shall deliver to Finisar audited financial statements for each of such fiscal years prior to the Closing Date and otherwise in accordance with Section 6.20 hereof.

    Section 3.5  Absence of Undisclosed Liabilities.  Shomiti does not have any liabilities, either accrued or contingent (whether or not required to be reflected in financial statements in accordance with GAAP), and whether due or to become due, other than (i) liabilities reflected or provided for on the balance sheet as of the Balance Sheet Date (the "Shomiti Balance Sheet") contained in the Shomiti Financial Statements, (ii) liabilities contemplated by this Agreement or described in the Shomiti Disclosure Schedule, and (iii) normal or recurring liabilities incurred since the Balance Sheet Date in the ordinary course of business consistent with past practices.

    Section 3.6  Accounts Receivable.  The accounts receivable shown on the Shomiti Balance Sheet arose in the ordinary course of business and have been collected or are collectible in the book amounts thereof, less an amount not in excess of the allowance for doubtful accounts and returns provided for in the Shomiti Balance Sheet. The accounts receivable of Shomiti arising after the Balance Sheet Date and prior to the Closing Date arose, or will arise, in the ordinary course of business and have been collected or will be collectible in the book amounts thereof, less allowances for doubtful accounts and returns determined in accordance with GAAP and the past practices of Shomiti. None of such accounts receivable is subject to any claim of offset or recoupment or counterclaim, and Shomiti has no knowledge of any specific facts that would be likely to give rise to any such claim. No amount of such accounts receivable is contingent upon the performance by Shomiti of any obligation and no agreement for deduction or discount has been made with respect to any such accounts receivable.

    Section 3.7  Inventories.  The inventories shown on the Shomiti Balance Sheet or thereafter acquired by Shomiti consist of items of a quantity and quality usable or salable in the ordinary course of business. Since the Balance Sheet Date, Shomiti has continued to replenish inventories in a normal and customary manner consistent with past practices. Shomiti has not received notice that it will experience in the foreseeable future any difficulty in obtaining, in the desired quantity and quality and at a reasonable price and upon reasonable terms and conditions, the supplies or component products required for the manufacture, assembly or production of its products. The value at which inventories are carried reflect the inventory valuation policy of Shomiti, which is consistent with its past practice and in accordance with GAAP. Due provision has been made on the books of Shomiti, consistent with past practices, to provide for all slow-moving, obsolete, or unusable inventories at their estimated useful or scrap values, and such inventory reserves are adequate to provide for such slow-moving, obsolete or unusable inventory and inventory shrinkage.

    Section 3.8  Absence of Certain Changes or Events.  Since the Balance Sheet Date, Shomiti has conducted its business in the ordinary course and in a manner consistent with past practices and, since such date, Shomiti has not:

B–16

    Section 3.9  Taxes.  

B–17

B–18

    Section 3.10  Tangible Assets and Real Property.  

    Section 3.11  Intellectual Property.  

B–19

B–20

    Section 3.12  Bank Accounts.  The Shomiti Disclosure Schedule sets forth the names and locations of all banks and other financial institutions at which Shomiti maintains accounts of any nature, the type of accounts maintained at each such institution and the names of all persons authorized to draw thereon or make withdrawals therefrom.

B–21

    Section 3.13  Contracts.  

    Section 3.14  Labor Difficulties.  Shomiti is not engaged in any unfair labor practice or in violation of any applicable laws respecting employment, employment practices or terms and conditions of employment. There is no unfair labor practice complaint against Shomiti pending or, to Shomiti's knowledge, threatened before any Governmental Entity. There is no strike, labor dispute, slowdown, or stoppage pending or, to Shomiti's knowledge, threatened against Shomiti. Shomiti is not now and has never been subject to any union organizing activities. Shomiti has not experienced any work stoppage or other labor difficulty. To Shomiti's knowledge, the consummation of the transactions contemplated by this Agreement will not have a material adverse effect on its relations with Shomiti employees.

    Section 3.15  Trade Regulation.  Shomiti has not terminated its relationship with or refused to ship Shomiti Products to any dealer, distributor, third party marketing entity or customer which had theretofore paid or been obligated to pay Shomiti in excess of $10,000 over any consecutive twelve

B–22

(12) month period. All of the prices charged by Shomiti in connection with the marketing or sale of any of its products or services have been in compliance, in all material respects, with all applicable laws and regulations. No claims have been asserted or, to Shomiti's knowledge, threatened against Shomiti with respect to the wrongful termination of any dealer, distributor or any other marketing entity, discriminatory pricing, price fixing, unfair competition, false advertising, or any other material violation of any laws or regulations relating to anti-competitive practices or unfair trade practices of any kind, and, to Shomiti's knowledge, no specific situation, set of facts, or occurrence provides any basis for any such claim.

    Section 3.16  Environmental Matters.  

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    Section 3.17  Employee Benefit Plans.  

B–24

B–25

    Section 3.18  Compliance with Laws.  Shomiti has complied with, is not in violation of, and has not received any notices of violation with respect to, any statute, law or regulation applicable to the ownership or operation of its business.

    Section 3.19  Employees and Consultants.  The Shomiti Disclosure Schedule contains a list of the names of all employees and consultants of Shomiti as of the date of this Agreement and their salaries or wages, other compensation, dates of employment and positions.

    Section 3.20  Litigation.  There is no action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal or, to Shomiti's knowledge, threatened against Shomiti or any of its properties or officers or directors (in their capacities as such). There is no judgment, decree or order against Shomiti or, to its knowledge, any of its directors or officers (in their capacities as such) that could prevent, enjoin or materially alter or delay any of the transactions contemplated by this Agreement, or that could reasonably be expected to have a Material Adverse Effect on Shomiti.

    Section 3.21  Restrictions on Business Activities.  There is no agreement, judgment, injunction, order or decree binding upon Shomiti which has or could reasonably be expected to have the effect of prohibiting or materially impairing any current or future business practice of Shomiti, any acquisition of property by Shomiti or the conduct of business by Shomiti as currently being conducted or as currently proposed to be conducted.

    Section 3.22  Governmental Authorization.  Shomiti has obtained each governmental consent, license, permit, grant or other authorization of a Governmental Entity that is required for the operation of the business of Shomiti (collectively, the "Shomiti Authorizations"), and all of such Shomiti Authorizations are in full force and effect.

    Section 3.23  Insurance.  Shomiti has insurance policies of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of Shomiti. The Shomiti Disclosure Schedule contains a list of all such policies. There is no material claim made by Shomiti, or, to the knowledge of Shomiti, made by a third party pending under any of such policies as to which coverage has been questioned, denied or disputed by the underwriters of such policies. All premiums due and payable under all such policies have been paid, and Shomiti is otherwise in compliance with the terms of such policies. Shomiti has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies.

    Section 3.24  Interested Party Transactions.  

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    Section 3.25  No Existing Discussions.  As of the date hereof, Shomiti is not engaged, directly or indirectly, in any discussions or negotiations with any party other than Finisar with respect to a Shomiti Acquisition Proposal (as defined in Section 6.1).

    Section 3.26  Real Property Holding Corporation.  Shomiti is not a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code.

    Section 3.27  Corporate Documents.  Shomiti has furnished to Finisar, or its representatives, for its examination (i) its minute book containing all records required to be set forth of all proceedings, consents, actions, and meetings of the shareholders, the Board of Directors and any committees thereof and (ii) all permits, orders, and consents issued by any Governmental Entity with respect to Shomiti. The corporate minute books and other corporate records of Shomiti are complete and accurate in all material respects, and the signatures appearing on all documents contained therein are the true signatures of the persons purporting to have signed the same. All actions reflected in such books and records were duly and validly taken in material compliance with the laws of the applicable jurisdiction. Shomiti has delivered or made available to Finisar or its representatives true and complete copies of all documents which are referred to in the Shomiti Disclosure Schedule and any and all other documents which have been requested in writing by Finisar or its representatives in connection with their due diligence of Shomiti.

    Section 3.28  No Misrepresentation.  No representation or warranty by Shomiti in this Agreement, or any statement, certificate or schedule furnished or to be furnished by or on behalf of Shomiti pursuant to this Agreement, when taken together, contains or shall contain any untrue statement of a material fact or omits or shall omit to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances under which they were made, not misleading.

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF FINISAR AND SUB

    Finisar and Sub, jointly and severally, represent and warrant to Shomiti that the statements contained in this Article IV are true and correct except as set forth in the disclosure schedule delivered by Finisar to Shomiti on or before the date of this Agreement (the "Finisar Disclosure Schedule"). The Finisar Disclosure Schedule shall be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this Article IV and shall qualify only the corresponding Section in this Article IV and any other Section hereof where it is reasonably clear upon a reading of such disclosure without any independent knowledge on the part of the reader regarding the matter disclosed (after review of the entire Finisar Disclosure Schedule), that the disclosure would apply to such Section.

    Section 4.1  Organization.  Each of Finisar and Sub is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has all requisite corporate power to own, lease and operate its property and to carry on its business as now being conducted and is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect on Finisar as its business is currently conducted or currently proposed to be conducted.

    Section 4.2  Finisar Capital Structure.  

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    Section 4.3  Authority; No Conflict; Required Filings and Consents.  

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    Section 4.4  SEC Filings; Financial Statements.  

    Section 4.5  Absence of Undisclosed Liabilities.  Finisar and its Subsidiaries do not have any liabilities, either accrued or contingent (whether or not required to be reflected in financial statements in accordance with GAAP), and whether due or to become due, which individually or in the aggregate would be reasonably likely to have a Material Adverse Effect on Finisar, other than (i) liabilities reflected or provided for on the Finisar Balance Sheet, (ii) liabilities specifically contemplated by this Agreement, or described in the Finisar Disclosure Schedule or Finisar SEC Reports, and (iii) normal or recurring liabilities incurred since July 31, 2000 in the ordinary course of business consistent with past practices.

    Section 4.6  Litigation.  Except as described in the Finisar SEC Reports, there is no action, suit or proceeding, claim, arbitration or investigation against Finisar pending or, to Finisar's knowledge, threatened, or as to which Finisar has received any written notice of assertion, which is reasonably likely to have a Material Adverse Effect on Finisar or a material adverse effect on the ability of Finisar to consummate the transactions contemplated by this Agreement.

    Section 4.7  No Misrepresentation.  No representation or warranty by Finisar or Sub in this Agreement, or any statement, certificate or schedule furnished or to be furnished by or on behalf of Finisar or Sub pursuant to this Agreement, when taken together, contains or shall contain any untrue statement of a material fact or omits or shall omit to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances under which they were made, not misleading.

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ARTICLE V

CONDUCT OF BUSINESS

    Section 5.1  Covenants of Shomiti.  During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Shomiti agrees (except to the extent that Finisar shall otherwise consent in writing), to use all commercially reasonable efforts consistent with past practices and policies to carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, to pay its debts and Taxes when due, to pay or perform its other obligations when due (subject to good faith disputes with respect to such obligations), and, to the extent consistent with such business, (i) preserve intact its present business organization, (ii) keep available the services of its present officers and key employees and (iii) preserve its relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with it. Shomiti shall promptly notify Finisar of any event or occurrence not in the ordinary course of business of Shomiti where such event or occurrence would result in a breach of any covenant of Shomiti set forth in this Agreement or cause any representation or warranty of Shomiti set forth in this Agreement to be untrue as of the date of, or giving effect to, such event or occurrence. Except as expressly contemplated by this Agreement, or set forth on the Shomiti Disclosure Schedule, Shomiti shall not, without the prior written consent of Finisar:

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    Section 5.2  Cooperation.  Subject to compliance with applicable law, from the date hereof until the Effective Time, each of Finisar and Shomiti shall confer on a regular and frequent basis with one or more representatives of the other party to report operational matters of materiality and the general status of ongoing operations and shall promptly provide the other party or its counsel with copies of all filings made by such party with any Governmental Entity in connection with this Agreement, the Merger and the transactions contemplated hereby.

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ARTICLE VI

ADDITIONAL AGREEMENTS

    Section 6.1  No Solicitation.  

    Section 6.2  Consents.  Each of Finisar and Shomiti shall use all reasonable efforts to obtain all necessary consents, waivers and approvals under any of Finisar's or Shomiti's material agreements, contracts, licenses or leases as may be necessary or advisable to consummate the Merger and the other transactions contemplated by this Agreement.

    Section 6.3  Access to Information.  Upon reasonable notice, Shomiti shall afford to the officers, employees, accountants, counsel and other representatives of Finisar, reasonable access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records and, during such period, Shomiti shall furnish promptly or make available to Finisar or its representatives all other information concerning its business, properties and personnel as such other party may reasonably request. Unless otherwise required by law, the parties will treat any such information which is nonpublic in confidence in accordance with the Nondisclosure Agreement effective as of August 23, 2000 (the "Confidentiality Agreement") between Finisar and Shomiti, which Confidentiality Agreement shall continue in full force and effect in accordance with its terms. No

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information or knowledge obtained in any investigation pursuant to this Section 6.3 shall affect or be deemed to modify any representation or warranty contained in this Agreement or the conditions to the obligations of the parties to consummate the Merger.

    Section 6.4  Notification of Certain Matters.  Shomiti shall give prompt notice to Finisar, and Finisar shall give prompt notice to Shomiti, of the occurrence (or non-occurrence) of any event of which Shomiti or Finisar, respectively, has knowledge, the occurrence (or non-occurrence) of which would be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect and of the occurrence of any material failure of either party to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder, provided, however, that (i) delivery of any notice pursuant to this Section 6.4 shall not limit or otherwise affect the remedies available to either party hereunder and (ii) shall not constitute an admission by the party delivering such notice that any such representation or warranty has been breached. No disclosure by Shomiti pursuant to this Section 6.4, however, shall be deemed to amend or supplement the Shomiti Disclosure Schedule or prevent or cure any misrepresentations, breach of warranty or breach of contract.

    Section 6.5  Legal Conditions to Merger.  Each of Finisar and Shomiti will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on itself with respect to the Merger (which actions shall include, without limitation, furnishing all information in connection with approvals of or filings with any Governmental Entity) and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon either of them or any of their Subsidiaries in connection with the Merger. Each of Finisar and Shomiti will take all reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other third party, required to be obtained or made by Shomiti, Finisar or any of their Subsidiaries in connection with the Merger or the taking of any action contemplated thereby or by this Agreement and to enable the Closing to occur as promptly as practicable.

    Section 6.6  Public Disclosure.  Finisar and Shomiti shall consult with each other before issuing any press release or otherwise making any public statement with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law or by the rules or regulations of the SEC or the NNM.

    Section 6.7  Tax-Free Reorganization.  Finisar and Shomiti each intend that the Merger shall qualify for treatment as a reorganization within the meaning of Section 368(a) of the Code. Finisar and Shomiti each agree to refrain from taking any action inconsistent with such intended treatment. Finisar and Shomiti agree to make reasonable representations as requested by counsel to Finisar and Shomiti with respect to the rendering of the opinions required pursuant to Section 7.1(f).

    Section 6.8  NNM Quotation.  Finisar agrees to continue the quotation of Finisar Common Stock on the NNM during the term of this Agreement. Finisar shall use its best efforts to cause the shares of Finisar Common Stock to be issued upon the conversion of the Finisar Preferred Stock and such other shares required to be reserved for issuance in connection with the Merger to be approved for quotation on the NNM, subject to official notice of issuance, prior to the Closing Date.

    Section 6.9  Securities Law Matters.  

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    Section 6.10  HSR Act.  Finisar and Shomiti shall promptly prepare and file Notification and Report Forms under the HSR Act with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "Antitrust Division"), and respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation.

    Section 6.11  Employment Matters.  

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    Section 6.12  Stock Options.  

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    Section 6.13  Employee Benefits.  As of the Effective Time, all Shomiti employees who continue as employees of Finisar or Shomiti ("Continuing Employees") shall be eligible to participate in those benefit plans maintained for employees of Finisar on the same terms applicable to employees of Finisar. Each Continuing Employee shall be given credit, for purposes of any service requirements for participation or vesting, for his or her continuous period of service with Shomiti.

    Section 6.14  Termination of Shomiti 401(k) Plan.  Shomiti agrees to terminate its 401(k) Plan. Prior to the Closing Date, Shomiti shall provide to Finisar executed resolutions by Shomiti's Board of Directors authorizing the termination of the 401(k) Plan and an executed amendment to the 401(k) Plan intended to assure compliance with all applicable requirements of the Code and regulations thereunder so that the tax-qualified status of Shomiti's 401(k) Plan shall be maintained at the time of termination (the form and substance of such resolutions and amendment shall be subject to review and approval of Finisar).

