Finisar Corporation
FINISAR CORP(Form: DEF 14A, Received: 15 May 2001, 11:56:18 AM)      

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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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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.

                        Very truly yours,

                        LOGO

                        Jerry S. Rawls
                        President and Chief Executive Officer



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.

                        By order of the Board of Directors,

                        LOGO

                        Stephen K. Workman
                        Secretary

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:

    each stockholder known by us to be the beneficial owner of more than 5% of our common stock,

    each of our directors,

    our Chief Executive Officer and our four other most highly compensated executive officers for the fiscal year ended April 30, 2000, and

    all of our directors and executive officers as a group.

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.

                        AUDIT COMMITTEE
                        Michael C. Child
                        Roger C. Ferguson

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.

                        COMPENSATION COMMITTEE

                        Michael C. Child
                        Roger C. Ferguson

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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:

    if on the first anniversary of the closing of the merger, at least 75% of the key management and technical employees originally employed by Sensors, or equivalent replacement employees, are then employed by us, we will issue and deliver shares of our common stock having an aggregate value of $2.375 multiplied by the total number of shares initially deposited in escrow, rounded to the nearest whole share,

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    if on the second anniversary of the closing of the merger, at least 65% of the key Sensors employees, or equivalent replacement employees, are then employed by us, we will issue and deliver shares of our common stock having an aggregate value of $1.58333 multiplied by the total number of shares initially deposited in escrow, rounded to the nearest whole share, and
    if on the third anniversary of the closing of the merger, at least 50% of the key Sensors employees, or equivalent replacement employees, are then employed by us, and if prior to that date all six development milestones set forth in the reorganization agreement have been achieved, we will issue shares of our common stock having an aggregate value of $0.79167 multiplied by the total number of shares initially deposited in escrow, rounded to the nearest whole share.

    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:

        "A. The total number of shares of all classes of stock which the Corporation will have authority to issue is five hundred five million (505,000,000), consisting of:

          1.  Five million (5,000,000) shares of preferred stock, par value one-tenth of one cent ($0.001) per share (the "Preferred Stock"); and

          2.  Five hundred million (500,000,000) shares of common stock, par value one-tenth of one cent ($0.001) per share (the "common stock")."

    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  

    (1)
    Historical book value per share is computed by dividing stockholders' equity by the number of shares of common stock outstanding at the end of each period presented excluding 9,481,032 shares of common stock deposited into escrow pursuant to the reorganization agreement with Sensors, which may be released from escrow subject to the achievement of specific development milestones.

 
  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 )

    (2)
    Pro forma net loss per Finisar share is computed by dividing the unaudited pro forma combined condensed net loss by the pro forma number of weighted average outstanding common shares for the period presented.

 
  January 31,
2001

Unaudited pro forma combined book value per Finisar share (3)   $ 6.54

    (3)
    Pro forma book value per Finisar share is computed by dividing unaudited pro forma stockholders' equity by the pro forma number of shares of common stock outstanding at January 31, 2001 excluding 9,481,032 shares of common stock deposited into escrow pursuant to the reorganization agreement with Sensors, which may be released from escrow subject to the achievement of specific development milestones. The number of shares of common stock outstanding also excludes the shares of Series A Preferred Stock issued in the Shomiti and Transwave acquisitions.

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 )%
   
 
 
 
 
 

    Comparison of Three Months Ended December 31, 1999 and December 31, 2000.

     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.

    Comparison of Fiscal Years Ended September 30, 2000 and 1999.

     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.

    Comparison of Fiscal Years Ended September 30, 1999 and 1998.

     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:

    the expertise of Shomiti in its product area,
    the addition of knowledgeable and experienced personnel, and
    the increased diversification of customer base and markets that will be created from the combined company.

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:

    carry on its business in the usual, regular and ordinary course, in substantially the same manner as previously conducted,
    pay its debts and taxes when they became due,
    pay or perform its other obligations when they became due (subject to good faith disputes with respect to such obligations), and
    to the extent consistent with its business:
    preserve intact its present business organization,
    keep available the services of its present officers and key employees, and
    preserve its relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with Shomiti Systems.

