Star Tech

Economic ups and downs are a fact of life for companies in high-tech industries. Take the case of Star Technologies, Inc., a Virginia-based computer manufacturer incorporated in 1981 that went public in 1984.' In its early years, Star marketed scientific computers or "supercomputers" for highly specialized uses, including military surveillance and petroleum exploration. Star's operating results gyrated wildly, during the 1980s. Exhibit 1 presents Star's key financial data for the five-year period 1985-1989. Notice that in 1985 Star reported a net loss exceeding $8 million on revenues of $21.2 million. The following year's results were even worse. In 1987, Star's revenues vaulted to $44 million, allowing the company to earn an after-tax profit of $7.4 million. Two years later, more bad news. Star's revenues fell to $39 million in 1989, resulting in a loss of $4.4 million.

Like many firms in the highly competitive computer industry, Star found itself trapped in a vicious cycle during the 1980s, a cycle that accounted for the large swings in its operating results. Star's 1989 annual report declared that the company was committed to staying "in the forefront of technological innovation" in the computer industry. Because of this commitment, Star's 1989 R&D expenditures consumed 20 percent of its revenues. Unfortunately, rapid changes in technology within the computer industry rendered many of Star's impressive products obsolete shortly after they were introduced. This short product life cycle forced Star's executives to repeatedly "go back to the drawing board" and incur heavy R&D expenditures. As history later proved, only a few computer manufacturers could prosper under such conditions. Star Technologies was not among those firms.

A Fallen Star

By the end of fiscal 1989 (March 31, 1989), Star faced a financial crisis. Among the company's major products was a computer designed for use in petroleum exploration. Company officials forecasted that Star would sell 29 of the computers during 1989. Because of changes in computer technology and a slowdown in petroleum exploration activities, Star sold only one of these computers during 1989 and had no outstanding sales orders for the product at year-end. Star's poor operating results for 1989 caused the company to violate several covenants of a lending agreement with its principal bank. That bank had extended Star a $5.8 million long-term loan. The debt covenant violations accelerated the maturity date of the loan, making it immediately due and payable at the end of fiscal 1989.

EXHIBIT 1 Selected Financial Data Reported by Star Technologies. Inc., 1985-1989 (000s omitted)

1989 1988 1987 1986 1985