WOLF POPPER LLP
ROBERT C. FINKEL
845 Third Avenue
New York, NY 10022
Telephone: 212/759-4600

LAX & NOLL
ROBERT LAX
JEROME NOLL
551 Fifth Avenue
New York, NY 10176
Telephone: 212/818-9150

Attorneys for Plaintiff
 

1. This is an action on behalf of those who purchased or otherwise acquired Harmonic Inc. ("Harmonic" or the "Company") common stock between 3/27/00 and 6/26/00 (the "Class Period") against Harmonic and certain of its executive officers for violation of the federal securities laws.

2. Harmonic designs, manufactures and markets digital and fiber optic systems for delivering video, voice and data services over cable, satellite, telephone and wireless networks. The Company's solutions enable cable television and other network operators to provide a range of broadcast and interactive broadband services that include high-speed Internet access, telephony and video on demand.

3. Defendants' false and misleading statements concerning the revenues to be derived from Harmonic's largest customer, AT&T, and from its newly acquired C-Cube division (DiviCom), which would result in 2000 EPS of $1.19+, artificially inflated the price of Harmonic stock to a Class Period high of $102. This upsurge in Harmonic's stock caused by defendants' false and misleading statements enabled Harmonic to complete the $1.7 billion acquisition of the C-Cube's DiviCom business. After the acquisition was completed, on 6/26/00, Harmonic revealed that it was in fact suffering a huge drop in revenues and exposed the problems Harmonic had been experiencing during the Class Period in attempting to grow its business. This announcement caused its stock price to drop to as low as $22-11/16 on record volume of 21.9 million shares on 6/27/00 causing hundreds of millions of dollars in damages to members of the Class.

4. (a) The claims asserted herein arise under §§10(b) and 20(a) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. §§78j(b) and 78t(a), and Rule 10b-5. Jurisdiction is conferred by §27 of the 1934 Act, 15 U.S.C. §78aa. Venue is proper here pursuant to §27 of the 1934 Act. Acts and transactions giving rise to the violations of law complained of occurred here.

(b) Assignment of this action to the San Jose Division is appropriate as a substantial part of the acts or omissions identified herein occurred in Santa Clara County.

5. Plaintiff Bradley Hale purchased shares of Harmonic common stock as described in the attached certification and was damaged thereby.

6. Defendant Harmonic maintains its headquarters at Sunnyvale, CA. During the Class Period, Harmonic's common stock traded in an efficient market on the NASDAQ National Market System.

7. (a) Defendant Anthony J. Ley ("Ley") was, during the Class Period, President, Chief Executive Officer and Chairman of the Board of the Company.

(b) Defendant Robin N. Dickson ("Dickson") was, during the Class Period, Chief Financial Officer of the Company.

(c) Defendant Michael Yost ("Yost") was, during the Class Period, Vice President, Operations of the Company. Yost filed to sell 30,000 shares of his Harmonic stock during the Class Period for estimated proceeds of $1.1 million from his insider trading activity.

8. The individuals named in ¶7(a)-(c) are the "Individual Defendants." They are liable for the false statements pleaded herein at ¶¶20 and 26, as those statements were each "group-published" information for which they were collectively responsible. The Individual Defendants, by reason of their stock ownership and positions with Harmonic, were controlling persons of Harmonic. Harmonic controlled each of the Individual Defendants. These controlling persons are liable under §20(a) of the 1934 Act.

Scheme

9. Each defendant is liable for making false statements or for failing to disclose adverse facts and for participating in a fraudulent scheme which operated as a fraud or deceit on purchasers of Harmonic stock.

Knowledge

10. The Individual Defendants are each top executives of Harmonic. They ran Harmonic as "hands-on" managers, dealing with important issues facing Harmonic's business, i.e., its relationship with its largest customer, AT&T, the amount of Harmonic inventory on hand at AT&T, the integration of DiviCom, Harmonic's market share position, and the growth of the fiber-optic segment of the cable TV market upon which Harmonic's business depended.

11. A key factor in Harmonic's competitive position was its ability to offer several types of solutions for delivering video, voice and data over cable and telephone networks. DiviCom provided Harmonic with the ability to sell digital video encoders and remultiplexers to its traditional cable customers. Defendants closely monitored the acquisition and DiviCom's success in selling its products prior to the merger. The defendants also monitored AT&T's inventory and AT&T's use of Harmonic's products. As a result of the Individual Defendants' monitoring, each defendant was aware that Harmonic would be unable to continue to ship such large amounts of product to AT&T in 2000 as it had in 1999. Defendants knew that once AT&T sales were cut (which they knew prior to 3/27/00) future earnings estimates would be unattainable.

12. The Individual Defendants closely monitored the performance of Harmonic's business via reports which Harmonic's Finance Department (under Dickson) generated on a weekly and monthly basis. There were "order reports" and "backlog reports" that summarized orders, dollar volume and product type.