    Section 6.15  Forms 5500.  Shomiti agrees to file an accurate and complete Form 5500 Annual Return of Employee Benefit Plan ("Form 5500"), under the Department of Labor delinquent filer program, if available, for each benefit plan (including without limitation its 401(k) Plan) for which Shomiti has not filed a Form 5500. Prior to the Closing Date, Shomiti shall provide Finisar with documentation evidencing that each Form 5500 required to be filed has been filed, including copies of each such Form 5500 and all related correspondence to any governmental agency.

    Section 6.16  Brokers or Finders.  Each of Finisar and Shomiti represents, as to itself, its Subsidiaries and its Affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, and each of Finisar and Shomiti agrees to indemnify and hold the other harmless from and against any and all claims, liabilities or obligations with respect to any other fees, commissions or expenses asserted by any person on the basis of any act or statement alleged to have been made by such party or its Affiliate.

    Section 6.17  Additional Agreements; Reasonable Efforts.  Subject to the terms and conditions of this Agreement, each of the parties agrees to use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including cooperating fully with the other party, including by provision of information. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of either of the Constituent Corporations, the proper officers and directors of each party to this Agreement shall take all such necessary action.

    Section 6.18  Expenses.  The parties shall each pay their own legal, accounting, financial advisory and consulting fees and other out-of-pocket expenses related to the negotiation, preparation and carrying out of this Agreement and the transactions herein contemplated. In the event the Merger is consummated, except for accounting fees and expenses of up to a maximum amount of $100,000 (the "Shomiti Accounting Fee Deductible"), all legal, accounting, financial advisory and consulting fees and expenses incurred by Shomiti (whether paid or accrued) relating to the negotiation, preparation and carrying out of this Agreement and the transactions contemplated hereby, and obtaining all authorizations, consents, orders or approvals of, or declarations or filings with, all Governmental Entities in connection with such transactions (the "Shomiti Transaction Expenses") shall be borne by the former Shomiti Shareholders, as hereinafter provided. Schedule 6.18 hereto sets forth Shomiti's current estimate of the total Shomiti Transaction Expenses which Shomiti expects to incur (the "Estimated Shomiti Transaction Expenses"). Shomiti shall provide an updated schedule of Estimated Shomiti Transaction Expenses not later than two (2) business days prior to the Closing (the "Shomiti Closing Transaction Expense Schedule"). The parties acknowledge that the Total Adjusted Merger

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Consideration and each of the Exchange Ratios will be established on the basis of the Shomiti Closing Transaction Expense Schedule. In the event the Shomiti Transaction Expenses actually incurred by Shomiti exceed the amount shown on the Shomiti Closing Transaction Expense Schedule, Finisar shall be entitled to assert a claim against the Escrow Shares pursuant to Article IX hereof in order to recover all such additional expenses; provided, however, that in no event shall the Shomiti Shareholders be responsible for payment of the Shomiti Accounting Fee Deductible.

    Section 6.19  Warrant Exercise.  Shomiti shall exercise commercially reasonable efforts to cause all Shomiti Warrants that are outstanding as of the date hereof to be exercised, and Shomiti shall cause all Shomiti Warrants issued between the date hereof and the Closing Date, that would be outstanding at or immediately prior to the Effective Time to be exercised in full, by means of a cash exercise for shares of Shomiti Capital Stock prior to the Effective Time, and shall cause the cash exercise price therefor to be paid to Shomiti.

    Section 6.20  Audited Financial Statements.  Shomiti shall deliver to Finisar, at least five (5) business days prior to the Closing Date, its audited financial statements for the years ended October 1, 1999 and September 30, 2000, which shall have been prepared in accordance with GAAP applied on a consistent basis throughout the periods involved and present fairly in all material respects the financial position of Shomiti and the results of its operations and cash flows as of the dates and for the periods indicated therein.

    Section 6.21  Termination of Rights.  Shomiti shall use commercially reasonable efforts to cause the rights of the third parties (i) identified and set forth in Sections 2, 3 and 4 of the agreement described in Schedule 6.21(i) hereto, (ii) under the rights agreement described in Schedule 6.21(ii) hereto and (iii) under the letter agreement described in Schedule 6.21(iii) hereof, to be terminated, effective upon the consummation of the Merger.


ARTICLE VII

CONDITIONS TO MERGER

    Section 7.1  Conditions to Each Party's Obligation to Effect the Merger.  The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction on or prior to the Closing Date of the following conditions:

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    Section 7.2  Additional Conditions to Obligations of Finisar and Sub.  The obligations of Finisar and Sub to effect the Merger are subject to the satisfaction of each of the following conditions, any of which may be waived in writing exclusively by Finisar:

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    Section 7.3  Additional Conditions to Obligations of Shomiti.  The obligation of Shomiti to effect the Merger is subject to the satisfaction of each of the following conditions, any of which may be waived, in writing, exclusively by Shomiti:

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ARTICLE VIII

TERMINATION AND AMENDMENT

    Section 8.1  Termination.  This Agreement may be terminated at any time prior to the Effective Time (with respect to Sections 8.1(b) through 8.1(e), by written notice by the terminating party to the other party):

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    Section 8.2  Effect of Termination.  In the event of termination of this Agreement as provided in Section 8.1, there shall be no liability or obligation on the part of Finisar, Shomiti, Sub or their respective officers, directors, shareholders or Affiliates, except to the extent that such termination results from the willful breach by a party of any of its representations, warranties or covenants set forth in this Agreement; provided that the provisions of Sections 6.16 and 6.18 of this Agreement and the confidentiality provisions set forth herein and in the Confidentiality Agreement shall remain in full force and effect and survive any termination of this Agreement.

    Section 8.3  Amendment.  This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the shareholders of Shomiti, but, after any such approval, no amendment shall be made which by law requires further approval by such shareholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto.

    Section 8.4  Extension; Waiver.  At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party.


ARTICLE IX

ESCROW AND INDEMNIFICATION

    Section 9.1  Survival of Representations and Warranties.  If the Merger occurs, all of the representations and warranties contained in this Agreement shall survive the Closing Date. No action may be brought by a member of the Finisar Group (as defined in Section 9.2) with respect to a breach of a representation or warranty under this Agreement or the transactions contemplated hereby (i) unless an Indemnification Claim is made under Section 9.3 on or before the date that is twelve (12) months following the Closing Date (the "Termination Date") or (ii) except for claims under Section 9.2(d), as allowed by law.

    Section 9.2  Indemnification by Shareholders.  

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    Section 9.3  Procedures for Recovery.  

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    Section 9.4  Defense of Third Party Claims.  Should any claim be made or suit or proceeding be instituted against an Indemnitee which, if prosecuted successfully, would be a matter for which such Indemnitee is entitled to recovery under this Article IX (including, without limitation, any claim by the Internal Revenue Service or the United States Department of Labor) (a "Third Party Claim"), the obligations and liabilities of the parties hereunder with respect to such Third Party Claim shall be subject to the following terms and conditions:

    Section 9.5  Manner of Recovery.  

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    Section 9.6  Appointment of Shareholders' Representative.  For purposes of this Agreement, the Shomiti Shareholders consent to the appointment of William Nieto as the representative and attorney-in-fact for and on behalf of the Shomiti Shareholders (the "Shareholders' Representative"), and to the taking by the Shareholders' Representative of any and all actions and the making of any decisions required or permitted to be taken by him under this Agreement or the Escrow Agreement, including, without limitation, the exercise of the power to (i) execute the Escrow Agreement on behalf of the Shomiti Shareholders, (ii) authorize delivery to Finisar of Escrow Shares in satisfaction of Indemnification Claims, (iii) agree to, negotiate, enter into settlements and compromises of and comply with orders of courts and awards of arbitrators with respect to such Indemnification Claims, (iv) resolve any Indemnification Claims and (v) take all actions necessary in the judgment of the Shareholders' Representative for the accomplishment of the foregoing and all of the other terms, conditions and limitations of this Agreement and the Escrow Agreement. Accordingly, the Shareholders' Representative has unlimited authority and power to act on behalf of each shareholder of Shomiti with respect to the disposition, settlement or other handling of all Indemnification Claims. With respect to any interest in the Escrow, each shareholder of Shomiti will be bound by all actions taken by the Shareholders' Representative in connection with all Indemnification Claims, and Finisar shall be entitled to rely on any action or decision of the Shareholders' Representative. The Shareholders' Representative will incur no liability with respect to any action taken or suffered by him in reliance upon any notice, direction, instruction, consent, statement or other document believed by him to be genuine and to have been signed by the proper person (and shall have no responsibility to determine the authenticity thereof), nor for any other action or inaction, except his own willful misconduct or bad faith. In all questions arising under this Agreement or the Escrow Agreement, the Shareholders' Representative may rely on the advice of counsel, and the Shareholders' Representative will not be liable to anyone for anything done, omitted or suffered in good faith by the Shareholders' Representative based on such advice. Except as expressly provided herein, the Shareholders' Representative will not be required to take any action involving any expense (including consultation of his legal counsel) unless the payment of such expense is made or provided for in a manner satisfactory to him. The former Shomiti Shareholders on whose behalf the Escrow Shares were contributed to the Escrow Fund shall severally indemnify the Shareholders' Representative and hold the Shareholders' Representative harmless against any loss, liability or expense incurred without gross negligence or bad faith on the part of the Shareholders' Representative and arising out of or in connection with the acceptance or administration of the Shareholders' Representative's duties hereunder, including the reasonable fees and expenses of any legal counsel retained by the Shareholders' Representative. At any time during the term of the Escrow Agreement, holders of a majority of the Escrow Shares subject to Indemnification Claims under this Article IX may, by written consent, appoint a new representative as the Shareholders' Representative by sending notice and a copy of the written consent appointing such new representative signed by holders of a majority of the Escrow Shares to Finisar and the Escrow Agent. Such appointment will be effective upon the later of the date indicated in the consent or the date such consent is received by Finisar and the Escrow Agent.

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ARTICLE X

GENERAL PROVISIONS

    Section 10.1  Notices.  All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or within seventy-two (72) hours after being mailed by registered or certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

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    Section 10.2  Interpretation.  

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    Section 10.3  Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original as against any party whose signature appears on such counterpart and all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart.

    Section 10.4  Severability.  In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.

    Section 10.5  Entire Agreement.  This Agreement (including the schedules and exhibits hereto and the other documents delivered pursuant hereto) constitutes the entire agreement among the parties concerning the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, other than the Confidentiality Agreement.

    Section 10.6  Governing Law.  This Agreement shall be governed and construed in accordance with the laws of the State of California without regard to any applicable conflicts of law principles.

    Section 10.7  Assignment.  Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns.

    Section 10.8  Attorneys' Fees.  Notwithstanding anything to the contrary set forth in Section 6.18 hereof, if any dispute occurring prior to the Closing between the parties under this Agreement or with respect to the transaction contemplated hereby is determined, resolved or adjudicated by a court or public or private tribunal or panel, the prevailing party in such dispute shall be entitled to recover from the other its reasonable attorneys' fees and other professional fees and costs incurred in such dispute. "Prevailing party" within the meaning of this Section 10.8 includes, without limitation, a party who obtains substantially the relief or defense sought by it whether by compromise, settlement or judgment.

    Section 10.9  WAIVER OF JURY TRIAL.  EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY FOR ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT, OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF ANY PARTY HERETO IN NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF.

    [SIGNATURE PAGE FOLLOWS]

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    IN WITNESS WHEREOF, Finisar, Sub and Shomiti have caused this Agreement to be signed by their respective officers thereunto duly authorized, as of the date first written above.

SHOMITI SYSTEMS, INC.   FINISAR CORPORATION

By:
 
/s/ WILLIAM SHAW   
 
By:
 
/s/ JERRY S. RAWLS   
    William Shaw       Jerry S. Rawls
    President and Chief Executive Officer       President and Chief Executive Officer

 
 
 
 
SILVER ACQUISITION CORP.

 
 
 
 
By:
 
/s/ JERRY S. RAWLS   
            Jerry S. Rawls
            President and Chief Executive Officer

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ANNEX C

SECOND AMENDED AND RESTATED

AGREEMENT AND PLAN OF REORGANIZATION

among

FINISAR CORPORATION,
a Delaware corporation
("Finisar"),

TRANSWAVE FIBER, INC.,
a California corporation
("Transwave"),

and

CERTAIN PRINCIPAL SHAREHOLDERS
of
Transwave

Dated March 19, 2001


TABLE OF CONTENTS

 
    
    
   Page
ARTICLE I THE MERGER   C-5
    Section 1.1   Effective Time of the Merger   C-5
    Section 1.2   Closing   C-5
    Section 1.3   Effects of the Merger   C-6
    Section 1.4   Directors and Officers   C-6

ARTICLE II CONVERSION OF SECURITIES
 
C-6
    Section 2.1   Certain Definitions   C-6
    Section 2.2   Conversion of Capital Stock   C-7
    Section 2.3   Criteria For Determining Achievement of Milestones   C-7
    Section 2.4   Exchange of Certificates   C-8
    Section 2.5   Escrow   C-9
    Section 2.6   Restricted Shares   C-10
    Section 2.7   Dissenters' Rights   C-10
    Section 2.8   Conversion of Finisar Preferred Stock   C-11
    Section 2.9   Representations, Warranties, Covenants and Agreements   C-11

ARTICLE III REPRESENTATIONS AND WARRANTIES OF TRANSWAVE
 
C-12
    Section 3.1   Organization, Standing and Power   C-12
    Section 3.2   Transwave Capital Structure   C-12
    Section 3.3   Authority; Required Filings and Consents   C-13
    Section 3.4   Financial Statements   C-13
    Section 3.5   Absence of Undisclosed Liabilities   C-14
    Section 3.6   Accounts Receivable   C-14
    Section 3.7   Inventories   C-14
    Section 3.8   Absence of Certain Changes or Events   C-14
    Section 3.9   Taxes   C-15
    Section 3.10   Tangible Assets and Real Property   C-17
    Section 3.11   Intellectual Property   C-17
    Section 3.12   Bank Accounts   C-19
    Section 3.13   Contracts   C-19
    Section 3.14   Labor Difficulties   C-20
    Section 3.15   Trade Regulation   C-20
    Section 3.16   Environmental Matters   C-20
    Section 3.17   Employee Benefit Plans   C-21
    Section 3.18   Compliance with Laws   C-22
    Section 3.19   Employees and Consultants   C-22
    Section 3.20   Litigation   C-22
    Section 3.21   Restrictions on Business Activities   C-22
    Section 3.22   Governmental Authorization   C-22
    Section 3.23   Insurance   C-22
    Section 3.24   Interested Party Transactions   C-22
    Section 3.25   No Existing Discussions   C-23
    Section 3.26   Real Property Holding Corporation   C-23
    Section 3.27   Corporate Documents   C-23
    Section 3.28   No Misrepresentation   C-23

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF FINISAR
 
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    Section 4.1   Organization   C-24

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    Section 4.2   Finisar Capital Structure   C-24
    Section 4.3   Authority; No Conflict; Required Filings and Consents   C-24
    Section 4.4   SEC Filings; Financial Statements   C-25
    Section 4.5   Absence of Undisclosed Liabilities   C-26
    Section 4.6   Absence of Certain Changes or Events   C-26
    Section 4.7   Litigation   C-26
    Section 4.8   No Misrepresentation   C-26

ARTICLE V CONDUCT OF BUSINESS
 
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    Section 5.1   Covenants of Transwave   C-27
    Section 5.2   Cooperation   C-28

ARTICLE VI ADDITIONAL AGREEMENTS
 
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    Section 6.1   No Solicitation   C-29
    Section 6.2   Consents   C-29
    Section 6.3   Access to Information   C-29
    Section 6.4   Legal Conditions to Merger   C-30
    Section 6.5   Public Disclosure   C-30
    Section 6.6   Tax-Free Reorganization   C-30
    Section 6.7   Nasdaq Quotation   C-30
    Section 6.8   Securities Law Matters   C-30
    Section 6.9   Employment Matters   C-32
    Section 6.10   Stock Options   C-32
    Section 6.11   Finisar Plans   C-33
    Section 6.12   Employee Retention Pool   C-33
    Section 6.13   Brokers or Finders   C-33
    Section 6.14   Additional Agreements; Reasonable Efforts   C-34
    Section 6.15   Expenses   C-34

