Opinion ID: 571326
Heading Depth: 2
Heading Rank: 1

Heading: The AWS/IWS Product Line

Text: 6 In early 1981, Convergent began shipping its first product, a sixteen-bit microprocessor-based workstation, called the IWS. Convergent later developed a lower-cost version called the AWS. In 1982, the AWS/IWS workstation was Convergent's only product. Convergent sold the AWS/IWS product line to Original Equipment Manufacturers (OEMs) such as Burroughs and NCR, who then integrated the products into their own product lines under their own labels. Convergent sold its products pursuant to signed purchase agreements. 7 In September 1981, Convergent and Burroughs entered into a master Corporate Pricing Agreement (the Agreement). The Agreement required Burroughs to buy 10,000 workstations by the end of 1983. In July 1982, Burroughs and Convergent began negotiations regarding future Burroughs' purchases. In a letter dated July 29, 1982, Convergent agreed to reduce prices on its AWS/IWS workstations by 30% in return for Burroughs' firm commitment to buy 30,000 units from Convergent in 1983. Convergent never disclosed this 30,000 unit figure to the public. 8 In December 1982, Convergent and Burroughs began renegotiating the quantity commitment and exploring the possibility of a further price cut. By March 17, 1983, when the class period commenced, Burroughs had bought more than the 10,000 workstations it had committed to buy in the Agreement. Just after that date, Burroughs informed Convergent that it would buy 17,500 AWS workstations, plus all the NGENs (a new product line we discuss in part B) Convergent could make. The parties incorporated these quantities into an amendment to the Agreement. They signed the Amendment in September of 1983. 9 Sometime toward the end of July 1983, Convergent management concluded that AWS/IWS sales growth during the remainder of the year would slow. Convergent disclosed this projection in a press release on August 5, 1983:[N]et sales for the third quarter of 1983 will be approximately equal to [Convergent's] net sales for the second quarter because of customer anticipation of [Convergent's] next generation of products, which are expected to be available for volume shipments in the first half of calendar 1984. Fourth quarter revenues cannot be predicted with certainty, but could be below third quarter revenues. Because of price reduction on existing products and start-up costs associated with three new product lines, the Company anticipates that until volume shipments of its new products begin there will be a decrease in gross profit margin, and may be a substantial decrease in net income. 10 As a result of this press release, the stock price dropped $6.63 a share, nearly 20%.