John Wayne is either genuinely perplexed or--like his
namesake--a pretty convincing actor.
Wayne is senior vice president of Federal Data Corporation,
a Maryland company that specializes in selling computer
systems to the U.S. government.
Now, when you work for a company with $550 million
in revenues, no one expects you to keep track of every
deal. But Wayne seems pretty sure he would remember
if his company negotiated to buy computer systems worth
eight figures from Beaverton-based Sequent Computer
Systems Inc.
Sequent documents obtained by WW show that on
March 31, Sequent shipped a large order destined for
Federal Data. We're not talking about tossing a couple
of iMacs on a UPS truck; a Sequent employee says the
shipment filled two 48-foot semi trailers and was worth
$15 million to $20 million.
Wayne's name appears on the shipping documents, as
does a purchase-order number, suggesting that a sale
was made. But after being contacted by WW, Wayne,
who has done business with Sequent for six years, has
reviewed his records and says he didn't know anything
about the deal."To my knowledge, we've had nothing to
do with this," he says.
The Federal Data shipment, according to Sequent employees,
never left Oregon. From Sequent's Beaverton headquarters,
it went to a Portland warehouse operated by a company
named Jet Delivery Service and was returned to Sequent
on April 20--unopened.
Sequent officials attribute the curious chain of events
to aggressive salesmanship on their end and poor communication
on the part of Federal Data. Their explanation might
settle the matter--if the timing of the order weren't
so crucial. Instead, the transaction raises several
questions about Oregon's second-largest homegrown high-tech
company, questions that have caught the attention of
federal regulators.
The Federal Data shipment left Sequent's premises on
the last day of the company's first quarter. Quarterly
results are crucial on Wall Street; companies that miss
analysts' expectations by even a penny per share can
see their stock price plunge.
Before being bought by IBM last month, Sequent endured
a rough year, which included a $60 million write-off,
disappointing earnings and nearly continuous takeover
rumors.
The timing of the Federal Data transaction raises questions
about whether the struggling company may have resorted
to desperate tactics, shipping machines that customers
hadn't ordered.
Sequent spokesman Mike Fay insists the company did
nothing improper but admits the shipping document may
create confusion. "It's not hard to understand how it
would be taken the wrong way," he says.
Fay says Sequent had considered making Federal Data
its primary distributor in Washington, D.C., and thought
it was going to book a big sale to Federal. "In anticipation
of getting an order, we pre-built it," says Joe Moye,
Sequent's top salesman, of the shipment.
Although Federal Data hadn't finalized an order, Moye
says he authorized shipment while working closely with
a Federal Data executive named Charles Mathews. When
contacted by WW, however, Mathews declined to
confirm Moye's version of events.
Mathews and Wayne may simply be reluctant to comment
publicly on their business arrangements. But there's
another possible explanation for their reticence. WW
has learned that the Los Angeles office of the Securities
and Exchange Commission is conducting a preliminary
inquiry into how Sequent accounted for unconsummated
sales. (The SEC is merely asking questions at this point,
which is far less serious than a formal investigation.)
Shipping product that hasn't been ordered could carry
with it significant implications, depending on how it's
accounted for. If Sequent artificially inflated sales
by shipping bogus orders--and there's no proof the company
did so--the ploy would make Sequent more attractive
to Wall Street analysts, investors and prospective suitors.
According to Sequent's accounting policies, as outlined
in the company's annual report, "Revenue from product
sales is generally recognized upon shipment," although
it doesn't have to be. That means that as soon a computer
clears the loading dock, the company can record the
shipment as a sale, even if it is later returned and
has to be taken off the books.
Both Moye and Fay adamantly deny that Sequent ever
counted the Federal Data shipment as revenue. Moye does
say that Sequent periodically ships material that hasn't
been sold, hoping that it will "clean up" and become
a firm sale. "Right, wrong or indifferent," he says,
"it was common practice."
Analyst Larry Woods, who edits The Technology Review
in Stoney Creek, Ontario, says shipping unsold material
raises red flags. "It's not standard," says Woods. "It's
done in the industry, but it's a very bad practice."
Ray Johnson, an accounting professor at Portland State
University, agrees. Returned orders complicate a company's
inventory, he says, and reduce cash flow.
One Sequent employee, who requested anonymity, says
shipments are returned to Sequent unopened regularly
and often take the same form as the Federal Data order.
Rather than being configured to customer specifications,
the employee says, such orders are put together based
on dollar value--workers are told to throw together
miscellaneous parts worth $5 million, for example, and
ship them. Orders of this type only occur at the end
of a fiscal quarter, says the employee, and have raised
questions among workers.
Fay says employees involved in manufacturing and shipping
orders may not understand the company's sales practices.
He has no idea why Federal Data won't acknowledge they
were negotiating with Sequent but says that doesn't
mean Sequent did anything wrong. Moye, who was ultimately
responsible for the shipment, agrees. "I don't think
this is anything less than completely legitimate," he
says.
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Willamette Week | originally
published August 18,
1999
