Business Context and Reporting Period
Company: U-Store-It Trust (Cubesmart)
Filing Type: Form 8-K (Current Report)
Date of Report: February 27, 2007
Subject: Non-reliance on previously issued financial statements due to accounting errors and adoption of Staff Accounting Bulletin No. 108 (SAB 108).
Key Financial Metrics and Accounting Adjustments
The filing does not provide current period revenue, profit, or cash flow figures. Instead, it details specific accounting adjustments and misclassifications affecting historical periods:
- Auction Rate Securities (ARS) Misclassification: Approximately $90 million of ARS held at December 31, 2005, were incorrectly classified as cash and cash equivalents. These must be reclassified as marketable securities, with related purchases and sales reclassified as investing activities.
- Accumulated Deficit Adjustment: An increase of approximately $2.5 million to the accumulated deficit as of the beginning of 2006 was required under SAB 108.
- Net Loss Adjustment: A reduction of approximately $0.7 million to the net loss for the six months ended June 30, 2006, was recorded.
- Source of Funds: The ARS were purchased using proceeds from a secondary offering in October 2005, which yielded approximately $378.7 million in net proceeds.
Material Changes Versus Prior Periods
The filing announces a material restatement of financial statements for fiscal years 2004 and 2005, as well as quarterly periods in 2006. Key changes include:
- Balance Sheet: Reclassification of $90 million from cash equivalents to marketable securities.
- Statement of Cash Flows: Reclassification of ARS transactions from operating to investing activities.
- Internal Controls: Management identified a material weakness in internal control over financial reporting as of December 31, 2005, necessitating an amendment to prior conclusions on control effectiveness.
- Impact on Operations: The Company states it does not expect the restatement to have any effect on its results of operations.
Guidance, Outlook, and Risks
Management Commentary: The Audit Committee and management concluded that previously issued financial statements (2005 10-K and 2006 10-Qs) should no longer be relied upon. The Company is in the process of amending and restating these documents.
Risks and Contingencies:
- Preliminary Nature: The assessment of accounting matters is preliminary and subject to change as the 2006 Form 10-K is prepared.
- Future Adjustments: Additional material accounting issues may be identified, potentially resulting in material impairments to assets or further restatements.
- ARS Liquidity Risk: While the risk of auction failure is commercially believed to be remote, ARS do not meet the definition of cash equivalents under SFAS No. 95.
Investor Verification Checklist
- Verify the upcoming amended 2005 Form 10-K and 2006 Form 10-Q filings for the restated balance sheet and cash flow statements.
- Confirm the final quantification of the $2.5 million accumulated deficit adjustment and its impact on historical earnings per share.
- Monitor for any additional material weaknesses in internal controls identified during the ongoing review.
- Review the status of the $90 million ARS holdings and their liquidity in the current market environment.