ARTICLE VII CONDITIONS TO MERGER
 
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    Section 7.1   Conditions to Each Party's Obligation to Effect the Merger   C-34
    Section 7.2   Additional Conditions to Obligations of Finisar   C-35
    Section 7.3   Additional Conditions to Obligations of Transwave   C-36

ARTICLE VIII TERMINATION AND AMENDMENT
 
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    Section 8.1   Termination   C-37
    Section 8.2   Effect of Termination   C-37
    Section 8.3   Amendment   C-37
    Section 8.4   Extension; Waiver   C-38

ARTICLE IX ESCROW AND INDEMNIFICATION
 
C-38
    Section 9.1   Survival of Representations and Warranties   C-38
    Section 9.2   Indemnification by Principal Shareholders   C-38
    Section 9.3   Procedures for Indemnification   C-39
    Section 9.4   Defense of Third Party Claims   C-39
    Section 9.5   Manner of Indemnification   C-40
    Section 9.6   Appointment of Shareholders' Representative   C-40

ARTICLE X GENERAL PROVISIONS
 
C-41
    Section 10.1   Notices   C-41
    Section 10.2   Interpretation   C-41
    Section 10.3   Counterparts   C-42
    Section 10.4   Severability   C-42

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    Section 10.5   Entire Agreement   C-43
    Section 10.6   Governing Law   C-43
    Section 10.7   Assignment   C-43
    Section 10.8   Third Party Beneficiaries   C-43

EXHIBITS
 
 
 
 

Exhibit A
 
Transwave Operating Plan
 
 
Exhibit B   Form of Escrow Agreement    
Exhibit C-1   Form of Lock-Up Agreement for Principal Shareholders and Holders of Transwave Preferred Stock    
Exhibit C-2   Form of Lock-Up Agreement for Holders of Transwave Common Stock (other than Principal Shareholders)    
Exhibit D   Form of Affiliate Agreement    
Exhibit E   Form of Employment Agreement    
Exhibit F   Form of Noncompetition Agreement    
Exhibit G   Form of Opinion of Pacific Law Group LLP    
Exhibit H   Form of Opinion of Gray Cary Ware & Freidenrich LLP    
Exhibit I   Form of Certificate of Designation    

SCHEDULES
 
 
 
 

Schedule 6.8(f)
 
Transwave Affiliates
 
 
Schedule 6.9(b)   Transwave Employees to be Offered Employment    
Schedule 6.10(d)   Schedule of New Finisar Options    
Schedule 6.15   Estimated Transwave Transaction Expenses    
Schedule 7.2(e)   Schedule of Third Party Consents    

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SECOND AMENDED AND RESTATED

AGREEMENT AND PLAN OF REORGANIZATION

    THIS SECOND AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered into as of March 19, 2001, by and among Finisar Corporation, a Delaware corporation ("Finisar"), Transwave Fiber, Inc., a California corporation ("Transwave"), and Forrest Duan, Pin He and Yan Zhou, certain major shareholders of Transwave (the "Principal Shareholders").


RECITALS

    WHEREAS, the Boards of Directors of Finisar and Transwave deem it advisable and in the best interests of each corporation and its respective shareholders that Finisar and Transwave combine in order to advance the long-term business interests of Finisar and Transwave;

    WHEREAS, Finisar, Transwave and the Principal Shareholders entered into an Agreement and Plan of Reorganization dated November 20, 2000 (the "Original Reorganization Agreement");

    WHEREAS, Finisar, Transwave and the Principal Shareholders amended the Original Reorganization Agreement by entering into an Amended and Restated Agreement and Plan of Reorganization dated February 14, 2001 (the "Amended Reorganization Agreement");

    WHERAS, Finisar, Transwave and the Principal Shareholders desire to further amend and restate the Amended Reorganization Agreement;

    WHEREAS, the combination of Finisar and Transwave shall be effected by the terms of this Agreement through a transaction (the "Merger") in which Transwave will merge with and into Finisar and the shareholders of Transwave will become shareholders of Finisar; and

    WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").

    NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below, the parties agree as follows:


ARTICLE I

THE MERGER

    Section 1.1  Effective Time of the Merger.  Subject to the provisions of this Agreement, an Agreement and Plan of Merger (the "Agreement of Merger") in such form as is required by the relevant provisions of the California General Corporation Law ("GCL") shall be duly prepared, executed and acknowledged by Transwave and by Finisar as the Surviving Corporation (as defined in Section 1.3(a)) and delivered to the California Secretary of State for filing, along with certificates of officers (the "Officers' Certificates") of the Constituent Corporations (as defined in Section 1.3(a)), as soon as practicable on or after the Closing Date (as defined in Section 1.2). The Merger shall become effective upon the filing of the Agreement of Merger and the Officers' Certificates with the California Secretary of State (the "Effective Time").

    Section 1.2  Closing.  The closing of the Merger (the "Closing") will take place at 1:00 p.m., Pacific Time, on a date to be specified by Finisar and Transwave (the "Closing Date"), which shall be no later than the second business day after satisfaction of the latest to occur of the conditions set forth in Sections 7.1, 7.2(b) (other than the delivery of the officers' certificate referred to therein) and 7.3(b) (other than the delivery of the officers' certificate referred to therein), provided that the other closing conditions set forth in Article VII have been met or waived as provided in Article VII at or prior to

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the Closing, at the offices of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, CA 94301 unless another date or place is agreed to in writing by Finisar and Transwave.

    Section 1.3  Effects of the Merger.  

    Section 1.4  Directors and Officers.  The initial directors and officers of the Surviving Corporation shall be the directors and officers of Finisar, each of whom will hold office in accordance with the Certificate of Incorporation and Bylaws of the Surviving Corporation, in each case until their respective successors are duly elected or appointed.


ARTICLE II

CONVERSION OF SECURITIES

    Section 2.1  Certain Definitions.  For purposes of this Agreement, the following terms shall have the meanings set forth below:

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    Section 2.2  Conversion of Capital Stock.  As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of capital stock of Transwave or capital stock of Finisar:

    Section 2.3  Criteria For Determining Achievement of Milestones.  The achievement of each of the Milestones shall be determined on the basis of the criteria set forth in the Transwave Operating Plan.

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    Section 2.4  Exchange of Certificates.  The procedures for exchanging outstanding shares of Transwave Capital Stock for Finisar Preferred Stock pursuant to the Merger are as follows:

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    Section 2.5  Escrow.  

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    Section 2.6  Restricted Shares.  The Restricted Shares shall be subject to a lock-up agreement which restricts the transfer of the Restricted Shares during the period ending on the first anniversary of the Closing Date. As to those Restricted Shares issued to the Principal Shareholders and the holders of Transwave Preferred Stock, (a) one-half of such Restricted Shares shall be released from the transfer restrictions on the one-hundred-eightieth day following the Closing Date and (b) all of the Restricted Shares shall be released from the transfer restrictions on the first anniversary of the Closing Date. As to those Restricted Shares issued to the holders of Transwave Common Stock (other than Principal Shareholders), one-half of the Restricted Shares shall not be subject to any transfer restrictions and one-half of the Restricted Shares shall be released from the transfer restrictions on the one-hundred-eightieth day following the Closing Date. As a condition to the delivery of the Restricted Shares, each shareholder must execute and deliver a Lock-Up Agreement in substantially the form attached hereto as Exhibit C-1 or Exhibit C-2, as appropriate.

    Section 2.7  Dissenters' Rights.  In the event the Merger becomes effective without the approval of the holders of 100% of the outstanding shares of Transwave Common Stock, any shares of Transwave Common Stock held by shareholders who properly exercise and perfect the dissenters' rights set forth in Chapter 13 of the GCL ("Dissenting Shares") shall not be converted pursuant to Section 2.2, but shall instead be converted into the right to receive such consideration as may be determined to be due with respect to such Dissenting Shares pursuant to the provisions of the GCL. Finisar shall have the right to control all negotiations and proceedings with respect to the determination of the fair value of the Transwave Common Stock. Transwave agrees that, without the prior written consent of Finisar or as required under the GCL, it will not voluntarily make any payment with respect to, or determine or offer to determine, the fair value of the Transwave Common Stock. Each holder of Dissenting Shares (a "Dissenting Shareholder") who, pursuant to the provisions of the GCL, becomes entitled to payment of the fair value of Transwave Common Stock shall receive payment therefor (but only after the fair value therefor shall have been agreed upon or finally determined pursuant to the provisions of the GCL). In the event that any holder of Transwave Common Stock fails to make an effective demand for payment or otherwise loses his, her or its status as a Dissenting Shareholder, Finisar shall, as of the later of the Effective Time or the occurrence of such event, issue and deliver, upon surrender by such Dissenting Shareholder of his, her or its Certificate(s), the shares of Finisar Capital Stock and cash, including any cash payment in lieu of fractional shares, in each case without interest thereon, to which such Dissenting Shareholder would have been entitled under Section 2.2.

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    Section 2.8  Conversion of Finisar Preferred Stock.  Prior to the Closing, Finisar shall file a Certificate of Designation to its Certificate of Incorporation in substantially the form attached hereto as Exhibit I for the purpose of establishing and designating the rights and preferences of the Finisar Preferred Stock to be issued pursuant to Section 2.2 hereof, including the automatic conversion of the Finisar Preferred Stock into Finisar Common Stock immediately upon the filing of a certificate of amendment to Finisar's Certificate of Incorporation to increase the authorized shares of Finisar Common Stock to a number of shares sufficient to create a reserve of Finisar Common Stock to allow for the conversion of the Finisar Preferred Stock to be issued in the Merger into Finisar Common Stock on a three-for-one basis, subject to adjustment for stock splits, combinations, stock dividends and the like (the "Automatic Conversion").

    Section 2.9  Representations, Warranties, Covenants and Agreements.  Solely for the purposes of Articles III, IV, V, VI, and VII hereof, the Transwave Disclosure Schedule and the Finisar Disclosure Schedule (as each is defined herein), the representations and warranties, covenants, agreements and all other provisions contained therein shall be deemed to have been made and entered into as of November 20, 2000 and the phrases "the date hereof" and "the date of this Agreement" therein shall mean November 20, 2000.

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ARTICLE III

REPRESENTATIONS AND WARRANTIES OF TRANSWAVE

    Except as disclosed in the disclosure schedule provided to Finisar on or before the date of this Agreement (the "Transwave Disclosure Schedule"), Transwave and each of the Principal Shareholders, jointly and severally, represent and warrant to Finisar as follows:

    Section 3.1  Organization, Standing and Power.  Transwave is a corporation duly organized, validly existing and in good standing under the laws of the State of California, has all requisite corporate power to own, lease and operate its properties and to carry on its business as currently being conducted and as currently proposed to be conducted, and is duly qualified to transact business and is in good standing in each jurisdiction in which the nature of its operations requires such qualification, except where the failure to so qualify has not and will not have a Material Adverse Effect (as defined in Section 10.2(a)) on Transwave. Transwave has delivered true and correct copies of the Articles of Incorporation and Bylaws of Transwave, each as amended to date, to Finisar. Transwave is not in violation of any of the provisions of its Articles of Incorporation, Bylaws or other charter documents. Except as set forth in the Transwave Disclosure Schedule, Transwave does not directly or indirectly own any equity or similar interest in, or any interest convertible or exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity. Copies of the charter documents of each of the entities listed on the Transwave Disclosure Schedule in which Transwave owns an equity interest, each as amended to date, have been provided to Finisar.

    Section 3.2  Transwave Capital Structure.  

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    Section 3.3  Authority; Required Filings and Consents.  

    Section 3.4  Financial Statements.  Transwave has delivered to Finisar its unaudited financial statements, including statements of operations and cash flows for the nine-month period ended September 30, 2000 and a balance sheet as of September 30, 2000 (the "Balance Sheet Date") (collectively, the "Transwave Financial Statements"). The Transwave Financial Statements were prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved, except that the unaudited Transwave Financial Statements do not contain footnotes. The Transwave Financial Statements present fairly in all material respects the financial position of Transwave as of the respective dates and the results of its operations and cash flows for the periods indicated, subject, in the case of unaudited financial statements, to normal year-end audit adjustments. Transwave maintains, and until the Effective Time will continue to maintain, a standard system of accounting established and administered in accordance with GAAP.

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    Section 3.5  Absence of Undisclosed Liabilities.  Transwave does not have any liabilities, either accrued or contingent (whether or not required to be reflected in financial statements in accordance with GAAP), and whether due or to become due, other than (i) liabilities reflected or provided for on the balance sheet as of the Balance Sheet Date (the "Transwave Balance Sheet") contained in the Transwave Financial Statements, (ii) liabilities contemplated by this Agreement or described in the Transwave Disclosure Schedule, and (iii) normal or recurring liabilities incurred since the Balance Sheet Date in the ordinary course of business consistent with past practices.

    Section 3.6  Accounts Receivable.  The accounts receivable shown on the Transwave Balance Sheet arose in the ordinary course of business and have been collected or are collectible in the book amounts thereof, less an amount not in excess of the allowance for doubtful accounts and returns provided for in the Transwave Balance Sheet. The accounts receivable of Transwave arising after the Balance Sheet Date and prior to the Closing Date arose, or will arise, in the ordinary course of business and have been collected or will be collectible in the book amounts thereof, less allowances for doubtful accounts and returns determined in accordance with GAAP and the past practices of Transwave. None of such accounts receivable is subject to any claim of offset or recoupment or counterclaim, and Transwave has no knowledge of any specific facts that would be likely to give rise to any such claim. No amount of such accounts receivable is contingent upon the performance by Transwave of any obligation and no agreement for deduction or discount has been made with respect to any such accounts receivable.

    Section 3.7  Inventories.  The inventories shown on the Transwave Balance Sheet or thereafter acquired by Transwave consist of items of a quantity and quality usable or salable in the ordinary course of business. Since the Balance Sheet Date, Transwave has continued to replenish inventories in a normal and customary manner consistent with past practices. Transwave has not received notice that it will experience in the foreseeable future any difficulty in obtaining, in the desired quantity and quality and at a reasonable price and upon reasonable terms and conditions, the supplies or component products required for the manufacture, assembly or production of its products. The value at which inventories are carried reflect the inventory valuation policy of Transwave, which is consistent with its past practice and in accordance with GAAP. Due provision has been made on the books of Transwave, consistent with past practices, to provide for all slow-moving, obsolete, or unusable inventories at their estimated useful or scrap values, and such inventory reserves are adequate to provide for such slow-moving, obsolete or unusable inventory and inventory shrinkage.

    Section 3.8  Absence of Certain Changes or Events.  Since the Balance Sheet Date, Transwave has conducted its business in the ordinary course and in a manner consistent with past practices and, since such date, Transwave has not:

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    Section 3.9  Taxes.  

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    Section 3.10  Tangible Assets and Real Property.  

    Section 3.11  Intellectual Property.  

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    Section 3.12  Bank Accounts.  The Transwave Disclosure Schedule sets forth the names and locations of all banks and other financial institutions at which Transwave maintains accounts of any nature, the type of accounts maintained at each such institution and the names of all persons authorized to draw thereon or make withdrawals therefrom.

    Section 3.13  Contracts.  

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    Section 3.14  Labor Difficulties.  Transwave is not engaged in any unfair labor practice or in violation of any applicable laws respecting employment, employment practices or terms and conditions of employment. There is no unfair labor practice complaint against Transwave pending or, to Transwave's knowledge, threatened before any Governmental Entity. There is no strike, labor dispute, slowdown, or stoppage pending or, to Transwave's knowledge, threatened against Transwave. Transwave is not now and has never been subject to any union organizing activities. Transwave has not experienced any work stoppage or other labor difficulty. To Transwave's knowledge, the consummation of the transactions contemplated by this Agreement will not have a material adverse effect on its relations with Transwave employees.

    Section 3.15  Trade Regulation.  Transwave has not terminated its relationship with or refused to ship Transwave Products to any dealer, distributor, third party marketing entity or customer which had theretofore paid or been obligated to pay Transwave in excess of $10,000 over any consecutive twelve (12) month period. All of the prices charged by Transwave in connection with the marketing or sale of any of its products or services have been in compliance, in all material respects, with all applicable laws and regulations. No claims have been asserted or, to Transwave's knowledge, threatened against Transwave with respect to the wrongful termination of any dealer, distributor or any other marketing entity, discriminatory pricing, price fixing, unfair competition, false advertising, or any other material violation of any laws or regulations relating to anti-competitive practices or unfair trade practices of any kind.

