Backdating Options and Mercury Interactive’s 2004 10-K

I’ve been watching the backdating option scandal unfold with the same horror that someone watches a slow motion multi-car pile up (or maybe the space shuttle exploding on takeoff.)  A few folks have been writing interesting stuff and/or have useful links (such as Paul Kedrosky) and it’s been widely covered in several mainstream publications, most notably the Wall Street Journal.

Mercury Interactive – the company that was the first one to have to deal with an investigation into this issue (the first shoe fell with  an 8–K they filed on 11/2/05 announcing the resignation of their CEO, CFO, and General Counsel ) finally filed their restated 2004 10–K this week.  While a careful read of it is instructive for anyone following this issue in general, Jack Ciesielski has a fantastic summary of the major issues up on SeekingAlpha in his post titled Mercury Interactive: Less Murky But No More Forgivable.

One of the important facts is that a number of the restatements will ultimately have a cash impact since they result in underreported withholding taxes.  Several articles that I’ve read that have been dismissive of this issue have asserted that all the charges will be non-cash so this isn’t really a big deal.  I’ve never understood that perspective (I thought we already learned our lessons about cash and non-cash charges in the telecom and dotcom meltdown), but this just guts that argument altogether.

Unfortunately, this car crash is far from over.