Motive and Opportunity

13. In addition to having actual knowledge of the falsity of their statements, each of the defendants had the motive and the opportunity to perpetrate the fraudulent scheme and course of business described herein. During the Class Period, defendants were attempting to complete the acquisition of the DiviCom division of C-Cube Microsystems, Inc. Because this acquisition was to be completed using Harmonic stock as currency, it was imperative that Harmonic maintain a higher share price so that (1) the acquisition would be completed, which would be accretive to Harmonic's future earnings, and (2) the acquisition could be made using fewer Harmonic shares thereby making the acquisition as anti-dilutive to Harmonic's EPS as possible.

14. Harmonic designs, manufactures and markets digital and fiber optic systems for delivering video, voice and data services over cable, satellite, telephone and wireless networks. The Company's solutions enable cable television and other network operators to provide a range of broadcast and interactive broadband services that include high-speed Internet access, telephony and video on demand.

15. On 10/27/99, the Company entered into an Agreement and Plan of Merger and Reorganization with C-Cube Microsystems, Inc. ("C-Cube"), pursuant to which C-Cube would merge into Harmonic (the "Merger Agreement"). Under the terms of the Merger Agreement, C-Cube would sell or spin-off to its shareholders all of the assets and liabilities of its semiconductor business prior to closing. C-Cube would then merge into Harmonic and, as a result, Harmonic would acquire C-Cube's DiviCom business. The DiviCom business designs, manufactures and sells products and systems that enable companies to deliver digital video, audio and data over a variety of networks including satellite, wireless, telephone and cable. The merger was structured as a tax-free exchange of stock and accounted for under the purchase method of accounting. In the merger, each share of common stock of C-Cube would be converted into the right to receive .5427 shares of Harmonic common stock. Approximately 25.7 million shares of Harmonic common stock would be issued and the purchase price, including acquisition-related costs, was expected to be approximately $1.7 billion. The consummation of the merger was subject to a number of conditions, including Harmonic and C-Cube shareholder approval, the prior disposition of C-Cube's semiconductor business and regulatory approvals. The shareholder meetings were scheduled to be held on 4/24/00. Defendants knew that if Harmonic's shares dropped prior to the shareholder vote or otherwise appeared to be subject to great selling pressure prior to the vote, C-Cube's shareholders would not endorse the merger.

16. In the 4thQ 99, Harmonic benefitted from excessive shipments to AT&T which allowed Harmonic to report very favorable results. Thus, on 1/19/00, Harmonic issued a press release which stated:

For the fourth quarter of 1999, Harmonic reported net sales of $63.3 million, up 134% from $27.1 million for the fourth quarter of 1998. Net income for the fourth quarter of 1999 was $10.8 million or $0.33 per diluted share on 33,074,000 shares outstanding, compared to net income of $628,000 or $0.02 per diluted share on 25,250,000 shares outstanding for the same period of the previous year.

* * *

"This was a great year for Harmonic," said Anthony J. Ley, Chairman, President and Chief Executive Officer. "We are very pleased with our growth in sales and profitability, and our continued development and roll out of exciting new systems. Backed by stronger financial resources and subscriber demand for bandwidth, cable operators continued to upgrade their networks to offer video-on-demand, high-speed Internet access, telephony and other advanced services."

"In 2000, we intend to continue to develop advanced fiber optic and digital systems, expand our worldwide sales and marketing effort, and complete the acquisition and integration of DiviCom. The combination with DiviCom will double the size of our company and allow us to offer more complete solutions for cable operators, as well as expand our penetration into telecommunications, satellite, wireless and other emerging broadband markets. We expect that combining DiviCom's strengths in digital compression and our strengths in fiber optics will significantly enhance Harmonic's position in the broadband market."

18. On or about 3/27/00, top management of Harmonic, including Ley and Dickson, met with analysts in Cannes, France to discuss the acquisition of DiviCom and the Company's prospects. Defendants knew that Harmonic was experiencing declining sales to AT&T due to its excessive shipments of product to AT&T in the prior quarter. With AT&T's bloated inventory and grim prospects for Harmonic's business, defendants knew that their planned acquisition of DiviCom was at grave risk - unless they could convince the public that its business prospects remained strong. Based on this meeting and statements made by Ley and Dickson, S.G. Cowen analyst Blaine Carroll issued a report on Harmonic repeating Ley and Dickson's statements. Ley and Dickson made these statements with the intent that they would be repeated to shareholders. The report rated Harmonic a Strong Buy, forecast 2000 EPS of $.95 and stated:

STRONG TRENDS CONFIRMED AT SG COWEN CONFERENCE - At the 6th Annual SG Cowen Global Tech Conference being held in Cannes, France, management of HLIT once again expressed that the strong business trends that it has experienced over the past year are continuing. The company is seeing strong demand from traditional operators (AT&T, Cox, Charter) as well as from new operators, such as RCN (remember that in early January, RCN increased its CapX for 2000 by 44%). We believe that the business with AT&T remains at healthy levels ($20-25MM), and that its sales as a percentage of sales will be in the high-30% range, a lower percentage versus previous quarters, which should ease investor's concerns regarding HLIT's dependence on AT&T. Additionally, we believe that the mini-node (i.e., Lightwire) architecture that AT&T is trialing in Salt Lake City is now ready to be deployed in other major markets with more typical network builds in AT&T's smaller markets. Interestingly, a number of larger MSOs that have been very vocal regarding the near-completion of their network upgrade (i.e., 80% complete by EOY) are now circling back to HLIT for additional bandwidth enabling solutions (transmitters, DWDM) as they begin to add enhanced services to their networks. They are realizing that the network is not as robust as originally engineered, a trend that will extend the current upgrade cycle in the U.S. HLIT has shipped DWDM products to over 17 customers, although AT&T is the only MSO that has actively deployed the technology. The interest in DWDM solutions is building.

DIVICOM ACQUISITION PROGRESSING - SEC REVIEW COMPLETE, SHOULD CLOSE IN MAY - HLIT's planned acquisition of the Divicom division of C-Cube is progressing, although at a slower rate than originally expected. One of the major hurdles was waiting for SEC comments regarding both C-Cube's spin of its semiconductor business as well as HLIT's previous acquisition of NewMedia. However, all comments have been received and met and the deal is now ready to proceed with shareholder meetings at both companies scheduled for late-April and an expected close scheduled for early May. We view this deal as positive as Divicom's digital encoding technology compliments HLIT's existing product lines. Divicom's products groom the video signal prior to transmission along HLIT's traditional product offerings.

20. On 4/19/00, Harmonic announced its 1stQ 00 results in a press release which stated:

Harmonic Inc. today announced its results for the quarter ended March 31, 2000.

For the first quarter of 2000, Harmonic reported net sales of $62.9 million, up 108% from $30.3 million for the first quarter of 1999. Net income for the first quarter of 2000 was $9.3 million or $0.28 per diluted share on 33,391,000 shares outstanding, compared to net income of $1.3 million or $0.05 per diluted share on 26,692,000 shares outstanding for the same period of 1999.

For the quarter, Harmonic had strong year-over-year growth for its fiber optic and digital products across its worldwide customer base. Domestic sales increased 141% and international sales increased 62% from the first quarter of 1999.

While AT&T continued to be the Company's largest single customer, Harmonic's shipments to other domestic and international cable operators grew strongly during the quarter. The Company shipped its METROLink DWDM product to several new customers, and saw good growth in its sales of optical node and return-path products. In addition, Harmonic continues to work with AT&T and others to explore a variety of new deep fiber network architectures that enable greater bandwidth, higher reliability and better access to advanced services.

* * *

"We are very pleased with our sales and profitability in the first quarter, which is historically our weakest quarter," said Anthony J. Ley, Chairman, President and Chief Executive Officer. "Cable operators continued to upgrade their networks to offer video-on-demand, high-speed Internet access, telephony and other advanced services. As the number of subscribers has grown, we are encouraged that our customers increasingly see our nodes and other fiber optic systems as a fast, flexible and economical way to scale up their networks."

22. Subsequent to the release of its 1stQ 00 results, on 4/19/00, Harmonic held a conference call for analysts, money and portfolio managers, institutional investors and large Harmonic shareholders to discuss Harmonic's 1stQ 00 results, its business and its prospects. During the call, and in follow-up one-on-one conversations with analysts, Ley and Dickson made the following statements with the intent that they would be repeated:

o The strong results were driven by strength in Harmonic's core fiber optic transport business.

o The Company had shipped its new MetroLink product in the quarter and the product was being evaluated by many new customers.

o The Company's CyberStream products were also experiencing strong growth.

o The Cable TV network was upgrading its facilities which was leading to enormous growth opportunities for Harmonic.

o International markets continued to show improvement and would contribute to favorable results going forward.

o Sales to AT&T continued to be strong and demand from AT&T would continue as AT&T upgraded its cable infrastructure requiring more MetroLink DWDM and PowerBlazer optical nodes.

o AT&T was planning to use Harmonic's Mux-nodes in additional cities in 2000 which would lead to increased sales to AT&T.

o A pickup in sales to AT&T during 2000 appeared likely.

o Harmonic was on track to report 2000 EPS of $1.19-$1.20 and 2ndQ 00 EPS of $0.29+.

24. On 4/27/00, Harmonic senior management, including Ley and Dickson, appeared in New York and met with analysts to discuss the Company's business and prospects. The statements made by Ley and Dickson in this meeting were repeated to the market in analyst reports. In response to these positive statements, investors bid up the price of Harmonic's shares to $79 on the same day.

25. On 4/28/00, Josephthal & Co. issued a report on Harmonic written by Harris repeating Ley and Dickson's statements. These statements were made by Ley and Dickson with the intent that they would be repeated to investors. The report forecasted 2ndQ 00 and 2000 EPS of $0.29 and $1.20, respectively, and stated:

The senior management of Harmonic delivered a confident presentation to analysts in New York on April 27. Our 12-month price objective is $135 per share, over a 60% premium to current levels.