    Section 3.16  Environmental Matters.  

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    Section 3.17  Employee Benefit Plans.  

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    Section 3.18  Compliance with Laws.  Transwave has complied with, is not in violation of, and has not received any notices of violation with respect to, any statute, law or regulation applicable to the ownership or operation of its business.

    Section 3.19  Employees and Consultants.  The Transwave Disclosure Schedule contains a list of the names of all employees and consultants of Transwave as of the date of this Agreement and their salaries or wages, other compensation, dates of employment and positions.

    Section 3.20  Litigation.  There is no action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal or, to Transwave's knowledge, threatened against Transwave or any of its properties or officers or directors (in their capacities as such). There is no judgment, decree or order against Transwave or, to its knowledge, any of its directors or officers (in their capacities as such) that could prevent, enjoin or materially alter or delay any of the transactions contemplated by this Agreement, or that could reasonably be expected to have a Material Adverse Effect on Transwave.

    Section 3.21  Restrictions on Business Activities.  There is no agreement, judgment, injunction, order or decree binding upon Transwave which has or could reasonably be expected to have the effect of prohibiting or materially impairing any current or future business practice of Transwave, any acquisition of property by Transwave or the conduct of business by Transwave as currently being conducted or as currently proposed to be conducted.

    Section 3.22  Governmental Authorization.  Transwave has obtained each governmental consent, license, permit, grant or other authorization of a Governmental Entity that is required for the operation of the business of Transwave (collectively, the "Transwave Authorizations"), and all of such Transwave Authorizations are in full force and effect.

    Section 3.23  Insurance.  Transwave has insurance policies of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of Transwave. The Transwave Disclosure Schedule contains a list of all such policies. There is no material claim pending under any of such policies as to which coverage has been questioned, denied or disputed by the underwriters of such policies. All premiums due and payable under all such policies have been paid, and Transwave is otherwise in compliance with the terms of such policies. Transwave has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies.

    Section 3.24  Interested Party Transactions.  

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    Section 3.25  No Existing Discussions.  As of the date hereof, Transwave is not engaged, directly or indirectly, in any discussions or negotiations with any party other than Finisar with respect to a Transwave Acquisition Proposal (as defined in Section 6.1).

    Section 3.26  Real Property Holding Corporation.  Transwave is not a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code.

    Section 3.27  Corporate Documents.  Transwave has furnished to Finisar, or its representatives, for its examination (i) its minute book containing all records required to be set forth of all proceedings, consents, actions, and meetings of the shareholders, the Board of Directors and any committees thereof and (ii) all permits, orders, and consents issued by any Governmental Entity with respect to Transwave. The corporate minute books and other corporate records of Transwave are complete and accurate in all material respects, and the signatures appearing on all documents contained therein are the true signatures of the persons purporting to have signed the same. All actions reflected in such books and records were duly and validly taken in material compliance with the laws of the applicable jurisdiction. Transwave has delivered or made available to Finisar or its representatives true and complete copies of all documents which are referred to in this Article III or in the Transwave Disclosure Schedule.

    Section 3.28  No Misrepresentation.  No representation or warranty by Transwave in this Agreement, or any statement, certificate or schedule furnished or to be furnished by or on behalf of Transwave pursuant to this Agreement, when taken together, contains or shall contain any untrue statement of a material fact or omits or shall omit to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances under which they were made, not misleading.

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ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF FINISAR

    Except as set forth in the disclosure schedule delivered by Finisar to Transwave on or before the date of this Agreement (the "Finisar Disclosure Schedule"), Finisar represents and warrants to Transwave as follows:

    Section 4.1  Organization.  Finisar is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, has all requisite corporate power to own, lease and operate its property and to carry on its business as now being conducted and as proposed to be conducted, and is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect on Finisar.

    Section 4.2  Finisar Capital Structure.  

    Section 4.3  Authority; No Conflict; Required Filings and Consents.  

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    Section 4.4  SEC Filings; Financial Statements.  

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    Section 4.5  Absence of Undisclosed Liabilities.  Finisar and its Subsidiaries do not have any liabilities, either accrued or contingent (whether or not required to be reflected in financial statements in accordance with GAAP), and whether due or to become due, which individually or in the aggregate would be reasonably likely to have a Material Adverse Effect on Finisar, other than (i) liabilities reflected or provided for on the Finisar Balance Sheet, (ii) liabilities specifically contemplated by this Agreement, or described in the Finisar Disclosure Schedule or Finisar SEC Reports, and (iii) normal or recurring liabilities incurred since July 31, 2000 in the ordinary course of business consistent with past practices.

    Section 4.6  Absence of Certain Changes or Events.  Since July 31, 2000, Finisar has not suffered any event or occurrence that has had a Material Adverse Effect on Finisar.

    Section 4.7  Litigation.  Except as described in the Finisar SEC Reports, there is no action, suit or proceeding, claim, arbitration or investigation against Finisar pending or as to which Finisar has received any written notice of assertion, which is reasonably likely to have a Material Adverse Effect on Finisar or a material adverse effect on the ability of Finisar to consummate the transactions contemplated by this Agreement.

    Section 4.8  No Misrepresentation.  No representation or warranty by Finisar in this Agreement, or any statement, certificate or schedule furnished or to be furnished by or on behalf of Finisar pursuant to this Agreement, when taken together, contains or shall contain any untrue statement of a material fact or omits or shall omit to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances under which they were made, not misleading.

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ARTICLE V

CONDUCT OF BUSINESS

    Section 5.1  Covenants of Transwave.  During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Transwave agrees (except to the extent that Finisar shall otherwise consent in writing), to carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, to pay its debts and Taxes when due, to pay or perform its other obligations when due (subject to good faith disputes with respect to such obligations), and, to the extent consistent with such business, to use all commercially reasonable efforts consistent with past practices and policies to (i) preserve intact its present business organization, (ii) keep available the services of its present officers and key employees and (iii) preserve its relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with it. Transwave shall promptly notify Finisar of any event or occurrence not in the ordinary course of business of Transwave where such event or occurrence would result in a breach of any covenant of Transwave set forth in this Agreement or cause any representation or warranty of Transwave set forth in this Agreement to be untrue as of the date of, or giving effect to, such event or occurrence. Except as expressly contemplated by this Agreement, or set forth on the Transwave Disclosure Schedule, Transwave shall not, without the prior written consent of Finisar:

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    Section 5.2  Cooperation.  Subject to compliance with applicable law, from the date hereof until the Effective Time, each of Finisar and Transwave shall confer on a regular and frequent basis with one or more representatives of the other party to report operational matters of materiality and the general status of ongoing operations and shall promptly provide the other party or its counsel with copies of all filings made by such party with any Governmental Entity in connection with this Agreement, the Merger and the transactions contemplated hereby.

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ARTICLE VI

ADDITIONAL AGREEMENTS

    Section 6.1  No Solicitation.  

    Section 6.2  Consents.  Each of Finisar and Transwave shall use all reasonable efforts to obtain all necessary consents, waivers and approvals under any of Finisar's or Transwave's material agreements, contracts, licenses or leases as may be necessary or advisable to consummate the Merger and the other transactions contemplated by this Agreement.

    Section 6.3  Access to Information.  Upon reasonable notice, Transwave shall afford to the officers, employees, accountants, counsel and other representatives of Finisar, reasonable access, during

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normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records and, during such period, Transwave shall furnish promptly to Finisar or its representatives all other information concerning its business, properties and personnel as such other party may reasonably request. Unless otherwise required by law, the parties will treat any such information which is nonpublic in confidence in accordance with the Nondisclosure Agreement effective as of June 17, 2000 (the "Confidentiality Agreement") between Finisar and Transwave, which Confidentiality Agreement shall continue in full force and effect in accordance with its terms. No information or knowledge obtained in any investigation pursuant to this Section 6.3 shall affect or be deemed to modify any representation or warranty contained in this Agreement or the conditions to the obligations of the parties to consummate the Merger.

    Section 6.4  Legal Conditions to Merger.  Each of Finisar and Transwave will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on itself with respect to the Merger (which actions shall include, without limitation, furnishing all information in connection with approvals of or filings with any Governmental Entity) and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon either of them or any of their Subsidiaries in connection with the Merger. Each of Finisar and Transwave will take all reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other third party, required to be obtained or made by Transwave, Finisar or any of their Subsidiaries in connection with the Merger or the taking of any action contemplated thereby or by this Agreement and to enable the Closing to occur as promptly as practicable.

    Section 6.5  Public Disclosure.  Finisar and Transwave shall consult with each other before issuing any press release or otherwise making any public statement with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law or by the rules or regulations of the SEC or the NNM.

    Section 6.6  Tax-Free Reorganization.  Finisar and Transwave each intend that the Merger shall qualify for treatment as a reorganization within the meaning of Section 368(a) of the Code. Finisar and Transwave each agree to refrain from taking any action inconsistent with such intended treatment.

    Section 6.7  Nasdaq Quotation.  Finisar agrees to continue the quotation of Finisar Common Stock on the NNM during the term of this Agreement. Finisar shall use its best efforts to cause the shares of Finisar Common Stock to be issued upon the conversion of the Finisar Preferred Stock and such other shares required to be reserved in connection with the Merger to be approved for quotation on the NNM, subject to official notice of issuance, prior to the Closing Date.

    Section 6.8  Securities Law Matters.  

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    Section 6.9  Employment Matters.  

    Section 6.10  Stock Options.  

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    Section 6.11  Finisar Plans.  All Transwave employees who remain employees of Finisar, Transwave or any other Subsidiary of Finisar following the Effective Time shall be entitled to participate in all employee benefit plans and programs (the "Finisar Plans") that are available to other Finisar employees holding comparable positions. To the extent permitted by the Finisar Plans, each participant shall be given full credit for such participant's period of continuous service with Transwave prior to the Effective Time. To the extent permitted by law, Finisar shall amend the Finisar Plans, as necessary, to provide for such participation. In the case of medical and health insurance coverage, Finisar shall cause the Surviving Corporation to continue to insure Transwave employees under Transwave's existing insurance plans or provide them with the opportunity to participate in Finisar Plans providing generally comparable medical and health insurance coverage.

    Section 6.12  Employee Retention Pool.  Finisar shall establish a pool of cash in the aggregate amount of $1,000,000 (the "Retention Pool") for retention of Transwave employees. The Retention Pool shall be allocated among the Transwave employees in accordance with a schedule to be mutually agreed upon by Finisar and Transwave prior to the Closing Date.

    Section 6.13  Brokers or Finders.  Each of Finisar and Transwave represents, as to itself, its Subsidiaries and its Affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, and each of Finisar and Transwave agrees to indemnify and hold the other harmless from and against any and all claims, liabilities or obligations with respect to any other fees, commissions or expenses asserted by any person on the basis of any act or statement alleged to have been made by such party or its Affiliate.

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    Section 6.14  Additional Agreements; Reasonable Efforts.  Subject to the terms and conditions of this Agreement, each of the parties agrees to use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including cooperating fully with the other party, including by provision of information. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of either of the Constituent Corporations, the proper officers and directors of each party to this Agreement shall take all such necessary action.

    Section 6.15  Expenses.  The parties shall each pay their own legal, accounting, financial advisory and consulting fees and other out-of-pocket expenses related to the negotiation, preparation and carrying out of this Agreement and the transactions herein contemplated. In the event the Merger is consummated all legal, accounting, financial advisory and consulting fees and expenses incurred by Transwave (whether paid or accrued) relating to the negotiation, preparation and carrying out of this Agreement and the transactions contemplated hereby, and obtaining all authorizations, consents, orders or approvals of, or declarations or filings with, all Governmental Entities in connection with such transactions (the "Transwave Transaction Expenses") shall be borne by the former security holders of Transwave, as hereinafter provided. Schedule 6.15 hereto sets forth Transwave's current estimate of the total Transwave Transaction Expenses which Transwave expects to incur (the "Estimated Transwave Transaction Expenses"). Transwave shall provide an updated schedule of Estimated Transwave Transaction Expenses not later than two (2) business days prior to the Closing (the "Closing Transwave Transaction Expense Schedule"). In the event that the amount of the Transwave Transaction Expenses as set forth on the Closing Transwave Transaction Expense Schedule exceeds the Estimated Transwave Transaction Expenses, the Exchange Ratios shall be adjusted proportionately so that such excess Transwave Transaction Expenses are borne by the former security holders of Transwave in the form of a reduction in the aggregate amount of the Merger consideration. In the event the Transwave Transaction Expenses actually incurred by Transwave exceed the amount shown on the Closing Transwave Transaction Expense Schedule, Finisar shall be entitled to assert a claim against the Escrow Shares pursuant to Article IX hereof in order to recover all such additional expenses.


ARTICLE VII

CONDITIONS TO MERGER

    Section 7.1  Conditions to Each Party's Obligation to Effect the Merger.  The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction on or prior to the Closing Date of the following conditions:

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    Section 7.2  Additional Conditions to Obligations of Finisar.  The obligation of Finisar to effect the Merger are subject to the satisfaction of each of the following conditions, any of which may be waived in writing exclusively by Finisar:

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    Section 7.3  Additional Conditions to Obligations of Transwave.  The obligation of Transwave to effect the Merger is subject to the satisfaction of each of the following conditions, any of which may be waived, in writing, exclusively by Transwave:

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ARTICLE VIII

TERMINATION AND AMENDMENT

    Section 8.1  Termination.  This Agreement may be terminated at any time prior to the Effective Time (with respect to Sections 8.1(b) through 8.1(e), by written notice by the terminating party to the other party):

    Section 8.2  Effect of Termination.  In the event of termination of this Agreement as provided in Section 8.1, there shall be no liability or obligation on the part of Finisar or Transwave or their respective officers, directors, shareholders or Affiliates, except to the extent that such termination results from the willful breach by a party of any of its representations, warranties or covenants set forth in this Agreement; provided that the provisions of Sections 6.13 and 6.15 of this Agreement, the confidentiality provisions set forth herein and in the Confidentiality Agreement and the non-competition provisions set forth in the Confidentiality Agreement shall remain in full force and effect and survive any termination of this Agreement.

    Section 8.3  Amendment.  This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the shareholders of Transwave, but, after any such approval, no amendment shall be made which by law requires further approval by such shareholders

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without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto.

    Section 8.4  Extension; Waiver.  At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party.


ARTICLE IX

ESCROW AND INDEMNIFICATION

    Section 9.1  Survival of Representations and Warranties.  If the Merger occurs, all of the representations and warranties contained in this Agreement shall survive the Closing Date. No action may be brought with respect to this Agreement or the transactions contemplated hereby unless (i) an Indemnification Claim is made under Section 9.3 on or before the date that is twelve (12) months following the Closing Date (the "Termination Date") or (ii) except for claims under Section 9.2(d), as allowed by law.

    Section 9.2  Indemnification by Principal Shareholders.  

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    Section 9.3  Procedures for Indemnification.  

    Section 9.4  Defense of Third Party Claims.  Should any claim be made or suit or proceeding be instituted against an Indemnitee which, if prosecuted successfully, would be a matter for which such Indemnitee is entitled to indemnification under this Article IX (a "Third Party Claim"), the obligations and liabilities of the parties hereunder with respect to such Third Party Claim shall be subject to the following terms and conditions:

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    Section 9.5  Manner of Indemnification.  