(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:

    take any action to solicit, initiate, encourage or support any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, business combination, sale of assets, sale of shares of capital stock or similar transaction involving Shomiti, other than the merger (any of such inquiries or proposals being a "Shomiti Acquisition Proposal"),
    engage in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to, any Shomiti Acquisition Proposal, or
    agree to, approve or recommend any Shomiti Acquisition Proposal.

(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:

    all consents and approvals required for the merger had been obtained and all required filings had been made,

    there was no court order or other legal or regulatory restraint preventing the consummation of the merger or limiting or restricting our conduct or operation of our business or the business of Shomiti after the merger, nor was any proceeding brought by any governmental entity seeking any of the foregoing pending, nor was there any action taken or any law, regulation or order which would have made the consummation of the merger illegal,

    we had received an opinion from our counsel, and Shomiti had received an opinion from its counsel, to the effect that the merger will be treated as a tax-free reorganization for federal income tax purposes within the meaning of Section 368(a) of the Internal Revenue Code, and

    if required, the shares of our common stock reserved for issuance on the merger had been authorized for listing on The Nasdaq National Market.

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

    the representations and warranties of Shomiti in the Shomiti Reorganization Agreement were true and correct on November 21, 2000 and as of the closing date of the merger,

    Shomiti had complied with its obligations under the Shomiti Reorganization Agreement and we had received a certificate signed on behalf of Shomiti by its chief executive officer to that effect,

    we had received written evidence from Shomiti that the Shomiti Reorganization Agreement had been duly and validly approved by Shomiti's Board of Directors and shareholders,

    we had received all authorizations and permits required by state securities laws for the issuance of shares of our Series A Preferred Stock in the merger,

    we had received signed employment and noncompetition agreements from specified individuals, and we had received satisfactory assurance that at least 90% of designated Shomiti employees will remain employed by us or the surviving corporation after the merger,

    we had received a legal opinion from counsel to Shomiti,

    the agreement covering the Escrow had been signed by the representative of Shomiti's security holders and the escrow agent,

    we had received from each of the affiliates of Shomiti an executed affiliate agreement,

    all outstanding warrants to acquire shares of Shomiti capital stock had been exercised (we waived this condition),

    Shomiti had received all consents of third parties required for the merger,

    the Shomiti shareholders had approved all "parachute payments" to Shomiti's management or a waiver of rights had been executed by a recipient of a potential "parachute payment",

    we had received audited financial statements of Shomiti for its 1999 and 2000 fiscal years, and

    Shomiti had terminated certain third party rights pursuant to a warrant agreement, a shareholder rights agreement and a letter agreement.

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

    the representations and warranties of Finisar and Silver set forth in the Shomiti Reorganization Agreement were true and correct on November 21, 2000 and as of the closing date of the merger,

    Finisar and Silver had complied with their obligations under the Shomiti Reorganization Agreement and Shomiti had received a certificate signed on behalf of Finisar and Silver by our chief financial officer to that effect,

    Shomiti had received written evidence from Finisar and Silver that the Shomiti Reorganization Agreement had been duly and validly approved by the Boards of Directors of Finisar and Silver,

    we had signed employment and noncompetition agreements with respect to the specified individuals,

    Shomiti had received a legal opinion from our counsel, and

    the agreement covering the Escrow had been signed by Finisar and the escrow agent.

(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:

    any inaccuracy or breach of the covenants, representations or warranties Shomiti made in the Shomiti Reorganization Agreement,

    any merger expenses incurred by Shomiti (excluding the Shomiti Accounting Fee Deductible) that exceed the estimate used in calculating the number of shares of our Series A Preferred Stock issued in the merger, or

    any breach of the indemnification provisions of the Shomiti Reorganization Agreement or the agreement governing the Escrow.

    However, no member of the Finisar Group may recover:

    any amounts from the Escrow (other than merger expenses exceeding the estimate as discussed above) except to the extent the aggregate amount of all such losses exceeds $100,000, and

    on account of any claim for indemnification made 12 months or more after the closing date of the merger.

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

    on account of willful fraud or misrepresentation by Shomiti, any security holder of Shomiti or any of their respective representatives, and

    under federal or state securities laws regarding compliance or non-compliance with the anti-fraud provisions thereof.