Last fall, AT&T conducted a trial on its fiber-rich LightWire architecture last fall in Salt Lake City. AT&T selected two vendors to supply for both the multiplexing node and mini-node portions of the trials. Harmonic, along with C-COR.net (CCBL-$38 1/8-Buy,a,m), supplied the multiplexing nodes. C-COR and the Broadband Communications division of Motorola (MOT-$116 ½-Hold) were the mini-node vendors.

At the analyst meeting on April 27, Harmonic disclosed that production of mini-nodes will be commencing in the near future and it expects that its mini-node design will be approved by AT&T. ANTEC (ANTC-$52 3/8-Buy,#) and Scientific-Atlanta (SFA-$62 9/16-Buy) have also indicated that they will target the mini-node market. Given that mini-nodes will serve clusters of 50 to 100 homes apiece, mini-node sales could exceed the sale of multiplexing nodes by a factor of ten. Therefore, we believe that the market could support several vendors if the LightWire architecture proves to be popular.

Harmonic's non-AT&T customers have also expressed an interest in the mini-node concept, but are interested in somewhat designs than that which is expected to be approved by AT&T.

Harmonic indicated that it learned several lessons as a result of the trials in Salt Lake City. The company's new nodes will cost less and will feature improved reliability when compared with first generation models. The return path portion of the node will be redesigned. Finally, the mechanical aspects of the node will be changed, including how fibers are handled.

Adding mini-nodes to a cable network should mean increased sales of Harmonic-supplied return transmitters.

With respect to the forthcoming acquisition of DiviCom, Harmonic expects that the deal will be closed during the week of May 1. The transaction is expected to be neutral to slightly accretive to Harmonic's earnings per share, before consideration of goodwill. Goodwill will be significant. Harmonic is paying for DiviCom with approximately 26 million shares of stock. Once the transaction is closed, Harmonic will have close to 60 million shares outstanding. The company does not anticipate that analyst estimates will change significantly.

DiviCom's revenues in fiscal 1999 were almost $185 million. DiviCom's gross margins have been about 500 basis points higher than Harmonic's, but R&D has also been higher as a percentage of revenues. DiviCom's operating margins have been in the high teen's.

In the future, Harmonic will report its results in two separate product lines - fiber optics and digital. The digital product line will encompass DiviCom, Harmonic's existing TRANsend headend product line, and the current CyberStream date over satellite products.

At the analyst meeting, Harmonic emphasized the synergistic aspects of the merger with DiviCom, which will marry TRANsend's SONET/IP interfaces, QAM modulation, video on demand gateway, with DiviCom's encoding, ATM interface, and statistical multiplexing capabilities. After the transaction closes, Harmonic will then be able to offer a completed headend solution to its customers.

Harmonic Inc. (Nasdaq:HLIT) announced that it has completed its acquisition of the DiviCom business of C-Cube Microsystems Inc. today. This acquisition was effected through the merger of Harmonic with C-Cube Microsystems after the spin off of C-Cube Microsystems' semiconductor business yesterday. Harmonic, including the DiviCom business, will provide open-systems solutions for delivering video, voice and data over cable, satellite, telco and wireless networks.

* * *

"Harmonic is strongly positioned to enable broadband communications over any network," said Anthony Ley, Harmonic's Chairman, President and Chief Executive Officer. "We are now offering the most advanced fiber optic, digital video, and IP data delivery solutions available in the market...."

28. On 5/4/00, S.G. Cowen issued a report on Harmonic written by Carroll based on Carroll's conversations with Harmonic management, including Ley and Dickson. The report forecasted a 40% growth rate, 2ndQ 00 and 2000 EPS of $0.29 and $1.20, respectively, and stated:

HLIT CLOSES DIVICOM ACQUISITION - HLIT announced last night that it has completed its acquisition of the Divicom business of C-Cube Microsystems (CUBE) for $1.9B in stock (based on HLIT's close of $72 on 5/3), or roughly 8X estimated 2000 revenue. Under terms of the agreement, shareholders of CUBE will receive .5427 shares of HLIT stock for each share of C-Cube. Divicom is a leading provider of standards-based MPEG-2 encoding products that are used in digital video products. Its revenues are derived from satellite customers (40% of revenue) such as DirecTV and EchoStar, terrestrial cable customers (20%) such as Telia and NTL in Europe and Time Warner and MediOne in the U.S., telco customers (USW, GTE) for both overbuild and MMDS systems and broadcast customers (20%).