    Section 9.6  Appointment of Shareholders' Representative.  For purposes of this Agreement, the Principal Shareholders hereby consent to the appointment of Forrest Duan as the representative and attorney-in-fact for and on behalf of the Principal Shareholders (the "Shareholders' Representative"), and to the taking by the Shareholders' Representative of any and all actions and the making of any decisions required or permitted to be taken by him under this Agreement or the Escrow Agreement, including, without limitation, the exercise of the power to (i) execute the Escrow Agreement on behalf of the Principal Shareholders, (ii) authorize delivery to Finisar of Escrow Shares in satisfaction of Indemnification Claims, (iii) agree to, negotiate, enter into settlements and compromises of and comply with orders of courts and awards of arbitrators with respect to such Indemnification Claims, (iv) resolve any Indemnification Claims and (v) take all actions necessary in the judgment of the Shareholders' Representative for the accomplishment of the foregoing and all of the other terms, conditions and limitations of this Agreement and the Escrow Agreement. Accordingly, the Shareholders' Representative has unlimited authority and power to act on behalf of each Principal Shareholder with respect to this Agreement and the Escrow Agreement and the disposition, settlement or other handling of all Indemnification Claims, rights or obligations arising from and taken pursuant to this Agreement. The Principal Shareholders will be bound by all actions taken by the Shareholders' Representative in connection with this Agreement, and Finisar shall be entitled to rely on any action or decision of the Shareholders' Representative. The Shareholders' Representative will incur no liability with respect to any action taken or suffered by him in reliance upon any notice, direction, instruction, consent, statement or other document believed by him to be genuine and to have been signed by the proper person (and shall have no responsibility to determine the authenticity thereof), nor for any other action or inaction, except his own willful misconduct or bad faith. In all questions arising under this Agreement or the Escrow Agreement, the Representative may rely on the advice of counsel, and the Shareholders' Representative will not be liable to anyone for anything done, omitted or suffered in good faith by the Shareholders' Representative based on such advice. Except as expressly provided herein, the Shareholders' Representative will not be required to take any action involving any expense unless the payment of such expense is made or provided for in a manner satisfactory to him. At any time during the term of the Escrow Agreement, holders of a majority of the Escrow Shares subject to Indemnification Claims under this Article IX may, by written consent, appoint a new representative as the Shareholders' Representative by sending notice and a copy of the written consent appointing such new representative signed by holders of a majority of the Escrow Shares to Finisar and the Escrow Agent. Such appointment will be effective upon the later of the date indicated in the consent or the date such consent is received by Finisar and the Escrow Agent.

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ARTICLE X

GENERAL PROVISIONS

    Section 10.1  Notices.  All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or within seventy-two (72) hours after being mailed by registered or certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

    Section 10.2  Interpretation.  

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    Section 10.3  Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original as against any party whose signature appears on such counterpart and all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart.

    Section 10.4  Severability.  In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable

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provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.

    Section 10.5  Entire Agreement.  This Agreement (including the schedules and exhibits hereto and the other documents delivered pursuant hereto) constitutes the entire agreement among the parties concerning the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, other than the Confidentiality Agreement.

    Section 10.6  Governing Law.  This Agreement shall be governed and construed in accordance with the laws of the State of California without regard to any applicable conflicts of law principles.

    Section 10.7  Assignment.  Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns.

    Section 10.8  Third Party Beneficiaries.  Nothing contained in this Agreement is intended to confer upon any person other than the parties hereto and their respective successors and permitted assigns, any rights, remedies or obligations under, or by reason of this Agreement, except that (i) the persons who are shareholders of Transwave immediately prior to the Effective Time (and their successors and assigns) are express intended third party beneficiaries of Articles I, II and IV, Sections 6.6 and 6.7 and Article IX, (ii) the persons who hold Transwave Options immediately prior to the Effective Time (and their lawful successors and assigns) are express intended third party beneficiaries of Section 6.10, and (iii) each of the foregoing persons is an express intended third party beneficiary of Article X, to the extent relevant to any of the foregoing, and as such are entitled to rely on the provisions hereof as if a party hereto.

    [SIGNATURE PAGE FOLLOWS]

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    IN WITNESS WHEREOF, Finisar and Transwave have caused this Agreement to be signed by their respective officers thereunto duly authorized, and the Principal Shareholders have signed this Agreement, as of the date first written above.

TRANSWAVE FIBER, INC.   FINISAR CORPORATION

By:
 
/s/ F. DUAN   
 
By:
 
/s/ JERRY S. RAWLS   
    Forrest Duan       Jerry S. Rawls
    President and Chief Executive Officer       President and Chief Executive Officer

PRINCIPAL SHAREHOLDERS
 
 
 
 

/s/ F. DUAN   
 
 
 
 
Forrest Duan        

/s/ PING HE   
 
 
 
 
Ping He        

/s/ YAN ZHOU   
 
 
 
 
Yan Zhou        

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ANNEX D

AGREEMENT AND PLAN OF REORGANIZATION

among

FINISAR CORPORATION,
a Delaware corporation,

MARBLE ACQUISITION CORP.,
a Texas corporation and wholly-owned
subsidiary of Finisar Corporation,

MARLOW INDUSTRIES, INC.,
a Texas corporation,

THE MARLOW CO., LTD.,
a Texas limited partnership,

and

Raymond Marlow,
the Shareholders' Representative

Dated February 20, 2001


TABLE OF CONTENTS

 
    
    
   Page
ARTICLE I THE MERGER   D-5
    Section 1.1   Effective Time of the Merger   D-5
    Section 1.2   Closing   D-5
    Section 1.3   Effects of the Merger   D-5
    Section 1.4   Directors and Officers   D-6

ARTICLE II CONVERSION OF SECURITIES
 
D-6
    Section 2.1   Certain Definitions   D-6
    Section 2.2   Conversion of Capital Stock   D-7
    Section 2.3   Exchange of Certificates   D-8
    Section 2.4   Escrow   D-9
    Section 2.5   Dissenters' Rights   D-10

ARTICLE III REPRESENTATIONS AND WARRANTIES OF MARLOW
 
D-10
    Section 3.1   Organization, Standing and Power   D-10
    Section 3.2   Marlow Capital Structure   D-11
    Section 3.3   Authority; Required Filings and Consents   D-11
    Section 3.4   Financial Statements   D-12
    Section 3.5   Absence of Undisclosed Liabilities   D-12
    Section 3.6   Accounts Receivable   D-12
    Section 3.7   Inventories   D-13
    Section 3.8   Absence of Certain Changes or Events   D-13
    Section 3.9   Taxes   D-14
    Section 3.10   Tangible Assets and Real Property   D-15
    Section 3.11   Intellectual Property   D-16
    Section 3.12   Bank Accounts   D-19
    Section 3.13   Contracts   D-19
    Section 3.14   Labor Difficulties   D-20
    Section 3.15   Trade Regulation   D-20
    Section 3.16   Environmental Matters   D-20
    Section 3.17   Employee Benefit Plans   D-21
    Section 3.18   Compliance with Laws   D-23
    Section 3.19   Employees and Consultants   D-23
    Section 3.20   Litigation   D-23
    Section 3.21   Restrictions on Business Activities   D-23
    Section 3.22   Governmental Authorization   D-23
    Section 3.23   Insurance   D-23
    Section 3.24   Interested Party Transactions   D-24
    Section 3.25   No Existing Discussions   D-24
    Section 3.26   Real Property Holding Corporation   D-24
    Section 3.27   Corporate Documents   D-24
    Section 3.28   No Misrepresentation   D-24
    Section 3.29   Disclaimer of Additional and Implied Warranties   D-25

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF FINISAR AND SUB
 
D-25
    Section 4.1   Organization   D-25
    Section 4.2   Finisar Capital Structure   D-25
    Section 4.3   Authority; No Conflict; Required Filings and Consents   D-26
    Section 4.4   SEC Filings; Financial Statements   D-26

D–2

    Section 4.5   Absence of Undisclosed Liabilities   D-27
    Section 4.6   Absence of Certain Changes or Events   D-27
    Section 4.7   Litigation   D-27
    Section 4.8   Investment Intent   D-27
    Section 4.9   Financing   D-27
    Section 4.10   Taxes   D-27
    Section 4.11   No Misrepresentation   D-28
    Section 4.12   Disclaimer of Additional and Applied Warranties   D-28

ARTICLE V CONDUCT OF BUSINESS
 
D-28
    Section 5.1   Covenants of Marlow   D-28
    Section 5.2   Covenants of Finisar   D-30
    Section 5.3   Cooperation   D-30

ARTICLE VI ADDITIONAL AGREEMENTS
 
D-30
    Section 6.1   No Solicitation   D-30
    Section 6.2   Consents   D-31
    Section 6.3   Access to Information   D-31
    Section 6.4   Legal Conditions to Merger   D-31
    Section 6.5   Public Disclosure   D-31
    Section 6.6   Tax-Free Reorganization   D-31
    Section 6.7   Nasdaq Quotation   D-31
    Section 6.8   Securities Law Matters   D-32
    Section 6.9   HSR Act   D-33
    Section 6.10   Employment Matters   D-33
    Section 6.11   Stock Options   D-34
    Section 6.12   Employee Stock Purchase Plan   D-35
    Section 6.13   Finisar Plans   D-35
    Section 6.14   Employee Retention Pool   D-35
    Section 6.15   Marlow 401(k) Plan   D-35
    Section 6.16   Brokers or Finders   D-36
    Section 6.17   Additional Agreements; Reasonable Efforts   D-36
    Section 6.18   Expenses   D-36
    Section 6.19   Audited Financial Statements   D-36
    Section 6.20   Items to be Transferred   D-37
    Section 6.21   Indemnification of Officers and Directors   D-37
    Section 6.22   Proxy Statement and Special Meeting of Finisar; Voting Agreement   D-38
    Section 6.23   No Contractual Restrictions on Finisar Common Stock   D-39
    Section 6.24   Specific Performance   D-39

ARTICLE VII CONDITIONS TO MERGER
 
D-39
    Section 7.1   Conditions to Each Party's Obligation to Effect the Merger   D-39
    Section 7.2   Additional Conditions to Obligations of Finisar and Sub   D-40
    Section 7.3   Additional Conditions to Obligations of Marlow   D-41

ARTICLE VIII TERMINATION AND AMENDMENT
 
D-42
    Section 8.1   Termination   D-42
    Section 8.2   Effect of Termination   D-43
    Section 8.3   Termination Fee   D-43
    Section 8.4   Amendment   D-43
    Section 8.5   Extension; Waiver   D-44

D–3


ARTICLE IX ESCROW AND INDEMNIFICATION
 
D-44
    Section 9.1   Survival of Representations and Warranties   D-44
    Section 9.2   Indemnification by Shareholders   D-44
    Section 9.3   Procedures for Indemnification   D-45
    Section 9.4   Defense of Third Party Claims   D-45
    Section 9.5   Manner of Indemnification   D-46
    Section 9.6   Appointment of Shareholders' Representative   D-46

ARTICLE X DISPOSITION OF SECURITIES BY PRINCIPAL SHAREHOLDER; VOTING
 
D-47
    Section 10.1   Agreements of Principal Shareholder   D-47
    Section 10.2   Representations and Warranties   D-47
    Section 10.3   Transfer Restrictions   D-48

ARTICLE XI GENERAL PROVISIONS
 
D-48
    Section 11.1   Notices   D-48
    Section 11.2   Interpretation   D-50
    Section 11.3   Counterparts   D-50
    Section 11.4   Severability   D-51
    Section 11.5   Entire Agreement   D-51
    Section 11.6   Governing Law   D-51
    Section 11.7   Assignment   D-51
    Section 11.8   Third Party Beneficiaries   D-51

EXHIBITS
 
 
 
 

Exhibit A
 
Form of Escrow Agreement
 
 
Exhibit B   Form of Affiliate Agreement    
Exhibit C   Form of Employment Agreement    
Exhibit D   Form of Consulting Agreement    
Exhibit E   Form of Noncompetition Agreement    
Exhibit F   Form of Finisar Voting Agreement    
Exhibit G   Form of Opinion of Locke Liddell & Sapp LLP    
Exhibit H   Form of Opinion of Gray Cary Ware & Freidenrich LLP    
Exhibit I   Environmental Laws    

SCHEDULES
 
 
 
 

Schedule 6.8(f)
 
Marlow Affiliates
 
 
Schedule 6.10(a)   Key Marlow Employees    
Schedule 6.10(b)   Marlow Employees to be Offered Employment    
Schedule 6.11(d)   New Finisar Options    
Schedule 6.14   Allocation of Retention Pool    
Schedule 6.18   Marlow Estimated Transaction Expenses    
Schedule 6.20   Items to be Transferred    
Schedule 7.2(e)   Third Party Consents    
Schedule 7.2(j)   List of Retained Marlow Employees    

D–4


AGREEMENT AND PLAN OF REORGANIZATION

    THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and entered into as of February 20, 2001, by and among Finisar Corporation, a Delaware corporation ("Finisar"), Marble Acquisition Corp., a Texas corporation and wholly-owned subsidiary of Finisar ("Sub"), Marlow Industries, Inc., a Texas corporation ("Marlow"), The Marlow Co., Ltd., a Texas limited partnership and principal shareholder of Marlow (the "Principal Shareholder"), and Raymond Marlow (the "Shareholders' Representative").


RECITALS

    WHEREAS, the Boards of Directors of Finisar, Sub and Marlow deem it advisable and in the best interests of each corporation and its respective shareholders that Finisar and Marlow combine in order to advance the long-term business interests of Finisar and Marlow;

    WHEREAS, the combination of Finisar and Marlow shall be effected by the terms of this Agreement through a transaction (the "Merger") in which Sub will merge with and into Marlow, Marlow will become a wholly-owned subsidiary of Finisar and the shareholders of Marlow will become stockholders of Finisar; and

    WHEREAS, for federal income tax purposes, it is intended that the Merger shall qualify as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").

    NOW, THEREFORE, in consideration of the foregoing and the respective representations, warranties, covenants and agreements set forth below, the parties agree as follows:


ARTICLE I

THE MERGER

    Section 1.1  Effective Time of the Merger.  Subject to the provisions of this Agreement, Articles of Merger (the "Articles of Merger") in such form as is required by the relevant provisions of the Texas Business Corporation Act (the "BCA") shall be duly prepared, executed and acknowledged by Sub and by Marlow as the Surviving Corporation (as defined in Section 1.3(a)) and delivered to the Texas Secretary of State for filing as soon as practicable on or after the Closing Date (as defined in Section 1.2). The Merger shall become effective at such time as the Secretary of State of the State of Texas issues a certificate of merger after the filing of the Articles of Merger with the Secretary of State of the State of Texas (the "Effective Time").

    Section 1.2  Closing.  The closing of the Merger (the "Closing") will take place at 11:00 a.m., Pacific Time, on a date to be specified by Finisar and Marlow (the "Closing Date"), which shall be no later than the second business day after satisfaction of the latest to occur of the conditions set forth in Sections 7.1, 7.2(b) (other than the delivery of the officers' certificate referred to therein) and 7.3(b) (other than the delivery of the officers' certificate referred to therein), provided that the other closing conditions set forth in Article VII have been met or waived as provided in Article VII at or prior to the Closing, at the offices of Gray Cary Ware & Freidenrich LLP, 400 Hamilton Avenue, Palo Alto, CA 94301 unless another date or place is agreed to in writing by Finisar and Marlow.

    Section 1.3  Effects of the Merger.  

D–5

    Section 1.4  Directors and Officers.  The directors and officers of Sub immediately prior to the Effective Time shall be the initial directors and officers of the Surviving Corporation, each of whom will hold office in accordance with the Articles of Incorporation and Bylaws of the Surviving Corporation, in each case until their respective successors are duly elected or appointed.


ARTICLE II

CONVERSION OF SECURITIES

    Section 2.1  Certain Definitions.  For purposes of this Agreement, the following terms shall have the meanings set forth below:

D–6

    Section 2.2  Conversion of Capital Stock.  As of the Effective Time, by virtue of the Merger and without any action on the part of the holder of any shares of capital stock of Marlow or capital stock of Sub:

D–7

    Section 2.3  Exchange of Certificates.  The procedures for exchanging outstanding shares of Marlow Common Stock for Finisar Common Stock and cash pursuant to the Merger are as follows:

D–8

    Section 2.4  Escrow.  

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    Section 2.5  Dissenters' Rights.  In the event the Merger becomes effective without the approval of the holders of 100% of the outstanding shares of Marlow Common Stock, any shares of Marlow Common Stock held by shareholders who properly exercise and perfect, pursuant to Section 5.12 of the BCA, the dissenters' rights set forth in Section 5.11 of the BCA ("Dissenting Shares") shall not be converted pursuant to Section 2.2, but shall instead be converted into the right to receive payment of fair value as may be determined to be due with respect to such Dissenting Shares pursuant to the provisions of the BCA. Finisar shall have the right to control all negotiations and proceedings with respect to the determination of the fair value of the Dissenting Shares. Marlow agrees that, without the prior written consent of Finisar or as required under the BCA, it will not voluntarily make any payment with respect to, or determine or offer to determine, the fair value of the Dissenting Shares. Each holder of Dissenting Shares (a "Dissenting Shareholder") who, pursuant to the provisions of the BCA, becomes entitled to payment of the fair value of Dissenting Shares shall receive payment therefor (but only after the fair value therefor shall have been agreed upon or finally determined pursuant to the provisions of the BCA). In the event that any holder of Marlow Common Stock fails to make an effective exercise and perfection of dissenters' rights or demand for payment or otherwise loses his, her or its status as a Dissenting Shareholder, Finisar shall, as of the later of the Effective Time or the occurrence of such event, issue and deliver, upon surrender by such Dissenting Shareholder of his, her or its Certificate(s), the shares of Finisar Common Stock and cash, including any cash payment in lieu of fractional shares, in each case without interest thereon, to which such Dissenting Shareholder would have been entitled under Section 2.2.