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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:

    was an officer or director of Shomiti at the time the Shomiti Reorganization Agreement was signed, or

    is a venture capital fund or firm that was affiliated with any such director at the time the Shomiti Reorganization Agreement was signed.

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:

    by the mutual consent of Finisar and Shomiti,

    by either Finisar or Shomiti if the merger was not consummated by April 15, 2001, except that a party could not terminate the agreement if its failure to fulfill its obligations resulted in the failure of the merger to occur,

    by either Finisar or Shomiti if a court or other governmental entity had issued a nonappealable final order, decree or ruling or taken any other action having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, unless the party relying on the action had breached its obligations under the agreement to comply with legal requirements for the merger and to obtain necessary consents and approvals for the merger and to refrain from taking action inconsistent with qualification for treatment of the merger as a tax-free reorganization,

    by Finisar if the Board of Directors of Shomiti had withdrawn or modified its recommendation of the Shomiti Reorganization Agreement or the merger for approval by the Shomiti shareholders in a manner adverse to us or publicly announced or disclosed to any third party its intention to do so, and

    by Finisar or Shomiti if there had been a material breach of any representation, warranty, covenant or agreement on the part of the other party that:

    caused a condition to closing of the terminating party not to be satisfied, and

    was not cured within ten business days following the receipt by the breaching party of written notice of the breach from the terminating party.

    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:

    each party would bear its own expenses (including the expense of any financial advisor), and

    confidentiality provisions in the Shomiti Reorganization Agreement and a related confidentiality 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:

    extend the time for performing any of the obligations or other acts of the other party;

    waive any inaccuracies in the other's representations and warranties; and

    waive the other's compliance with any of the agreements or conditions in the Shomiti Reorganization Agreement.

    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   56 2 / 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.

    Results of Operations for Eleven Months Ended December 31, 2000.

     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:

    the expertise Transwave will bring in its product area,

    the addition of knowledgeable and experienced personnel,

    increased diversification of customer base and markets for the combined company, and

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    the belief that the merger will facilitate our strategic objectives.

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:

    carry on its business in the usual, regular and ordinary course, in substantially the same manner as previously conducted,

    pay its debts and taxes when they became due,

    pay or perform its other obligations when they became due (subject to good faith disputes with respect to such obligations), and

    to the extent consistent with its business:

    preserve intact its present business organization,

    keep available the services of its present officers and key employees, and

    preserve its relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with Transwave.

(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:

    take any action to solicit, initiate, encourage or support any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, business combination, sale of assets, sale of shares of capital stock or similar transaction involving Transwave, other than the merger with us (any of such inquiries or proposals being a "Transwave Acquisition Proposal"),

    engage in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to, any Transwave Acquisition Proposal, or

    agree to, approve or recommend any Transwave Acquisition Proposal.

(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:

    all consents and approvals required for the merger had been obtained and all required filings had been made, and

    there was no court order or other legal or regulatory restraint preventing the consummation of the merger or limiting or restricting our conduct or operation of our business or the business of Transwave after the merger, nor was any proceeding brought by any governmental entity seeking

41


      any of the foregoing pending, nor was there any action taken or any law, regulation or order which would have made the consummation of the merger illegal.

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

    the representations and warranties of Transwave and certain principal shareholders of Transwave set forth in the Transwave Reorganization Agreement were true and correct on November 21, 2000 and as of the closing date of the merger,

    Transwave had complied with its obligations under the Transwave Reorganization Agreement and we had received a certificate signed on behalf of Transwave by its chief executive officer to that effect,

    we had received written evidence from Transwave that the Transwave Reorganization Agreement had been duly and validly approved by Transwave's Board of Directors and shareholders,

    we had received all authorizations and permits required by state securities laws for the issuance of shares of our Series A Preferred Stock in the merger,

    we had received signed employment and noncompetition agreements from specified individuals, and we had received satisfactory assurance that at least 90% of the Transwave employees will remain employed by us or the surviving corporation after the merger,

    we had received a legal opinion from counsel to Transwave,

    the agreement covering the Escrow had been signed by the representative of Transwave's security holders and the escrow agent,

    we had received from each of the affiliates of Transwave an executed affiliate agreement,

    each of the shareholders of Transwave had signed a lock-up agreement,

    all of the outstanding capital stock of Transwave Optics Apparatus (Shanghai) Co. Ltd. ("Transwave Shanghai") had been transferred to Transwave and Transwave Shanghai had received an acknowledgement from the Shanghai Foreign Investment Commission confirming that all of the outstanding shares of Transwave Shanghai had been fully paid for, and

    Transwave had obtained a new business license that reflects the ownership of Transwave Shanghai's capital stock by Transwave.