... Management has stated in the past that the assumed revenue growth rate for DiviCom is somewhere between 25-35%. Over the past 2 years, DiviCom's growth rate has accelerated from 20% in 1998 to 30% in 1999. Management's recent comments regarding the deal is [sic] that it likely will have little to no impact to the cash EPS of HLIT, with the deal being characterized as neutral to accretive by upwards of a nickel. As we stated when the deal was announced, the financial models of the two companies are very similar with DiviCom carrying higher gross margins, but also higher operating expenses. Below, we have outlined what we feel the financial impact of the new HLIT will be based [on] three different growth rates for DiviCom (25%, 30%, 35%) while maintaining our EPS estimates of $1.20 and $1.65 in 2000 and 2001, respectively. Although the inclusion of DiviCom tempers HLIT's revenue growth slightly, we feel that at a blended growth rate of roughly 40% in 2000 and the mid-30% level in 2001 is still compelling.

* * *

We view this deal as positive for a number of reasons. First, DiviCom's digital encoding technology compliments HLIT's existing product lines. The Divicom products groom the video signal prior to transmission, either wired or wireless, by encoding (changing the signal from analog to digital), compressing (packing more channels per given amount of bandwidth) and in some instances, encrypting the video. These tasks are similar, although somewhat more detailed, to the functions performed by HLIT's TranSend product (digital headend equipment). Second, DiviCom expands HLIT's addressable market to include satellite, the international DVB market (international standard for encryption) and the domestic digital market, especially once open cable is available. It is worth noting that a couple of operators (MediaOne, Time Warner and Cablevision) are already developing plans for open cable in certain markets.

MAINTAIN STRONG BUY RATING - We are making no change to our estimates at this time pending better guidance from management regarding the one time write-off, DiviCom growth rates, potential revenue synergies and cost eliminations. However, as we mentioned above, we expect that the financial model will remain compelling and is likely to have little impact on cash EPS. With the strong growth prospects continuing in the CATV area and the company's strong position in the market, we would encourage investors to continue to view HLIT as a core holding in the CATV equipment space. As such, we re-iterate our Strong Buy (1).

30. On 5/9/00, S.G. Cowen issued a report on Harmonic written by Carroll which was based on statements made to Carroll by Harmonic management, including Ley and Dickson. The report stated:

HLIT (Strong Buy) - We had the chance to spend some time with senior management of HLIT and the strong trends that have been experienced over the past several quarters are continuing. The company continues to see strong demand from key cable operators such as RCN, Charter, COX, and Time Warner, to name a few. We walked away with two key points from our meeting. First, the business with AT&T continues to be strong, although below recent levels as AT&T evaluates what technology to deploy in which markets. At issue is how far AT&T drives fiber into its network. The deeper the fiber, the fewer homes per node and more optical nodes needed in the network. This is the Lightwire architecture that AT&T has 'trialed' in Salt Lake City. We feel that AT&T is likely to deploy Lightwire in certain major markets and varying network designs in other markets. In either case, we feel that HLIT is well positioned with AT&T to supply it with optical nodes, as well as optical transmission equipment. Management mentioned that the activity with AT&T is picking up once again and that network designs could be better defined during 2H00. Secondly, the integration of Divicom has begun in earnest. Integration plans range from better utilization of the sales and R&D organizations, to mundane tasks such as implementing a joint IT, phone and e-mail system. We feel the benefits of this acquisition will be combining HLIT's expertise in the CATV industry with Divicom's expertise in content grooming.

We are initiating coverage of Harmonic Inc. with a Buy rating and a price target of $90. We find Harmonic particularly attractive because the company: 1) is a leader in optical networking equipment for cable and access networks, 2) has adopted a new business model that allows 100% focus on its core competence, 3) is now strongly positioned, through its Divicom merger, to deliver next-generation broadband services, including video-on-demand, through cable networks, 4) enjoys a strong presence in high-growth international markets, and 5) has a reputation for timely execution.

The recent decline in the Harmonic stock price has created a buying opportunity. Our target price of $90, based on a 10-year Discounted Cash Flow model that incorporates our secular bullish outlook on the optical networking industry and accounts for Harmonic's leadership position in it, presents the investor with an upside potential of 40%.

* * *

2. Customer base diversifying. One investor concern has been Harmonic's customer concentration. AT&T drove much of the revenue acceleration for the company in fiscal 1999 and continued to be a 28% customer in Q1 of fiscal 2000. But this revenue concentration is changing for the better due to two factors. First is the Divicom merger: the merger has doubled the revenue base of Harmonic without any additional contribution from AT&T, since AT&T is not a Divicom customer. Second, Harmonic's non-AT&T customers continued to accelerate spending on Harmonic products; spending from Charter and RCN, for example, was up 18% sequentially in Q1 of 2000. In addition to the reduced customer concentration, the +20 new customers that Divicom brings to Harmonic will create cross-selling opportunities for both halves of the combined entity.

* * *

4. Divicom merger broadens product line, positions Harmonic to deliver next-generation video services. One of the key themes behind our bullish outlook on the optical equipment and components industry is that demand for next-generation services, including video-on-demand, will ultimately drive demand for the equipment and components industry. While the Divicom merger dilutes Harmonic's optical networking focus from a revenue-by-product-line perspective, we believe that the merger strengthens the company's position as an enabler of next-generation content-on-demand services. Divicom gives Harmonic cutting edge video compression capability, bandwidth management expertise, interactive set-top box control technology, encoders, and powerful system integration capabilities. In our opinion, this nicely complements Harmonic's core focus on enabling high bandwidth services over optical access networks.