ARTICLE III

REPRESENTATIONS AND WARRANTIES OF MARLOW

    Except as disclosed in the disclosure schedule provided to Finisar on or before the date of this Agreement (the "Marlow Disclosure Schedule"), Marlow represents and warrants to Finisar as follows:

    Section 3.1  Organization, Standing and Power.  

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    Section 3.2  Marlow Capital Structure.  

    Section 3.3  Authority; Required Filings and Consents.  

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    Section 3.4  Financial Statements.  Marlow has delivered to Finisar (i) the audited consolidated balance sheets of Marlow and Marlow Subsidiaries as of January 31, 1999 and January 30, 2000, and the related audited consolidated statements of income, stockholders' equity and cash flows for the fiscal years ended January 31, 1999 and January 30, 2000, and (ii) its unaudited balance sheet as of December 31, 2000 (the "Balance Sheet Date") and unaudited consolidated statements of income for the eleven-month period ended December 31, 2000 (collectively, the "Marlow Financial Statements"). The Marlow Financial Statements were prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved, except that the unaudited Marlow Financial Statements do not contain footnotes and are subject to normal year-end adjustments. The Marlow Financial Statements present fairly in all material respects the financial position of Marlow as of the respective dates and the results of its operations and cash flows for the periods indicated. Marlow maintains, and until the Effective Time will continue to maintain, a standard system of accounting established and administered in accordance with GAAP.

    Section 3.5  Absence of Undisclosed Liabilities.  Marlow and the Marlow Subsidiaries do not have any liabilities, either accrued or contingent (which is required to be reflected in financial statements in accordance with GAAP), and whether due or to become due, other than (i) liabilities reflected or provided for on the balance sheet as of the Balance Sheet Date (the "Marlow Balance Sheet"), (ii) liabilities contemplated by this Agreement or described in the Marlow Disclosure Schedule, and (iii) normal or recurring liabilities incurred since the Balance Sheet Date in the ordinary course of business consistent with past practices.

    Section 3.6  Accounts Receivable.  The accounts receivable shown on the Marlow Balance Sheet arose in the ordinary course of business and have been collected or are collectible in the book amounts thereof, less an amount not in excess of the allowance for doubtful accounts and returns provided for

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in the Marlow Balance Sheet. The accounts receivable of Marlow and the Marlow Subsidiaries arising after the Balance Sheet Date and prior to the Closing Date arose, or will arise, in the ordinary course of business and have been collected or will be collectible in the book amounts thereof, less allowances for doubtful accounts and returns determined in accordance with GAAP and the past practices of Marlow. None of such accounts receivable is subject to any pending claim of offset or recoupment or counterclaim, and neither Marlow nor the Marlow Subsidiaries have knowledge of any specific facts that would be likely to give rise to any such claim. No amount of such accounts receivable is contingent upon the performance by Marlow or the Marlow Subsidiaries of any obligation and no agreement for deduction or discount has been made with respect to any such accounts receivable.

    Section 3.7  Inventories.  The inventories shown on the Marlow Balance Sheet or thereafter acquired by Marlow or the Marlow Subsidiaries consist of items of a quantity and quality usable or salable in the ordinary course of business. Since the Balance Sheet Date, Marlow and the Marlow Subsidiaries have continued to replenish inventories in a normal and customary manner consistent with past practices. Neither Marlow nor the Marlow Subsidiaries have received notice that they will experience in the foreseeable future any difficulty in obtaining, in the desired quantity and quality and at a reasonable price and upon reasonable terms and conditions, the supplies or component products required for the manufacture, assembly or production of its products. The value at which inventories are carried reflect the inventory valuation policy of Marlow, which is consistent with its past practice and in accordance with GAAP. Due provision has been made on the books of Marlow and the Marlow Subsidiaries, consistent with past practices, to provide for all slow-moving, obsolete, or unusable inventories at their estimated useful or scrap values, and such inventory reserves are adequate to provide for such slow-moving, obsolete or unusable inventory and inventory shrinkage.

    Section 3.8  Absence of Certain Changes or Events.  Since the Balance Sheet Date, Marlow and the Marlow Subsidiaries have conducted their business in the ordinary course and in a manner consistent with past practices and, since such date, neither Marlow nor the Marlow Subsidiaries have:

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    Section 3.9  Taxes.  

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    For purposes of this Agreement, a "Tax" or, collectively, "Taxes," means any and all federal, state and local taxes of any country, assessments and other governmental charges, duties, impositions and liabilities, including taxes based upon or measured by gross receipts, income, profits, sales, use and occupation, and value added, ad valorem, transfer, franchise, withholding, payroll, recapture, employment, excise and property taxes, together with all interest, penalties and additions imposed with respect to such amounts and any obligations under any agreements or arrangements with any other person with respect to such amounts and including any liability for taxes of a predecessor entity.

    Section 3.10  Tangible Assets and Real Property.  

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    Section 3.11  Intellectual Property.  

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    Section 3.12  Bank Accounts.  Section 3.12 of the Marlow Disclosure Schedule sets forth the names and locations of all banks and other financial institutions at which Marlow or the Marlow Subsidiaries maintains accounts of any nature, the type of accounts maintained at each such institution and the names of all persons authorized to draw thereon or make withdrawals therefrom.

    Section 3.13  Contracts.  

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    Section 3.14  Labor Difficulties.  Neither Marlow nor the Marlow Subsidiaries are engaged in any unfair labor practice or in violation of any applicable laws respecting employment, employment practices or terms and conditions of employment. There is no unfair labor practice complaint against Marlow or the Marlow Subsidiaries pending or, to Marlow's knowledge, threatened before any Governmental Entity. There is no strike, labor dispute, slowdown, or stoppage pending or, to Marlow's knowledge, threatened against Marlow or the Marlow Subsidiaries. Marlow and the Marlow Subsidiaries are not now and have never been subject to any union organizing activities. Neither Marlow nor the Marlow Subsidiaries have experienced any work stoppage or other labor difficulty. To Marlow's knowledge, the consummation of the transactions contemplated by this Agreement will not have a Material Adverse Effect on the relations with the employees of Marlow and the Marlow Subsidiaries.

    Section 3.15  Trade Regulation.  Within three years prior to the date of this Agreement, Marlow and the Marlow Subsidiaries have not terminated their relationship with or refused to ship Marlow products to any dealer, distributor, third party marketing entity or customer which had theretofore paid or been obligated to pay Marlow or the Marlow Subsidiaries in excess of $100,000 over any consecutive twelve (12) month period. All of the prices charged by Marlow and the Marlow Subsidiaries in connection with the marketing or sale of any of its products or services have been in compliance, in all material respects, with all applicable laws and regulations. No claims have been asserted or, to Marlow's knowledge, threatened against Marlow or the Marlow Subsidiaries with respect to the wrongful termination of any dealer, distributor or any other marketing entity, discriminatory pricing, price fixing, unfair competition, false advertising, or any other material violation of any laws or regulations relating to anti-competitive practices or unfair trade practices of any kind.

    Section 3.16  Environmental Matters.  

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    Section 3.17  Employee Benefit Plans.  

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    Section 3.18  Compliance with Laws.  Except with respect to matters covered by Sections 3.9 (Taxes), 3.14 (Labor Difficulties), 3.16 (Environmental Matters) and 3.17 (Employee Benefit Plans) of this Agreement which are exclusively governed by such Sections, Marlow and the Marlow Subsidiaries have complied with, are not in violation of, any statute, law or regulation applicable to the ownership or operation of their business. Within the past six (6) years Marlow and the Marlow Subsidiaries have not received any written notices of violation with respect to, any statute, law or regulation applicable to the ownership or operation of their business.

    Section 3.19  Employees and Consultants.  Section 3.19 of the Marlow Disclosure Schedule contains a list of the names of all employees and consultants of Marlow and the Marlow Subsidiaries as of February 9, 2001 and their salaries or wages, other compensation, dates of employment or engagement and positions.

    Section 3.20  Litigation.  There is no action, suit, proceeding, claim, arbitration or investigation pending before any agency, court or tribunal or, to Marlow's knowledge, threatened against Marlow, the Marlow Subsidiaries or any of their properties or officers or directors (in their capacities as such). There is no judgment, decree or order against Marlow or the Marlow Subsidiaries or, to Marlow's knowledge, any of their directors or officers (in their capacities as such) that could prevent, enjoin or materially alter or delay any of the transactions contemplated by this Agreement, or that could reasonably be expected to have a Material Adverse Effect on Marlow.

    Section 3.21  Restrictions on Business Activities.  There is no agreement, judgment, injunction, order or decree binding upon Marlow which has or could reasonably be expected to have the effect of prohibiting or materially impairing any current or future business practice of Marlow or the Marlow Subsidiaries currently proposed by Marlow, any acquisition of property by Marlow or the Marlow Subsidiaries or the conduct of business by Marlow and the Marlow Subsidiaries as currently being conducted or as currently proposed by Marlow to be conducted.

    Section 3.22  Governmental Authorization.  Marlow and the Marlow Subsidiaries have obtained each consent, license, permit, grant or other authorization of a Governmental Entity that is required for the operation of the business of Marlow and the Marlow Subsidiaries as being conducted, or as currently proposed by Marlow to be conducted, as of the date hereof (collectively, the "Marlow Authorizations"), and, to Marlow's knowledge, all of such Marlow Authorizations are in full force and effect.

    Section 3.23  Insurance.  Marlow and the Marlow Subsidiaries have insurance policies of the type and in amounts customarily carried by persons conducting businesses or owning assets similar to those of Marlow and the Marlow Subsidiaries. Section 3.23 of the Marlow Disclosure Schedule contains a list of all such policies. There is no material claim pending under any of such policies as to which coverage

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has been questioned, denied or disputed by the underwriters of such policies. All premiums due and payable under all such policies have been paid, and Marlow and the Marlow Subsidiaries are otherwise in compliance with the terms of such policies. Marlow has no knowledge of any threatened termination of, or material premium increase with respect to, any of such policies.

    Section 3.24  Interested Party Transactions.  

    Section 3.25  No Existing Discussions.  As of the date hereof, neither Marlow nor the Marlow Subsidiaries are engaged, directly or indirectly, in any discussions or negotiations with any party other than Finisar with respect to a Marlow Acquisition Proposal (as defined in Section 6.1).

    Section 3.26  Real Property Holding Corporation.  Neither Marlow nor the Marlow Subsidiaries is a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code.

    Section 3.27  Corporate Documents.  Marlow has furnished to Finisar, or its representatives, for its examination (i) copies of its minute books and copies of the minute books of the Marlow Subsidiaries containing all records required to be set forth of all proceedings, consents, actions, and meetings of the shareholders, the Board of Directors and any committees thereof and (ii) all permits, orders, and consents issued by any Governmental Entity with respect to Marlow or the Marlow Subsidiaries. The corporate minute books and other corporate records of Marlow and the Marlow Subsidiaries are complete and accurate in all material respects, and the signatures appearing on all documents contained therein are the true signatures of the persons purporting to have signed the same. All actions reflected in such books and records were duly and validly taken in material compliance with the laws of the applicable jurisdiction. Marlow has delivered or made available to Finisar or its representatives true and complete copies of all documents which are referred to in this Article III or in the Marlow Disclosure Schedule.

    Section 3.28  No Misrepresentation.  No representation or warranty by Marlow in this Agreement, or any statement, certificate or schedule furnished or to be furnished by or on behalf of Marlow

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pursuant to this Agreement, when taken together, contains or shall contain any untrue statement of a material fact or omits or shall omit to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances under which they were made, not misleading.

    Section 3.29  Disclaimer of Additional and Implied Warranties.  Marlow is making no representations or warranties, express or implied, of any nature whatsoever, except as specifically set forth in Article III of this Agreement.


ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF FINISAR AND SUB

    Except as set forth in the disclosure schedule delivered by Finisar to Marlow on or before the date of this Agreement (the "Finisar Disclosure Schedule"), Finisar and Sub represent and warrant to Marlow as follows:

    Section 4.1  Organization.  Each of Finisar and Sub is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has all requisite corporate power to own, lease and operate its properties and to carry on its business as now being conducted and as proposed to be conducted, and to perform all of its obligations under the agreements and instruments to which it is a party or by which it is bound. Each of Finisar and Sub is duly qualified to transact business and is in good standing in each jurisdiction in which the nature of its operations requires such qualification, except where the failure to so qualify has not and will not have a Material Adverse Effect on Finisar. Finisar is not in violation of any of the provisions of its Certificate of Incorporation, Bylaws or other charter documents.

    Section 4.2  Finisar Capital Structure.  

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    Section 4.3  Authority; No Conflict; Required Filings and Consents.  

    Section 4.4  SEC Filings; Financial Statements.  

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    Section 4.5  Absence of Undisclosed Liabilities.  Finisar and its Subsidiaries do not have any liabilities, either accrued or contingent (whether or not required to be reflected in financial statements in accordance with GAAP), and whether due or to become due, which individually or in the aggregate would be reasonably likely to have a Material Adverse Effect on Finisar, other than (i) liabilities reflected or provided for on the Finisar Balance Sheet, (ii) liabilities specifically contemplated by this Agreement, or described in the Finisar Disclosure Schedule or Finisar SEC Reports, and (iii) normal or recurring liabilities incurred since October 29, 2000 in the ordinary course of business consistent with past practices.

    Section 4.6  Absence of Certain Changes or Events.  Since October 29, 2000, Finisar has not suffered any event or occurrence that has had a Material Adverse Effect on Finisar.

    Section 4.7  Litigation.  Except as described in the Finisar SEC Reports, there is no action, suit or proceeding, claim, arbitration or investigation against Finisar pending or as to which Finisar has received any written notice of assertion, which is reasonably likely to have a Material Adverse Effect on Finisar or a material adverse effect on the ability of Finisar to consummate the transactions contemplated by this Agreement.

    Section 4.8  Investment Intent.  Finisar is acquiring the shares of Marlow Common Stock as contemplated by this Agreement for its own account for investment and not with a view toward resale or redistribution in a manner which would require registration under the Securities Act or the securities laws of any state.

    Section 4.9  Financing.  Finisar and Sub have sufficient capital resources to enable Finisar and Sub to deliver the Total Cash Consideration in accordance with this Agreement and to effect the other transactions contemplated by this Agreement on the Closing Date.

    Section 4.10  Taxes.  Neither Finisar nor any of its subsidiaries have constituted either a "distributing corporation" or a "controlled corporation" in a distribution of stock qualifying for tax-free treatment under Section 355 of the Code (i) in the two years prior to the date of this Agreement or (ii) in a distribution which could otherwise constitute part of a "plan" or "series of related transactions" (within the meaning of Section 355(e) of the Code) in conjunction with the Merger.

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    Section 4.11  No Misrepresentation.  No representation or warranty by Finisar or Sub in this Agreement, or any statement, certificate or schedule furnished or to be furnished by or on behalf of Finisar or Sub pursuant to this Agreement, when taken together, contains or shall contain any untrue statement of a material fact or omits or shall omit to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances under which they were made, not misleading.

    Section 4.12  Disclaimer of Additional and Implied Warranties.  Finisar is making no representations or warranties, express or implied, of any nature whatsoever, except as specifically set forth in Article IV of this Agreement.


ARTICLE V

CONDUCT OF BUSINESS

    Section 5.1  Covenants of Marlow.  During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Marlow agrees (except to the extent that Finisar shall otherwise consent in writing), to carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, to pay its debts and Taxes when due, to pay or perform its other obligations when due (subject to good faith disputes with respect to such obligations), and, to the extent consistent with such business, to use all commercially reasonable efforts consistent with past practices and policies to (i) preserve intact its present business organization, (ii) keep available the services of its present officers and key employees and (iii) preserve its relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with it. Marlow shall promptly notify Finisar upon Marlow obtaining knowledge of any event or occurrence not in the ordinary course of business of Marlow where such event or occurrence would result in a breach of any covenant of Marlow set forth in this Agreement or cause any representation or warranty of Marlow set forth in this Agreement to be untrue as of the date of, or giving effect to, such event or occurrence. Except as expressly contemplated by this Agreement, or set forth in Section 5.1 of the Marlow Disclosure Schedule, Marlow shall not, without the prior written consent of Finisar:

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    Section 5.2  Covenants of Finisar.  During the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, Finisar agrees to carry on its business in the usual, regular and ordinary course in substantially the same manner as previously conducted, to pay its debts and Taxes when due, subject to good faith disputes over such debts or Taxes, and to pay or perform its other obligations when due.