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

    our representations and warranties set forth in the Transwave Reorganization Agreement were true and correct on November 21, 2000 and as of the closing date of the merger,

    we had complied with our obligations under the Transwave Reorganization Agreement and Transwave had received a certificate signed on our behalf by our chief financial officer to that effect,

    Transwave had received written evidence from Finisar that the Transwave Reorganization Agreement had been duly and validly approved by the Board of Directors of Finisar,

    we had signed employment and noncompetition agreements with respect to the specified individuals,

    Transwave had received a legal opinion from our counsel, and

    the agreement covering the Escrow had been signed by Finisar and the escrow agent.

(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:

    any inaccuracy or breach of the covenants, representations or warranties Transwave made in the Transwave Reorganization Agreement,

    any merger expenses incurred by Transwave that exceed the estimate used in calculating the number of shares of our Series A Preferred Stock issued in the merger, or

    any breach of the indemnification provisions of the Transwave Reorganization Agreement or the agreement governing the Escrow.

    However, no member of the Finisar Group may recover:

    any amounts from the Escrow (other than merger expenses exceeding the estimate as discussed above) except to the extent the aggregate amount of all such losses exceeds $50,000, and

    on account of any claim for indemnification made 12 months or more after the closing date of the merger.

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:

    by the mutual consent of Finisar and Transwave,

    by either Finisar or Transwave if the merger was not consummated by April 30, 2001, except that a party could not terminate the agreement if its failure to fulfill its obligations resulted in the failure of the merger to occur,

    by either Finisar or Transwave if a court or other governmental entity had issued a nonappealable final order, decree or ruling or taken any other action having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, unless the party relying on the action had breached its obligations under the agreement to comply with legal requirements for the merger and to obtain necessary consents and approvals for the merger and to refrain from taking action inconsistent with qualification for treatment of the merger as a tax-free reorganization,

    by Finisar if the Board of Directors of Transwave had withdrawn or modified its recommendation of the Transwave Reorganization Agreement or the merger for approval by the

43


      Transwave shareholders in a manner adverse to us or publicly announced or disclosed to any third party its intention to do so, and

    by Finisar or Transwave if there had been a material breach of any representation, warranty, covenant or agreement on the part of the other party that:

    caused a condition to closing of the terminating party not to be satisfied, and

    was not cured within ten business days following the receipt by the breaching party of written notice of the breach from the terminating party.

    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:

    each party would bear its own expenses (including the expense of any financial advisor), and

    confidentiality provisions in the Transwave Reorganization Agreement and the confidentiality and non-competition provisions in a related confidentiality agreement.

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

    extend the time for performing any of the obligations or other acts of the other party;

    waive any inaccuracies in the other's representations and warranties; and

    waive the other's compliance with any of the agreements or conditions in the Transwave Reorganization Agreement.

    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")

45


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 %
   
 
 
 

    Fiscal Year Ended January 30, 2000 Compared to Fiscal Year Ended January 28, 2001.

     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.

    Fiscal Year Ended January 30, 2000 Compared to Fiscal Year Ended January 31, 1999.

     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

49


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

52


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

53


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:

    the expertise of Marlow in its product area,

    the addition of knowledgeable and experienced personnel, and

    the increased diversification of customer base and markets that will be created from the combined company.

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,

54


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:

    carry on its business in the usual, regular and ordinary course, in substantially the same manner as previously conducted,

    pay its debts and taxes when they are due,

    pay or perform its other obligations when they are due (subject to good faith disputes with respect to such obligations), and

    to the extent consistent with its business, use all commercially reasonable efforts consistent with past practices and policies to:

    preserve intact its present business organization,

    keep available the services of its present officers and key employees, and

    preserve its relationships with customers, suppliers, distributors, licensors, licensees and others having business dealings with Marlow.