"[A]ll is well" in the Tampa service trial as well as their RF amplifier sales. We had lunch with Robin Dixon, CFO of Harmonic (HLIT-Buy) where we chatted regarding the strength in sales from overbuilder such as RCN Corp. (RCNC-Not Rated) and the addition of the recently closed Divicom acquisition. We expect to visit the newly added company shortly and will give a full update then. In addition, the company has its new mini node at AT&T (T-Hold) available for testing and expect news in the coming months.

34. On 5/16/00-5/17/00, Harmonic's stock declined from the $66 range to $54 as DiviCom sales for 1stQ 00 were disappointing. However, Harmonic's stock continued to be artificially inflated as defendants concealed the drop-off in AT&T sales and the lack of meaningful ramp-up of non-AT&T sales.

35. On 5/16/00, Dickson was interviewed on RadioWallStreet.com. about the decline and stated:

I think what we've seen today is clearly a resurgence of some of the investor fear and uncertainty over our DiviCom acquisition. This happened back in October - the end of October - last year when we first announced the acquisition the same thing happened. And I think as we got the message out to the street that the DiviCom business and the Harmonic business in our view have pretty consistent growth rates over time, we allayed a lot of those fears and people began to feel more comfortable with the story. I think what we have today is the result of our filing of our 10Q in which we put some first quarter proforma information. There has been a renewal of fears about growth.

* * *

We've seen 55% growth rates in the conversion systems on a proforma basis that's the digital head end business, and we've seen 45% growth rates over the last few years in the fiber optics business. And while I can't pretend that we can necessarily continue at that rate, we're still very comfortable with growth rates in the 35-40% rate which is what we have been seeing all along with respect to the combined company.

* * *

We've been working very hard on some integration issues to make sure the company gets off to a fast start as we finally completed it in early May. Now, it's very clear that our job is to get back out and reconfirm to investors the story is completely intact but that any rumors to the contrary are unfounded.

* * *

I wouldn't say anything different from six months ago. That the growth story remains unchanged, that the operating model is essentially unchanged, and that the company's balance sheet is stronger than ever. So, I really would not change the story.

In this note we comment on our new model for Harmonic, and outline our valuation thesis. Despite a superior projected growth rate and profit prospects in the peer group, Harmonic now trades on par or at a discount to its comparables. Lingering doubts about the recently acquired DiviCom business are the likely reason. We believe the story will "prove itself" as the new entity reports a good quarter or two out of the box, and we therefore have confidence in our $100 price target which is 46x our 2002 EPS estimate of $2.18. Our model is conservative, in our view, and has upside potential.

HIGHLIGHTS

* We are hereby publishing our long-awaited new model on Harmonic, which given the recently completed (May 3) acquisition of DiviCom warrants special comment. The initial approach we take is to create an income statement which has no historical apples-to-apples comparison as far as the whole income statement is concerned. Such an apples-to-apples comparison, however, is made in a separate revenue breakdown. We believe this presents both an accurate, but yet valuable, presentation of Harmonic's performance given the data which exists at this point.

DIVICOM SALES DISAPPOINTING - As we mentioned yesterday, we were disappointed regarding the lighter than expected revenue growth at Divicom (HLIT's $1.9B acquisition which closed on 5/4) which was released in HLIT's 10-Q on Monday night. Specifically, the sales growth of 3% Y/Y for Divicom's Q1 was far below the expected range of 25-35%, and the recent thinking of 30% per year. Based on our sensitivity analysis on the day the deal closed (see our note of 5/5/00), we surmised that if Divicom was a 30% grower this year, that this would imply that the 'New HLIT' revenue growth would be 40%. However, in light of the weaker than expected results for Q1, we are now projecting that the 'New HLIT', on a proforma basis (remember, under purchase accounting, previous numbers are not restated), will grow it revenue around 33-34%. We feel, after discussing the issues with management, that the shortfall in Q1 was likely due to merger-related disruptions and is not indicative of a cyclical or secular issue within Divicom's business. We are hopeful that with the ongoing rebound in the international market, the upgrade in the U.S. market as DBS providers begin to offer local programming withing local markets and the advent of open cable standards in the U.S. markets, that Divicom will return to the 30% growth rate that it exhibited during 1999.

* * *

SELL-OFF & GROWTH RATES VS. VALUATION MAKE HLIT MORE APPEALING - We continue to be upbeat regarding the upgrade of the CATV industry in the U.S. and the early signs of a rebound in the international markets. Although we feel that there remains some concern regarding the integration of DiviCom into HLIT's business, with the stock currently trading at 33X CY01 EPS of $1.65 and a projected growth rate of 35%, we feel that HLIT represents an attractive investment for investors that are looking for a way to benefit from the strong growth trends in the CATV equipment market. As such, we continue to rate the shares a Strong Buy (1).

