U-Store-It Trust will restate its 2004 and 2005 financials and delay the filing of its 2006 annual report due to a classification error in its December 2005 balance sheet.
The real estate investment trust, which specializes in self-storage facilities, explained that about $90 million in short-term investments were incorrectly classified as “cash and cash equivalents” rather than as “marketable securities.”
The company stressed that the revision will not affect its 2005 results of operations.
In a statement, an obviously frustrated president and chief executive officer Dean Jernigan said: “It is certainly disappointing to have this management team invest the time and energy on correcting historic misstatements. Particularly in this case, where the item is primarily balance sheet related.” Added Jernigan, “We are fortunate to have a newly assembled finance and accounting team with strong leadership.”
U-Store-It explained that at the end of 2005, prior management invested a portion of the proceeds from an earlier follow-on equity offering into auction-rate securities. Although they have stated maturities longer than three months, auction-rate securities are often priced and traded as short-term investments, according to the company, thanks to the liquidity provided through the auction mechanism that generally resets interest rates every 7 to 35 days.
“The risk of failure of an auction process is commercially believed to be remote,” according to U-Store-It. Nonetheless, the company conceded, auction-rate securities still do not meet the definition of “cash equivalent” under Financial Accounting Standard No. 95, Statement of Cash Flows, and therefore require classification as marketable securities.
FAS 95 has raised concern from other quarters, too. Last summer the Association for Financial Professionals asserted that the lack of clarity in FAS 95 has allowed the Big Four accounting firms, “with no regulatory authority, oversight, or due process,” to unilaterally reinterpret the standard, creating confusion and requiring companies to modify or restate their financials.
For U-Store-It’s part, it continued to invest in auction-rate securities through February 2006, when all the investments were liquidated without realizing any gain or loss, and the proceeds were used to acquire self-storage facilities.
Since the company continued to use the December 31, 2005, cash and cash equivalents balance in its reports for the first three quarters of 2006, U-Store-It added that those reports also should no longer be relied upon.