Personal Finance > Investing
The Enron story is nothing new
graphic February 4, 2002: 6:43 p.m. ET

Silicon Valley firms have been playing the off-balance sheet game for years.
By Adam Lashinsky
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SAN FRANCISCO (CNN/Money) - Long before Enron and off-balance-sheet accounting became part of the financial lexicon of average American investors, creative accounting was an accepted way of doing business in Silicon Valley. A small, perfectly legal and completely finished piece of financial engineering executed between 1998 and 2000 by Intuit illustrates that technology companies have long been willing to use accounting tactics to tell the stories they want told.

Intuit is one of the Valley's great success stories. Once an acquisition target by Microsoft (the Feds put the kibosh on the deal on antitrust grounds), Intuit has succeeded in Microsoft's shadow by having better products (its Quicken and TurboTax software are consumer staples) and deftly exploiting the Web without giving away its prized products to consumers.

So it was something of a surprise when Intuit quietly created a joint venture called Venture Finance Software Corp. back in 1998. Intuit contributed technology to the venture, which aimed at creating "certain Web-oriented finance products," according to securities filings, and in return received a 49 percent stake.

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    The venture's investors were Morgan Stanley (one of Intuit's investment banks), Kleiner Perkins Caufield & Byers (whose famous partner, John Doerr, has been on Intuit's board since 1990), and an unnamed third investor. The venture existed for a little more than two years, and in that time, non-Intuit investors pumped $54.5 million into it.

    Intuit never talked much about VFSC. Its unspoken purpose was to enable Intuit to develop products without incurring development expenses that would hurt its bottom line. The venture minimized Intuit's risk and presumably helped it smooth out its earnings. It also gave away to outside investors -- essentially friends of the house -- value that rightfully belonged to Intuit shareholders.

    The venture ended up having little impact on Intuit's bottom line, but oh how the privileged few associated with it prospered. In August 2000, Intuit bought out the 51 percent it didn't own for $119 million in cash, a more than 100 percent return for the non-Intuit investors.

    One former Intuit employee, then-chief technology officer Eric Dunn, did rather well too. According to Intuit's securities filings, Dunn was paid $5.7 million for his equity position in VFSC, of which he was president. If this sounds similar to the financial stake Enron chief financial officer Andrew Fastow had in certain Enron partnerships, it should. Dunn essentially was being paid almost $6 million for doing his job -- helping Intuit develop new products.

    The story didn't end there, however. Intuit eventually took an impairment charge of $51 million associated with VFSC, meaning nearly half of what it paid its joint venture partners ended up being useless. It ultimately sold some of the technology it "acquired" from its own joint venture to Princeton eCom, a privately-held electronic payments company.

    As a result of that "sale," Intuit recorded a pre-tax loss of $16.9 million (as well as a related tax benefit of $6.4 million). As of July 31, 2001, its investment in Princeton eCom was worth $27 million, though Intuit warned that "there can be no guarantee that we will ultimately realize the value" associated with selling its technology to Princeton eCom. Indeed, in its most recent SEC filing, Intuit reduced the "fair value" of the investment to zero.

    To review, rather than use its own cash to develop a promising product, Intuit sold technology to outside investors, richly rewarded those investors (as well as one of its own employees) for their trouble and ended up writing off much of the value of the enterprise.

    Some day we may go back to looking at revenues, expenses and profits. We're not there yet.

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