39. On 5/22/00, Josephthal & Co. issued a report on Harmonic by Harris based on Harris' conversations with Harmonic's senior management regarding the disclosures in Harmonic's 10-Q and regarding the Company's prospects. The report forecast 2ndQ 00 and 2000 EPS of $0.29 and $1.20, respectively, and stated:

The recent decline in Harmonic's share price has probably created an interesting opportunity for patient investors. We believe that the decline is tied to the overall weakness of the NASDAQ market and high P/E multiple issues, as well as the disclosure in Harmonic's first quarter 10-Q of softer-than-anticipated sales and earnings at the company's recently acquired DiviCom unit. The softness occurred during the March 2000 quarter, prior to Harmonic's acquisition on May 3. There are some signs that the softness has been reversed. Therefore, we are continuing with our EPS estimates of $1.20 and $1.55 for 2000 and 2001, respectively. These estimates translate into earnings growth of over 90% in 2000 and 29% in 2001.

* * *

Given DiviCom's strong results over the past five years, many investors were disappointed with the disclosure in the 10-Q. By our calculation, DiviCom's revenues increased at a compound annual growth rate of 47.5% from 1995 to 1999. In 1999, DiviCom's sales rose by 30% to $185.5 million. In the first quarter of 2000, DiviCom's sales rose by just 3.1% year over year, from $38.2 million to $39.4 million, while net income dropped from $3.2 million to $1.6 million. The closing of the deal took one to two months longer than originally anticipated. Apparently some employees departed during this time, although key management people stayed. In addition, certain project-related sales were not recognized in the March quarter, but are likely to be recognized in the June quarter. Net income was affected not only by the lower revenues, but also by a series of nonrecurring expenses, including payroll and social security taxes.

Harmonic appears confident regarding the post-acquisition outlook. Because DiviCom has historically enjoyed gross margins of close to 50%, we now expect that consolidated gross margins will move from the 47.4% earned in the first quarter of 2000 to the 48% to 49% range. R&D expense is likely to remain 11% to 12% of sales. With the cash infusion of $60 million, interest income is likely to rise by at least $500,000 per quarter. Because of DiviCom's lower tax rate, Harmonic's tax rate is expected to move from 38% in the first quarter to 35% in subsequent quarters. As a result, the current consensus EPS estimate of $1.14 for 2000 appears too low. Furthermore, we expect that Harmonic will be able to exceed the June quarter consensus estimate of $0.28. Our estimate is $0.29, but earnings could be as high as $0.30, well above 1999's results.

41. Based on these statements, on 6/13/00, S.G. Cowen issued a report on Harmonic which continued to forecast 2ndQ 00 and 2000 EPS of $0.29 and $1.22, respectively, and stated:

The strong domestic trends in the CATV industry have propelled HLIT's financial performance over the past several quarters, however, a slight pause at AT&T as it evaluates its network architecture and some risk pertaining to the integration of DiviCom leads us to rate the shares a Long Term Buy (2).

DOWNGRADE RESULTS FROM AT&T SOFTNESS AND INTEGRATION ISSUES - Although we continue to believe that the overall trends in the CATV industry remain strong as cable operators upgrade their networks to offer advanced services, we are downgrading HLIT to a Buy (2). The key issue, which was highlighted yesterday as management presented at an investor conference, is regarding the lack of visibility with AT&T, HLIT's largest customer at 28% of revenue last quarter. Our estimates had implicit in them the assumption that T would begin to increase spending again with HLIT. This does not appear to be occurring just yet as T's rollout of advanced services may not be progressing as quickly as originally anticipated, slowing demand for optical infrastructure. Related to this is T's ongoing evaluation of the appropriate architecture to use in its network buildout. That is, T has been holding much publicized trials in Salt Lake City, testing very small node sizes and the "mini-mux" node architecture. While we believe AT&T is still in favor of smaller node sizes in concept (which benefits HLIT significantly), it also appears that T is still undecided on the exact architecture and may only use the "mini-mux" node architecture in selected cities as it evaluates alternatives. The other issue, which we have previously discussed, is the ongoing challenge of integrating recently acquired Divicom into HLIT.

NO CHANGE TO ESTIMATES, BUT SOME NEAR TERM CAUTION WARRANTED - HLIT is fighting two near term issues now: regaining momentum at AT&T (not necessarily under HLIT control) and successfully integrating Divicom and accelerating its growth rate to the original 30-35% estimate (much more under HLIT control). The combination may easily take a few quarters to work themselves out, forcing investors to worry about each quarter-end. Consequently, we are reducing our rating to a 2. It should be noted that each $5MM in revenue equates to approximately $0.015 and each point of gross margin equates to approximately $0.02/share. Longer term we continue to be upbeat regarding the upgrade of the CATV industry in the U.S. and the early signs of rebound in the international markets, still leaving HLIT an attractive stock for those investors with a longer time horizon, particularly when considering its attractive valuation on even conservative estimates.