(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:

    take any action to solicit, initiate, encourage or support any inquiries or proposals that constitute, or could reasonably be expected to lead to, a proposal or offer for a merger, consolidation, business combination, sale of assets, sale of shares of capital stock or similar transaction involving Marlow, other than the merger (any of such inquiries or proposals being a "Marlow Acquisition Proposal"),

    engage in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to, any Marlow Acquisition Proposal, or

56


    agree to, approve or recommend any Marlow Acquisition Proposal.

(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:

    all consents and approvals required for the merger shall have been obtained and all required filings shall have been made,

    there shall be no court order or other legal or regulatory restraint preventing the consummation of the merger or limiting or restricting our conduct or operation of our business or the business of Marlow after the merger, nor shall any proceeding brought by any governmental entity seeking any of the foregoing be pending, nor shall there be any action taken or any law, regulation or order which makes the consummation of the merger illegal,

    we shall have received an opinion from our counsel, and Marlow shall have received an opinion from its counsel, to the effect that the merger will be treated as a tax-free reorganization for federal income tax purposes within the meaning of Section 368(a) of the Internal Revenue Code,

    the Commissioner shall have issued a permit following the Fairness Hearing, and

    our stockholders shall have approved the Charter Amendment.

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

    the representations and warranties of Marlow and its principal shareholder set forth in the Marlow Reorganization Agreement shall be true and correct on February 20, 2001 and as of the closing date of the merger,

    Marlow shall have complied with its obligations under the Marlow Reorganization Agreement and we shall have received a certificate signed on behalf of Marlow by its chief executive officer to that effect,

    we shall have received written evidence from Marlow that the Marlow Reorganization Agreement has been duly and validly approved by Marlow's Board of Directors and shareholders,

    we shall have received all authorizations and permits required by state securities laws for the issuance of shares of our common stock in the merger,

    we shall have received signed noncompetition agreements, employment agreements and a signed consulting agreement from specified individuals, and we have received satisfactory assurance that at least 24 of 27 specified Marlow employees will remain employed by us or the surviving corporation after the merger,

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    we shall have received a legal opinion from counsel to Marlow,

    the agreement covering the Escrow shall have been signed by the representative of Marlow's security holders and the escrow agent,

    we shall have received from each of the affiliates of Marlow an executed affiliate agreement,

    holders of no more than 5% of the outstanding shares of Marlow common stock shall have perfected their dissenters rights,

    Marlow shall have received all consents of third parties required for the merger,

    each of the directors and officers of Marlow shall have resigned as a director and/or officer, as applicable, and

    the vesting schedules of certain outstanding options of Marlow shall have been modified as required by the Marlow Reorganization Agreement.

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

    the representations and warranties of Finisar and Marble set forth in the Marlow Reorganization Agreement shall be true and correct on February 20, 2001 and as of the closing date of the merger,

    Finisar and Marble shall have complied with their obligations under the Marlow Reorganization Agreement and Marlow shall have received a certificate signed on behalf of Finisar and Marble by our chief financial officer to that effect,

    Marlow shall have received written evidence from Finisar and Marble that the Marlow Reorganization Agreement has been duly and validly approved by the Boards of Directors of Finisar and Marble,

    we shall have signed the noncompetition agreements, employment agreements and a consulting agreement with respect to the specified individuals,

    we shall have signed the affiliate agreements with respect to the affiliates of Marlow,

    shares of our common stock to be issued in connection with the merger, including shares to be held in escrow, shall have been approved for quotation on The Nasdaq National Market, subject to official notice of issuance, if such approval is required,

    we shall be in compliance with the provisions of Rule 144(c) of the Securities Act,

    Marlow shall have received a legal opinion from our counsel, and

    the agreement covering the Escrow shall have been signed by Finisar and the escrow agent.

(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:

    any inaccuracy or breach of the covenants, representations or warranties of Marlow or the Principal Shareholder made in the Marlow Reorganization Agreement,

    any merger expenses incurred by Marlow that exceed the estimate used in calculating the number of shares of our common stock to be issued in the merger, or

    any breach of the indemnification provisions of the Marlow Reorganization Agreement or the agreement governing the Escrow.