    Section 5.3  Cooperation.  Subject to compliance with applicable law, from the date hereof until the Effective Time, each of Finisar and Marlow shall confer on a regular and frequent basis with one or more representatives of the other party to report operational matters of materiality and the general status of ongoing operations and shall promptly provide the other party or its counsel with copies of all filings made by such party with any Governmental Entity in connection with this Agreement, the Merger and the transactions contemplated hereby.


ARTICLE VI

ADDITIONAL AGREEMENTS

    Section 6.1  No Solicitation.  

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    Section 6.2  Consents.  Each of Finisar and Marlow shall use all reasonable efforts to obtain all necessary consents, waivers and approvals under any of Finisar's or Marlow's material agreements, contracts, licenses or leases as may be necessary or advisable to consummate the Merger and the other transactions contemplated by this Agreement.

    Section 6.3  Access to Information.  Upon reasonable notice, Marlow shall afford to the officers, employees, accountants, counsel and other representatives of Finisar, reasonable access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records and, during such period, Marlow shall furnish promptly to Finisar or its representatives all other information concerning its business, properties and personnel as such other party may reasonably request. Unless otherwise required by law, the parties will treat any such information which is nonpublic in confidence in accordance with the Nondisclosure Agreement dated September 25, 2000 (the "Confidentiality Agreement") between Finisar and Marlow, which Confidentiality Agreement shall continue in full force and effect in accordance with its terms. No information or knowledge obtained in any investigation pursuant to this Section 6.3 shall affect or be deemed to modify any representation or warranty contained in this Agreement or the conditions to the obligations of the parties to consummate the Merger.

    Section 6.4  Legal Conditions to Merger.  Each of Finisar and Marlow will take all reasonable actions necessary to comply promptly with all legal requirements which may be imposed on itself with respect to the Merger (which actions shall include, without limitation, furnishing all information in connection with approvals of or filings with any Governmental Entity) and will promptly cooperate with and furnish information to each other in connection with any such requirements imposed upon either of them or any of their Subsidiaries in connection with the Merger. Each of Finisar and Marlow will take all reasonable actions necessary to obtain (and will cooperate with each other in obtaining) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity or other third party, required to be obtained or made by Marlow, Finisar or any of their Subsidiaries in connection with the Merger or the taking of any action contemplated thereby or by this Agreement and to enable the Closing to occur as promptly as practicable.

    Section 6.5  Public Disclosure.  Finisar and Marlow shall consult with each other before issuing any press release or otherwise making any public statement with respect to the Merger or this Agreement and shall not issue any such press release or make any such public statement prior to such consultation, except as may be required by law or by the rules or regulations of the SEC or the NNM; provided, however, that Finisar shall use its commercially reasonable efforts to give Marlow advance notice of any disclosure relating to the Merger or this Agreement required by law or by the rules or regulations of the SEC, NNM or other regulatory agency as soon as practicable after the decision to make such disclosure has been made.

    Section 6.6  Tax-Free Reorganization.  Finisar and Marlow each intend that the Merger shall qualify for treatment as a reorganization within the meaning of Section 368(a) of the Code. Finisar and Marlow each agree to refrain from taking any action inconsistent with such intended treatment. Finisar and Marlow agree to make reasonable representations as requested by counsel to Finisar and Marlow with respect to the rendering of the opinions required pursuant to Section 7.1(e).

    Section 6.7  Nasdaq Quotation.  Finisar agrees to continue the quotation of Finisar Common Stock on the NNM during the term of this Agreement. Finisar shall use its best efforts to cause the

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shares of Finisar Common Stock to be issued in the Merger to be approved for quotation on the NNM, subject to official notice of issuance, prior to the Closing Date.

    Section 6.8  Securities Law Matters.  

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    Section 6.9  HSR Act.  Finisar and Marlow have prepared and filed Notification and Report Forms under the HSR Act with the Federal Trade Commission (the "FTC") and the Antitrust Division of the Department of Justice (the "Antitrust Division"). Finisar and Marlow shall respond as promptly as practicable to all inquiries received from the FTC or the Antitrust Division for additional information or documentation.

    Section 6.10  Employment Matters.  

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    Section 6.11  Stock Options.  

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    Section 6.12  Employee Stock Purchase Plan.  Employees of Marlow as of the Effective Time shall be permitted to participate in the Finisar Employee Stock Purchase Plan commencing on the first enrollment date following the Effective Time, subject to compliance with the eligibility provisions of such plan.

    Section 6.13  Finisar Plans.  All Marlow employees who remain employees of Finisar, Marlow or any other Subsidiary of Finisar following the Effective Time shall be entitled to participate in all employee benefit plans and programs (the "Finisar Plans") that are available to other Finisar employees holding comparable positions. To the extent permitted by the Finisar Plans, each participant shall be given full credit for such participant's service with Marlow prior to the Effective Time for purposes of eligibility and vesting. To the extent permitted by law, Finisar shall amend the Finisar Plans, as necessary, to provide for such participation and vesting. Finisar shall cause the Surviving Corporation to (i) continue Marlow's short term disability plan until December 31, 2001, (ii) continue Marlow's supplemental (employer-paid) executive life insurance coverages until the expiration of six (6) months after the Effective Time, and (ii) either continue Marlow's group health coverage (and existing employee premiums, copays and deductibles), or provide substantially similar coverage (with no increase in employee premiums, copays and deductibles) through August 2001.

    Section 6.14  Employee Retention Pool.  Finisar shall establish a pool of cash in the aggregate amount of $5,457,280 (the "Retention Pool") for retention of Marlow employees. The Retention Pool shall be allocated among the employees listed on Schedule 6.14 hereto. A portion of the amount allocated to each eligible employee will vest at the Effective Time as set forth in Schedule 6.14 provided such eligible employee accepts continued employment with the Surviving Corporation, and will be payable at the Effective Time; provided, however, that the full amount allocated to John Nelson and Frances Mattingly will be payable immediately at the Effective Time. The portion of the Retention Pool payable at the Effective Time shall be paid by the delivery of checks drawn on a checking account maintained by Marlow, and a schedule of such payments shall be delivered to Finisar at least five (5) business days prior to the Closing Date. Eligible employees (except John Nelson and Frances Mattingly) will vest in the remaining amount allocated to them in equal installments which shall be paid on the first and second anniversaries of the Closing Date, subject to their continued employment by Finisar or a Subsidiary of Finisar; provided, however, that any unpaid portion of an employee's share of the Retention Pool will become vested and payable upon the Involuntary Termination of the employee's employment following the Effective Date. All payments of cash from the Retention Pool will be net of applicable withholding requirements.

    Section 6.15  Marlow 401(k) Plan.  Marlow agrees to terminate its 401(k) plan immediately prior to the Effective Time, unless Finisar, in its sole and absolute discretion, agrees to sponsor and maintain such plan by providing Marlow with written notice of such election at least three (3) days before the Closing Date. Unless Finisar provides such notice, Marlow shall deliver to Finisar evidence that Marlow's 401(k) plan has been terminated pursuant to resolutions of Marlow's Board of Directors (the

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form and substance of which resolutions shall be subject to review and approval of Finisar), effective as of the day immediately preceding the Closing Date.

    Section 6.16  Brokers or Finders.  Each of Finisar and Marlow represents, as to itself, its Subsidiaries and its affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finder's fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, except Broadview International, financial advisor to Finisar, to which Finisar has agreed to pay fees and expenses in connection with financial advisory services, and Chase Securities Inc., financial advisor to Marlow, to which Marlow has agreed to pay fees and expenses in connection with financial advisory services, and each of Finisar and Marlow agrees to indemnify and hold the other harmless from and against any and all claims, liabilities or obligations with respect to any other fees, commissions or expenses asserted by any person on the basis of any act or statement alleged to have been made by such party or its affiliate.

    Section 6.17  Additional Agreements; Reasonable Efforts.  Subject to the terms and conditions of this Agreement, each of the parties agrees to use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including cooperating fully with the other party, including by provision of information. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of either of the Constituent Corporations, the proper officers and directors of each party to this Agreement shall take all such necessary action.

    Section 6.18  Expenses.  The parties shall each pay their own legal, accounting, financial advisory and consulting fees and other out-of-pocket expenses related to the negotiation, preparation and carrying out of this Agreement and the transactions herein contemplated. In the event the Merger is consummated all legal, accounting, financial advisory and consulting fees and expenses incurred by Marlow or its shareholders (whether paid or accrued) relating to the negotiation, preparation and carrying out of this Agreement and the transactions contemplated hereby, and obtaining all authorizations, consents, orders or approvals of, or declarations or filings with, all Governmental Entities in connection with such transactions (the "Marlow Transaction Expenses") shall be borne by the former security holders of Marlow, as hereinafter provided; provided, however, that filing fees and other fees payable to Governmental Entities by Finisar shall not be deemed to be Marlow Transaction Expenses. Schedule 6.18 hereto sets forth Marlow's current estimate of the total Marlow Transaction Expenses which Marlow expects to incur (the "Marlow Estimated Transaction Expenses"). Marlow shall provide an updated schedule of Marlow Estimated Transaction Expenses not later than four (4) business days prior to the Closing (the "Marlow Closing Transaction Expense Schedule"). The amount of Marlow Transaction Expenses set forth on the Marlow Closing Transaction Expense Schedule shall be used to calculate the Total Stock Consideration as defined in Section 2.1(m). In the event the Marlow Transaction Expenses actually incurred by Marlow exceed the amount shown on the Marlow Closing Transaction Expense Schedule, Finisar shall be entitled to assert a claim against the Escrow Shares pursuant to Article IX hereof in order to recover all such additional expenses.

    Section 6.19  Financial Statements.  Marlow shall deliver to Finisar on or before February 28, 2001, its unaudited financial statements for the fiscal year ended January 28, 2001, and shall deliver its audited financial statements for the fiscal year ended January 28, 2001 as soon as practicable thereafter, which shall have been prepared in accordance with GAAP applied on a consistent basis throughout the periods involved and present fairly in all material respects the financial position of Marlow and the Marlow Subsidiaries and the results of their operations and cash flows as of the dates and for the periods indicated therein.

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    Section 6.20  Items to be Transferred.  At the Closing, Marlow agrees to transfer, convey and assign to the Shareholders' Representative any and all of Marlow's right, title and interest to each of the items listed in Schedule 6.20 hereto pursuant to transfer agreements in the form mutually agreed to by Marlow, Finisar and the Shareholders' Representative. Marlow agrees, at any time and from time to time after the Closing Date, to execute and deliver such instruments of transfer and conveyance and do all such further acts and things as may be reasonably requested by the Shareholders' Representative, to transfer, convey and assign to the Shareholders' Representative or to vest in the Shareholders' Representative all such right, title and interest in the items listed on Schedule 6.20 hereto.

    Section 6.21  Indemnification of Officers and Directors.  

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    Section 6.22  Proxy Statement and Meeting of Finisar Stockholders; Voting Agreement.  

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    Section 6.23  No Contractual Restrictions on Finisar Common Stock.  The parties acknowledge and agree that no Marlow Shareholder (or such Shareholder's respective transferees, successors or assigns (collectively, "Assignee") will be subject to any contractual requirement that would (i) prevent the Finisar Common Stock to be received as consideration for the Merger from being offered, sold, assigned, pledged, hypothecated, transferred or otherwise disposed of directly or indirectly (provided that such Shareholder has complied with applicable federal and state securities laws) or (ii) prevent such Shareholder or Assignee from engaging in any put, call, short-sale, hedge, straddle, collar or similar transactions with respect to any of the Finisar Common Stock to be received as consideration for the Merger intended to reduce such Shareholder's or Assignee's risk of owning such Finisar Common Stock. Notwithstanding the foregoing provisions of this Section 6.23, the Marlow Shareholders who serve as employees of Finisar after the Effective Time will be subject to Finisar's insider trading policy.

    Section 6.24  Specific Performance.  The parties acknowledge and agree that each of the parties hereto shall be entitled to specific performance for any breach of the other parties' obligations under this Agreement, provided that the party seeking specific performance is not in breach of or in default under its obligations under this Agreement.


ARTICLE VII

CONDITIONS TO MERGER

    Section 7.1  Conditions to Each Party's Obligation to Effect the Merger.  The respective obligations of each party to this Agreement to effect the Merger shall be subject to the satisfaction on or prior to the Closing Date of the following conditions:

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    Section 7.2  Additional Conditions to Obligations of Finisar and Sub.  The obligations of Finisar and Sub to effect the Merger are subject to the satisfaction of each of the following conditions, any of which may be waived in writing exclusively by Finisar:

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    Section 7.3  Additional Conditions to Obligations of Marlow.  The obligation of Marlow to effect the Merger is subject to the satisfaction of each of the following conditions, any of which may be waived in writing exclusively by Marlow:

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ARTICLE VIII


TERMINATION AND AMENDMENT

    Section 8.1  Termination.  This Agreement may be terminated at any time prior to the Effective Time (with respect to Sections 8.1(b) through 8.1(g), by written notice by the terminating party to the other party):

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    Section 8.2  Effect of Termination.  In the event of termination of this Agreement as provided in Section 8.1, there shall be no liability or obligation on the part of Finisar, Marlow, Sub or their respective officers, directors, shareholders or affiliates (including the Principal Shareholder and the Shareholders' Representative), except to the extent that such termination results from the willful or intentional breach by a party of any of its representations, warranties or covenants set forth in this Agreement; provided that the provisions of Sections 6.16 and 6.18 of this Agreement, the confidentiality provisions set forth herein and in the Confidentiality Agreement and the non-solicitation provisions set forth in the Confidentiality Agreement shall remain in full force and effect and survive any termination of this Agreement.

    Section 8.3  Termination Fee.  

    Section 8.4  Amendment.  This Agreement may be amended by the parties hereto, by action taken or authorized by their respective Boards of Directors, at any time before or after approval of the matters presented in connection with the Merger by the shareholders of Marlow, but, after any such approval, no amendment shall be made which by law requires further approval by such shareholders without such further approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto.

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    Section 8.5  Extension; Waiver.  At any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed, (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party.


ARTICLE IX


ESCROW AND INDEMNIFICATION

    Section 9.1  Survival of Representations and Warranties.  If the Merger occurs, all of the representations and warranties contained in this Agreement shall survive the Closing Date; provided, however, that there shall not be deemed to be any inaccuracy in or breach of such representations and warranties, if such representations and warranties are true and accurate as of the Closing Date or such other date that may be specific in a particular representation or warranty; and provided further that no action may be brought with respect to a breach of a representation or warranty under this Agreement or the transactions contemplated hereby (i) unless an Indemnification Claim is made under Section 9.3 on or before the date that is eighteen (18) months following the Closing Date (the "Termination Date") or (ii) except for claims under Section 9.2(d), as allowed by law.

    Section 9.2  Indemnification by Shareholders.  

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    The amount of Finisar Losses shall be computed after giving effect to the receipt of any insurance proceeds (without any adverse effect on the premiums paid for such insurance) and tax benefits with respect thereto.

    Section 9.3  Procedures for Indemnification.  

    Section 9.4  Defense of Third Party Claims.  Should any claim be made or suit or proceeding be instituted against an Indemnitee which, if prosecuted successfully, would be a matter for which such Indemnitee is entitled to indemnification under this Article IX (a "Third Party Claim"), the obligations and liabilities of the parties hereunder with respect to such Third Party Claim shall be subject to the following terms and conditions:

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    Section 9.5  Manner of Indemnification.  