Current valuation looks compelling and we encourage patient investors to consider establishing or adding to positions. We institute a new $90 price target, down from $150 to reflect a slightly higher risk profile as the company digests the recent acquisition and changes at AT&T. Although management did not guide lower, we are conservatively lowering our 2Q EPS estimates from $0.29 to $0.27, to reflect a heightened near-term risk/reward profile with respect to Metrolink pricing pressures and a disruption in fiber node sales to AT&T.

Harmonic Inc. (Nasdaq:HLIT) today announced preliminary results for the quarter ending June 30, 2000. The Company expects to report revenue of $74 million to $82 million for the second quarter. Excluding the effects of customary purchase accounting adjustments for such items as amortization of goodwill and other intangibles from the acquisition of the DiviCom division of C-Cube Microsystems Inc., which closed on May 3, 2000, the Company expects earnings per diluted share will range from $0.12 to $0.16 for the quarter.

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Following the acquisition, the Company organized its operations into two product divisions, Broadband Access Networks (BAN) and Convergent Systems (CS), and a Worldwide Sales and Service division. The BAN division designs, manufactures and markets the Company's fiber optic products which are used extensively in hybrid-fiber coax and other broadband networks. The CS division designs, manufactures and markets digital headend systems, including substantially all of the products of the DiviCom business as well as the TRANsend (TM) and CyberStream (TM) product lines. The Worldwide Sales and Services division combines all of the Company's sales and customer service organizations and also includes DiviCom's system integration capability.

The Company anticipates that the BAN division will achieve revenue of $54 million to $58 million, compared to pro forma divisional revenue of $36.4 million in the second quarter of 1999. The BAN division's expected revenue for the second quarter of 2000 reflects reduced sales to AT&T, which have continued to decline from record levels in the third quarter of 1999. AT&T remains a major customer for the BAN division, and sales to BAN's other cable customers are expected to continue to increase in the second quarter from levels in the previous quarter.

45. This is a class action on behalf of purchasers of Harmonic stock between 3/27/00 and 6/26/00, excluding defendants (the "Class"). Excluded from the Class are officers and directors of the Company, as well as their families and families of the defendants. Class members are so numerous that joinder of them is impracticable.

46. Common questions of law and fact predominate and include whether defendants: (i) violated the 1934 Act; (ii) omitted and/or misrepresented material facts; (iii) knew or recklessly disregarded that their statements were false; and (iv) artificially inflated Harmonic's stock price and the extent of and appropriate measure of damages.

47. Plaintiff's claims are typical of those of the Class. Prosecution of individual actions would create a risk of inconsistent adjudications. Plaintiff will adequately protect the interests of the Class. A class action is superior to other available methods for the fair and efficient adjudication of this controversy.

48. The statutory safe harbor provided for forward-looking statements ("FLS") does not apply to the false FLS pleaded. None of the particular oral FLS in Harmonic's conference calls and meetings with analysts were so identified as required. The defendants are liable for the false FLS pleaded because, at the time each FLS was made, the speaker knew the FLS was false and the FLS was authorized and/or approved by an executive officer of Harmonic who knew that the FLS was false. None of the historic or present-tense statements made by defendants were assumptions underlying or relating to any plan, projection or statement of future economic performance, as they were not stated to be such assumptions underlying or relating to any projection or statement of future economic performance when made nor were any of the projections or forecasts made by defendants expressly related to or stated to be dependent on those historic or present-tense statements when made.

49. Defendants violated §10(b) and Rule 10b-5 by:

(a) Employing devices, schemes and artifices to defraud;

(b) Making untrue statements of material facts and omitting to state material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; and

(c) Engaging in acts, practices and a course of business that operated as a fraud or deceit upon the Class in connection with their purchases of Harmonic stock.

50. Class members were damaged. In reliance on the integrity of the market, they paid artificially inflated prices for Harmonic stock.

WHEREFORE, plaintiff prays for judgment as follows: declaring this action to be a proper class action; awarding damages, including interest; and such other equitable/injunctive relief as the Court may deem proper.

Plaintiff demands a trial by jury.
 

DATED: June 29, 2000

MILBERG WEISS BERSHAD  HYNES & LERACH LLP WILLIAM S. LERACH DARREN J. ROBBINS           __________________________ WILLIAM S. LERACH 600 West Broadway, Suite 1800 San Diego, CA 92101 Telephone: 619/231-1058 MILBERG WEISS BERSHAD HYNES & LERACH LLP  PATRICK J. COUGHLIN 100 Pine Street, Suite 2600 San Francisco, CA 94111 Telephone: 415/288-4545 WOLF POPPER LLP ROBERT C. FINKEL 845 Third Avenue New York, NY 10022 Telephone: 212/759-4600 LAX & NOLL ROBERT LAX JEROME NOLL 551 Fifth Avenue New York, NY 10176 Telephone: 212/818-9150 Attorneys for Plaintiff