Opinion ID: 571326
Heading Depth: 2
Heading Rank: 2

Heading: The NGEN Product Line

Text: 11 As early as 1982 Convergent began finalizing development plans on the successor to the AWS/IWS workstation. Convergent expected the NGEN workstation (short for Next GENeration) to cost approximately half as much as the AWS/IWS with significant improvements in performance. Convergent established target list prices for the NGEN product line in the summer of 1982. It began to negotiate contracts for the sale of NGEN to its OEM customers, including Burroughs, by late 1982. 12 In early 1983, Convergent management became aware of serious pricing and cost problems with the NGEN line. In February, the NGEN project director noted in an internal memorandum that the cost/pricing structure for NGEN would leave the company with no profit! The project director concluded that he did not yet know how to achieve the necessary reductions. He anguished: I need more ideas. In late March, he circulated another internal memo, using a best-case analysis that revealed negative gross margins on sales to Burroughs through 1983. 1 13 In its March 17, 1983 Prospectus, Convergent discussed the introduction of the NGEN line and Convergent's cost objectives: 14 The Company plans to introduce an advanced family of 16-bit workstations which will be software compatible with its existing product line, but which are intended to provide significant performance and price advantages.... Volume shipments of these new products are planned for 1984; consequently, they are not expected to have a significant impact on 1983 revenues.... 15 In addition to its current products, this division is developing an advanced family of 16-bit multifunction workstations which the Company anticipates will be both significantly more powerful and less expensive than existing workstation products. These workstations will be software compatible with the AWS and IWS products. The Company currently expects to introduce and to begin volume shipments of these products in the first half of 1984. While the Company believes that the technical risks in the development of these products are well controlled, the product cost objectives are very aggressive, and there is no assurance that they can be achieved. 16 As it turned out, for most configurations of the NGEN workstation, Convergent failed to achieve positive gross margins until 1984. 17 The Prospectus for the August 30, 1983 offering repeated the March Prospectus' admonition that there is no assurance that the aggressive cost objective for these products can be achieved. 18 The August Prospectus did not disclose more detailed internal cost analyses which had been undertaken by Convergent. These cost studies were circulated internally, after the August Prospectus. They reflected that Convergent had made progress in its cost reduction battle, but had not yet attained positive gross margins for most NGEN configurations. A September 16, 1983 memo predicted a gross margin of 8% for all sales of NGEN products during 1984. A draft 1984 business plan presented at a September 22, 1983 board meeting assumed that [c]osts of certain NGEN models would exceed selling prices in at least the first two quarters of 1984. Convergent never disclosed these internal cost projections to the public. 19 Convergent continued in the second half of 1983 and through the first half of 1984 to try to improve its NGEN gross margins. Convergent management averred in affidavits filed in this suit that at all times they held a good faith belief that NGEN gross margins could eventually be made positive. Convergent's business plan adopted in early 1984 anticipated a gross margin of 14.8% in the first quarter of 1984, and a gross margin of 31.4% later in the year. Convergent achieved these projected gross margins during the first half of 1984.