    However, no member of the Finisar Group may recover:

    any amounts from the Escrow (other than merger expenses exceeding the estimate as discussed above) except to the extent the aggregate amount of all such losses exceeds $250,000, and

    on account of any claim for indemnification made 18 months or more after the closing date of the merger.

    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:

    by the mutual consent of Finisar and Marlow,

    by either Finisar or Marlow if the merger is not consummated by July 31, 2001, except that a party may not terminate the agreement if its failure to fulfill its obligations has resulted in the failure of the merger to occur,

    by either Finisar or Marlow if a court or other governmental entity has issued a nonappealable final order, decree or ruling or taken any other action having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, unless the party relying on the action has breached its obligations under the agreement to comply with legal requirements for the merger and to obtain necessary consents and approvals for the merger and to refrain from taking action inconsistent with qualification for treatment of the merger as a tax-free reorganization,

    by Finisar if the Board of Directors of Marlow has withdrawn or modified its recommendation of the Marlow Reorganization Agreement or the merger for approval by the Marlow shareholders in a manner adverse to us or publicly announced or disclosed to any third party its intention to do so, or if the shareholders of Marlow do not approve the merger or the Marlow Reorganization Agreement,

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    by Marlow if our Board of Directors has withdrawn or modified its recommendation of the Charter Amendment or publicly announced or disclosed to any third party its intention to do so, or if the Charter Amendment is not approved at the Annual Meeting,

    by Marlow if the average closing sale price of our common stock for the ten consecutive trading days ending one business day prior to the closing date is less than $16.00 per share, or

    by Finisar or Marlow if there has been a material breach of any representation, warranty, covenant or agreement on the part of the other party that:

    causes a condition to closing of the terminating party not to be satisfied, and

    is not cured within fifteen business days following the receipt by the breaching party of written notice of the breach from the terminating party.

    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:

    each party will bear its own expenses (including the expense of any financial advisor), and

    confidentiality and non-solicitation provisions in the Marlow Reorganization Agreement and a related confidentiality 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:

    extend the time for performing any of the obligations or other acts of the other party;

    waive any inaccuracies in the other's representations and warranties; and

    waive the other's compliance with any of the agreements or conditions in the Marlow Reorganization Agreement.

    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)

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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  
   
 
 
 
 
 
 
 

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  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.

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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  
   
     
 

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    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.

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    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
   

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    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.

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    (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
   

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    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.

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    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.

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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:

    retaining existing customers of each company,

    retaining and integrating management and other key employees of each company,

    coordinating research and development activities to enhance introduction of new products and technologies,

    integrating purchasing and procurement operations in multiple locations,

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    combining product offerings and product lines effectively and quickly,

    integrating sales and marketing efforts so that customers can understand and do business easily with the combined company,

    coordinating manufacturing operations in a rapid and efficient manner, and

    transitioning all facilities to common accounting and information technology systems.

    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 impairment of relationships with employees, customers, and suppliers,

    the potential disruption of the combined company's ongoing business and distraction of its management,

    delay in introducing new product offerings by the combined company, and

    unanticipated expenses related to integration of the companies.

    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:

    our ability to timely develop new products and integrate the products and sales efforts of the combined company,

    the risk that our customers or the customers of any one or more of the Acquired Companies may defer purchasing decisions,

    the risk that it may be more difficult to retain key management, marketing, and technical personnel after the acquisitions, and

    competitive conditions and cyclicality in the market.

    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.

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     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:

    the consideration given to the holders of shares of stock of each of the Acquired Companies in exchange for the stock of the Acquired Companies,

    the consideration given in exchange for outstanding options to purchase common stock of the Acquired Companies and the warrants of Shomiti that we assumed, and

    the amount of direct transaction costs.

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:

    write-downs of goodwill and other purchased intangibles, and

    asset write-offs associated with manufacturing and facility consolidations.

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.

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     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:

    some of our costs related to the proposed acquisition, such as legal, accounting and financial advisor fees, must be paid even if the proposed acquisition is not completed, and

    there may be substantial disruption to our businesses and distraction of our workforce and management team.

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.

                        By Order of the Board of Directors

                        LOGO

                        Stephen K. Workman
                        Secretary

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