    Section 9.6  Appointment of Shareholders' Representative.  By virtue of their approval of this Agreement, the Shareholders will be deemed to have irrevocably constituted and appointed, effective as of the Closing, the Shareholders' Representative as the representative and attorney-in-fact for and on behalf of the Shareholders, and to the taking by the Shareholders' Representative of any and all actions and the making of any decisions required or permitted to be taken by him under this Agreement or the Escrow Agreement, including, without limitation, the exercise of the power to (i) execute the Escrow Agreement, (ii) authorize delivery to Finisar of Escrow Shares in satisfaction of Indemnification Claims, (iii) agree to, negotiate, enter into settlements and compromises of and comply with orders of courts and awards of arbitrators with respect to such Indemnification Claims, (iv) resolve any Indemnification Claims and (v) take all actions necessary in the judgment of the Shareholders' Representative for the accomplishment of the foregoing and all of the other terms, conditions and limitations of this Agreement and the Escrow Agreement. Accordingly, the Shareholders' Representative has unlimited authority and power to act on behalf of each Shareholder with respect to this Agreement and the Escrow Agreement and the disposition, settlement or other handling of all Indemnification Claims,

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rights or obligations arising from and taken pursuant to this Agreement. The Shareholders will be bound by all actions taken by the Shareholders' Representative in connection with this Agreement, and Finisar shall be entitled to rely on any action or decision of the Shareholders' Representative. The Shareholders' Representative will incur no liability with respect to any action taken or suffered by him in reliance upon any notice, direction, instruction, consent, statement or other document believed by him to be genuine and to have been signed by the proper person (and shall have no responsibility to determine the authenticity thereof), nor for any other action or inaction, except his own willful misconduct or bad faith. In all questions arising under this Agreement or the Escrow Agreement, the Shareholders' Representative may rely on the advice of counsel, and the Shareholders' Representative will not be liable to anyone for anything done, omitted or suffered in good faith by the Shareholders' Representative based on such advice. Except as expressly provided herein, the Shareholders' Representative will not be required to take any action involving any expense unless the payment of such expense is made or provided for in a manner satisfactory to him. At any time during the term of the Escrow Agreement, holders of a majority of the Escrow Shares subject to Indemnification Claims under this Article IX may, by written consent, appoint a new representative as the Shareholders' Representative by sending notice and a copy of the written consent appointing such new representative signed by holders of a majority of the Escrow Shares to Finisar and the Escrow Agent. Such appointment will be effective upon the later of the date indicated in the consent or the date such consent is received by Finisar and the Escrow Agent.


ARTICLE X


DISPOSITION OF SECURITIES BY
PRINCIPAL SHAREHOLDER; VOTING

    Section 10.1  Agreements of Principal Shareholder.  From and after the date hereof through the Closing Date, or until this Agreement is terminated in accordance with Section 8.1, the Principal Shareholder agrees as follows:

    Section 10.2  Representations and Warranties.  The Principal Shareholder hereby represents and warrants to Finisar the following:

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    Section 10.3  Transfer Restrictions.  The Principal Shareholder acknowledges and agrees that Marlow shall decline and shall cause its transfer agent to decline to transfer any shares of Marlow Securities if such transfer would violate the terms of Sections 10.1 and 10.2 above.


ARTICLE XI

GENERAL PROVISIONS

    Section 11.1  Notices.  All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or by commercial delivery service, or within seventy-two (72) hours after being mailed by registered or certified mail (return receipt requested) or sent via facsimile (with confirmation of receipt) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

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    Section 11.2  Interpretation.  

    Section 11.3  Counterparts.  This Agreement may be executed in two or more counterparts, each of which shall be deemed an original as against any party whose signature appears on such counterpart and all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart.

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    Section 11.4  Severability.  In the event that any provision of this Agreement, or the application thereof, becomes or is declared by a court of competent jurisdiction to be illegal, void or unenforceable, the remainder of this Agreement will continue in full force and effect and the application of such provision to other persons or circumstances will be interpreted so as reasonably to effect the intent of the parties hereto. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the economic, business and other purposes of such void or unenforceable provision.

    Section 11.5  Entire Agreement.  This Agreement (including the schedules and exhibits hereto and the other documents delivered pursuant hereto) constitutes the entire agreement among the parties concerning the subject matter hereof and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof, other than the Confidentiality Agreement.

    Section 11.6  Governing Law.  This Agreement shall be governed and construed in accordance with the laws of the State of California without regard to any applicable conflicts of law principles.

    Section 11.7  Assignment.  Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns.

    Section 11.8  Third Party Beneficiaries.  Nothing contained in this Agreement is intended to confer upon any person other than the parties hereto and their respective successors and permitted assigns, any rights, remedies or obligations under, or by reason of this Agreement, except that (i) the persons who are shareholders of Marlow immediately prior to the Effective Time (and their successors and assigns) are express intended third party beneficiaries of Articles I, II and IV, Sections 6.6 and 6.7 and Article IX, (ii) the persons who hold Marlow Options immediately prior to the Effective Time (and their lawful successors and assigns) are express intended third party beneficiaries of Section 6.11, (iii) the persons who are entitled to payments from the Retention Pool (and their lawful successors and assigns) are express intended third party beneficiaries of Section 6.14, (iv) the persons who are Indemnified Personnel and their heirs and personal representatives are express intended third party beneficiaries of Section 6.21, and (v) each of the foregoing persons is an express intended third party beneficiary of Article XI, to the extent relevant to any of the foregoing, and as such are entitled to rely on the provisions hereof as if a party hereto.

    [SIGNATURE PAGE FOLLOWS]

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    IN WITNESS WHEREOF, Finisar, Sub, Marlow and the Principal Shareholder have caused this Agreement to be signed by their respective officers thereunto duly authorized, and the Shareholders' Representative has signed this Agreement, as of the date first written above.

MARLOW INDUSTRIES, INC.   FINISAR CORPORATION

By:
 
/s/ RAYMOND MARLOW   
 
By:
 
/s/ JERRY S. RAWLS   
    Raymond Marlow       Jerry S. Rawls
    Chairman of the Board and       President and Chief Executive Officer
    Chief Executive Officer        

THE MARLOW CO., LTD.
 
MARBLE ACQUISITION CORP.

By:
 
/s/ RAYMOND MARLOW   
 
By:
 
/s/ JERRY S. RAWLS   
    Raymond Marlow       Jerry S. Rawls
            President and Chief Executive Officer

Shareholders' Representative
 
 
 
 

 
 
 
 
 
 
 
/s/ RAYMOND MARLOW   
        
Raymond Marlow        

The following persons have executed this Agreement solely for purposes of Section 6.22:

/s/ JERRY S. RAWLS   
 
/s/ GREGORY H. OLSEN   
Jerry S. Rawls   Gregory H. Olsen

/s/ FRANK H. LEVINSON   
 
/s/ MARK J. FARLEY    
Frank H. Levinson   Mark J. Farley

[Signature Page to Agreement and Plan of Reorganization]

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[LOGO]

FINISAR CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD ON
June 19, 2001

    The undersigned hereby appoints Jerry S. Rawls and Stephen K. Workman, or either of them, as proxies and attorneys-in-fact, each with full power of substitution, to represent the undersigned at the Annual Meeting of Stockholders of Finisar Corporation (the "Company") to be held at the Wyndham Garden Hotel at 1300 Chesapeake Terrace, Sunnyvale, CA on June 19, 2001 at 10:00 a.m., and any adjournments or postponements thereof, and to vote the number of shares the undersigned would be entitled to vote if personally present at the meeting.

    UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR THE THREE NOMINEES FOR DIRECTOR NAMED IN PROPOSAL 1 AND FOR PROPOSAL 2 AND PROPOSAL 3, AS MORE SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH. In their discretion the proxies are authorized to vote upon such other business as may properly come before the meeting or any adjournment thereof to the extent authorized by Rule 14a-4(c) promulgated by the Securities and Exchange Commission.

(Continued, and to be signed and dated on the other side)


/x/ PLEASE MARK
YOUR VOTES AS
IN THIS EXAMPLE.

MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR
LISTED BELOW AND A VOTE FOR PROPOSALS 2 AND 3.

PROPOSAL 1.
To elect directors to hold office for three years or until their successors are elected.		        
    FOR   WITHHOLD
AUTHORITY
Nominees:        
Roger C. Ferguson   / /   / /
Larry D. Mitchell   / /   / /
Gregory H. Olsen   / /   / /

To withhold authority to vote for any nominee(s), write such nominee(s)' name(s) below:
 
 
 
 


 
 
 
 

PROPOSAL 2.
To approve an amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of common stock.
 
FOR
/ /
AGAINST
/ /
ABSTAIN
/ /

PROPOSAL 3.
To ratify the appointment of Ernst & Young LLP as the Company's independent auditors.
 
FOR
/ /
AGAINST
/ /
ABSTAIN
/ /

WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO SIGN AND
PROMPTLY MAIL THIS PROXY IN THE RETURN ENVELOPE SO THAT YOUR STOCK
MAY BE REPRESENTED AT THE MEETING

  
 
Signature   Signature   Date

Sign exactly as your name(s) appears on your stock certificate. If shares of stock stand of record in the names of two or more persons or in the name of husband and wife, whether as joint tenants or otherwise, both or all of such persons should sign the above Proxy. If shares of stock are held of record by a corporation, the Proxy should be executed by the President or Vice President and the Secretary or Assistant Secretary. Executors or administrators or other fiduciaries who execute the above Proxy for a deceased Shareholder should give their full title. Please date the Proxy.


QuickLinks

NOTICE OF MEETING OF STOCKHOLDERS
To Be Held June 19, 2001
TABLE OF CONTENTS
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
SOLICITATION AND VOTING OF PROXIES
INFORMATION ABOUT FINISAR CORPORATION
REPORT OF THE AUDIT COMMITTEE
EXECUTIVE COMPENSATION AND OTHER MATTERS
SUMMARY COMPENSATION TABLE
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END VALUES
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
COMPARISON OF STOCKHOLDER RETURN
Comparison of Cumulative Total Return From November 12, 1999 through April 28, 2000(1): Finisar, Nasdaq Index and Networking Index
ELECTION OF DIRECTORS
APPROVAL OF AMENDMENT TO OUR CERTIFICATE OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK
FINISAR SELECTED FINANCIAL DATA
SHOMITI SELECTED FINANCIAL DATA
TRANSWAVE SELECTED FINANCIAL DATA
MARLOW SELECTED FINANCIAL DATA
FINISAR CORPORATION, SHOMITI SYSTEMS, INC., TRANSWAVE FIBER, INC. AND MARLOW INDUSTRIES, INC.
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
NOTES TO FINISAR, SHOMITI, TRANSWAVE AND MARLOW UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
STOCKHOLDER PROPOSALS TO BE PRESENTED AT NEXT ANNUAL MEETING
WHERE YOU CAN FIND MORE INFORMATION
TRANSACTION OF OTHER BUSINESS
INDEX TO FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
FINISAR CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data)
FINISAR CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
FINISAR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
FINISAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Information as of January 31, 2001 and for the nine month periods ended January 31, 2001 and 2000 is unaudited)
SENSORS UNLIMITED, INC. BALANCE SHEETS AS OF DECEMBER 31, 1999 AND 1998
SENSORS UNLIMITED, INC. STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
SENSORS UNLIMITED, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
SENSORS UNLIMITED, INC. STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
SENSORS UNLIMITED, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1999 AND 1998
SENSORS UNLIMITED, INC. UNAUDITED BALANCE SHEET SEPTEMBER 30, 2000 (in thousands)
SENSORS UNLIMITED, INC. UNAUDITED STATEMENTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30 (in thousands, except per share data)
SENSORS UNLIMITED, INC. UNAUDITED STATEMENT OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30 (in thousands)
SENSORS UNLIMITED, INC. NOTE TO UNAUDITED FINANCIAL STATEMENTS SEPTEMBER 30, 2000
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
DEMETER TECHNOLOGIES, INC. BALANCE SHEET October 31, 2000
DEMETER TECHNOLOGIES, INC. STATEMENT OF OPERATIONS Period from inception (June 22, 2000) to October 31, 2000
DEMETER TECHNOLOGIES, INC. STATEMENT OF CASH FLOWS Period from inception (June 22, 2000) to October 31, 2000
DEMETER TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS October 31, 2000
FINISAR CORPORATION, SENSORS UNLIMITED, INC., DEMETER TECHNOLOGIES, INC. AND MEDUSA TECHNOLOGIES, INC.
INTRODUCTION TO PRO FORMA FINANCIAL INFORMATION
FINISAR, SENSORS, DEMETER AND MEDUSA UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS Year ended April 30, 2000 (in thousands, except per share data)
FINISAR, SENSORS, DEMETER AND MEDUSA UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS Nine months ended January 31, 2001 (in thousands, except per share data)
FINISAR AND MEDUSA UNAUDITED PRO FORMA CONDENSED BALANCE SHEET January 31, 2001 (in thousands)
NOTES TO FINISAR, SENSORS, DEMETER AND MEDUSA UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
SHOMITI SYSTEMS, INC. BALANCE SHEET (in thousands)
SHOMITI SYSTEMS, INC. STATEMENT OF OPERATIONS (in thousands except per share data)
SHOMITI SYSTEMS, INC. STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (in thousands)
SHOMITI SYSTEMS, INC. STATEMENT OF CASH FLOWS (in thousands)
SHOMITI SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (Information as of October 1, 1999 and for the years ended October 1, 1999 and October 2, 1998 is unaudited)
SHOMITI SYSTEMS, INC. UNAUDITED CONDENSED BALANCE SHEET (in thousands)
SHOMITI SYSTEMS, INC. UNAUDITED CONDENSED STATEMENTS OF OPERATIONS THREE MONTHS ENDED DECEMBER 31 (in thousands, except per share data)
SHOMITI SYSTEMS, INC. UNAUDITED CONDENSED STATEMENT OF CASH FLOWS THREE MONTHS ENDED DECEMBER 31 (in thousands)
SHOMITI SYSTEMS, INC. NOTE TO UNAUDITED CONDENSED FINANCIAL STATEMENTS DECEMBER 31, 2000
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
TRANSWAVE FIBER, INC. CONSOLIDATED BALANCE SHEET December 31, 2000
TRANSWAVE FIBER, INC. CONSOLIDATED STATEMENT OF OPERATIONS Period from inception (February 7, 2000) to December 31, 2000
TRANSWAVE FIBER, INC. CONSOLIDATED STATEMENT OF CASH FLOWS Period from inception (February 7, 2000) to December 31, 2000
TRANSWAVE FIBER, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
MARLOW INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
MARLOW INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
MARLOW INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
MARLOW INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
MARLOW INDUSTRIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 28, 2001, JANUARY 30, 2000, AND JANUARY 31, 1999
FINISAR CORPORATION CHARTER OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
TABLE OF CONTENTS
AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
RECITALS
ARTICLE I THE MERGER
ARTICLE II CONVERSION OF SECURITIES
ARTICLE III REPRESENTATIONS AND WARRANTIES OF SHOMITI
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF FINISAR AND SUB
ARTICLE V CONDUCT OF BUSINESS
ARTICLE VI ADDITIONAL AGREEMENTS
ARTICLE VII CONDITIONS TO MERGER
ARTICLE VIII TERMINATION AND AMENDMENT
ARTICLE IX ESCROW AND INDEMNIFICATION
ARTICLE X GENERAL PROVISIONS
TABLE OF CONTENTS
SECOND AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
RECITALS
ARTICLE I THE MERGER
ARTICLE II CONVERSION OF SECURITIES
ARTICLE III REPRESENTATIONS AND WARRANTIES OF TRANSWAVE
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF FINISAR
ARTICLE V CONDUCT OF BUSINESS
ARTICLE VI ADDITIONAL AGREEMENTS
ARTICLE VII CONDITIONS TO MERGER
ARTICLE VIII TERMINATION AND AMENDMENT
ARTICLE IX ESCROW AND INDEMNIFICATION
ARTICLE X GENERAL PROVISIONS
TABLE OF CONTENTS
AGREEMENT AND PLAN OF REORGANIZATION
RECITALS
ARTICLE I THE MERGER
ARTICLE II CONVERSION OF SECURITIES
ARTICLE III REPRESENTATIONS AND WARRANTIES OF MARLOW
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF FINISAR AND SUB
ARTICLE V CONDUCT OF BUSINESS
ARTICLE VI ADDITIONAL AGREEMENTS
ARTICLE VII CONDITIONS TO MERGER
ARTICLE VIII
TERMINATION AND AMENDMENT
ARTICLE IX
ESCROW AND INDEMNIFICATION
ARTICLE X
DISPOSITION OF SECURITIES BY PRINCIPAL SHAREHOLDER; VOTING
ARTICLE XI GENERAL PROVISIONS