** **

**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C.  20549**

**FORM 10-Q**

| **(Mark  One)**                                  |                                                                                          |
|--------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                             |                                                                                          |
| ý                                           | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934** |
|                                             |                                                                                          |
| **FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002** |
|                                             |
| o                                                | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF  1934** |
|                                             |                                                                                          |

 

**FOR THE TRANSITION PERIOD FROM                   TO                  **

**CommissionFile Number   333-63656  **

| **CORNERSTONE REALTY FUND, LLC**                                                    |
|-------------------------------------------------------------------------------------|
| (EXACT  NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)                             |
|                                                                                |
| **California**                                                                      |   | **33-0827161** |
| (State or other  jurisdiction  of incorporation or organization)                    |   | (IRS Employer  Identification No.) |
|                                                                                |   |   |
| **4590 MACARTHUR BLVD., SUITE 610, NEWPORT BEACH, CALIFORNIA  92660**               |
| (ADDRESS  OF PRINCIPAL EXECUTIVE OFFICES)                                           |
|                                                                                |
| **949-852-1007**                                                                    |
| (ISSUER’S  TELEPHONE NUMBER)                                                   |
|                                                                                |
| **Not  Applicable**                                                                 |
| (FORMER  NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT) |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act of 1934during the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

YES o    NOý

As of July 31,2002, the Fund had 12,997 units of membership interest issued and outstanding.

 

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**PART I - FINANCIAL INFORMATION**

 
| **Item  1.**                                                                                                                              | **Financial  Statements** |
|-------------------------------------------------------------------------------------------------------------------------------------------|---------------------------|
|                                                                                                                                      |
| **Cornerstone  Realty Fund, LLC**                                                                                                         |
|                                                                                                                                      |
| Condensed Balance Sheets at  June 30, 2002 and December 31, 2001                                                                          |
|                                                                                                                                      |
| Condensed  Statements of Operations for the Three Months and Six Months ended June 30,  2002 and June 30, 2001                            |
|                                                                                                                                      |
| Condensed  Statements of Members’ Capital (Deficit) for the Six Months ended June 30,  2002 and for the year ended December 31, 2001 |
|                                                                                                                                      |
| Condensed  Statements of Cash Flows for the Six Months ended June 30, 2002 and June 30,  2001                                             |
|                                                                                                                                      |
| Notes  to Condensed Financial Statements                                                                                                  |

 

 

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**CORNERSTONE REALTY FUND****, LLC**

**(a California Limited Liability Company)**

 

**CONDENSEDBALANCE SHEETS**

 

**ASSETS**

 
|                                                                                                                                           |   | **June 30,  2002** |      | **December  31,  2001** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|-------------------------|--------|
|                                                                                                                                           |   | **(Unaudited)**    |      |                    |   |
|                                                                                                                                           |   |               |      |                    |   |
| Cash and cash  equivalents                                                                                                                     |   | $                  | 4,808,012 |                    | $      | 2,493,073 |   |
| Office  equipment, less accumulated depreciation of $2,268 in 2002 and $1,984 in 2001                                                          |   | 586                |      | 870                     |   |
| Total assets                                                                                                                                   |   | $                  | 4,808,598 |                    | $      | 2,493,943 |   |
|                                                                                                                                           |   |               |      |                    |   |
| **LIABILITIES  AND MEMBERS’ CAPITAL**                                                                                                     |
|                                                                                                                                           |   |               |      |                    |   |
| Accounts payable                                                                                                                               |   | $                  | 22,204    |                    | $      | 55,559 |   |
| Advances payable  to managing member                                                                                                           |   | 108,143            |      | 265,106                 |   |
|                                                                                                                                           |   | 130,347            |      | 320,665                 |   |
| Members’ capital  (100,000 units authorized, 12,300 units issued and outstanding in 2002 and  6,186 units issued and outstanding in 2001) |   | 4,678,251          |      | 2,173,278               |   |
| Total  liabilities and members’ deficit                                                                                                   |   | $                  | 4,808,598 |                    | $      | 2,493,943 |   |

 

The accompanying notesare an integral part of these financial statements.

 

F-1

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**CONDENSED STATEMENTS OF OPERATIONS (Unaudited)**

 

 
|                                                     |   | **Three  Months Ended  June 30,** |    | **Six Months  Ended  June 30,** |   |
|----------------------------------------------------------|--------|-----------------------------------|---------|---------------------------------|--------|
|                                                     |   | **2002**                          |    | **2001**                        |   | **2002** |   | **2001** |   |
|                                                     |   |                              |    |                            |   |   |   |   |   |
| Interest and  dividend income                            |   | $                                 | 14,622  |                            | $      | — |   | $ | 26,420 |   | $ | — |   |
| Expenses                                                 |   |                              |    |                            |   |   |   |   |   |
| General and  administrative expenses                     |   | $                                 | (69,024 | )                               | $      | (12,747 | ) | $ | (101,334 | ) | $ | (14,582 | ) |
| Interest expense  on advances payable to managing member |   | (10,143                           | )       | (16,744                         | )      | (22,938 | ) | (34,050 | ) |
| Total expenses                                           |   | (79,167                           | )       | (29,491                         | )      | (124,272 | ) | (48,632 | ) |
|                                                     |   |                              |    |                            |   |   |   |   |   |
| Net loss                                                 |   | $                                 | (64,545 | )                               | $      | (29,491 | ) | $ | (97,852 | ) | $ | (48,632 | ) |
|                                                     |   |                              |    |                            |   |   |   |   |   |   |   |   |   |
| Net loss  allocable to managing member                   |   | $                                 | (6,454  | )                               | $      | (29,491 | ) | $ | (9,785 | ) | $ | (48,632 | ) |
|                                                     |   |                              |    |                            |   |   |   |   |   |   |   |   |   |
| Net loss  allocable to unitholders                       |   | $                                 | (58,091 | )                               | $      | — |   | $ | (88,067 | ) | $ | — |   |
|                                                     |   |                              |    |                            |   |   |   |   |   |   |   |   |   |
| Per share  amounts:                                      |   |                              |    |                            |   |   |   |   |   |   |   |   |   |
|                                                     |   |                              |    |                            |   |   |   |   |   |   |   |   |   |
| Basic and  diluted loss allocable to unitholders         |   | $                                 | (5.84   | )                               | $      | — |   | $ | (10.33 | ) | $ | — |   |
|                                                     |   |                              |    |                            |   |   |   |   |   |   |   |   |   |
| Basic and  diluted weighted average units outstanding    |   |                              | 9,945   |                            |   | — |   |   | 8,527 |   |   | — |   |

 

 

The accompanyingnotes are an integral part of these financial statements.

 

F-2

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**CONDENSED STATEMENTS OF MEMBERS’ CAPITAL (DEFICIT)**

 

 

 
| Balance,  December 31, 2000                                    |   | $         | (337,188  | )      |
|----------------------------------------------------------------|--------|-----------|-----------|--------|
| Capital  contributions                                         |   | 56,532    |      |
| Net proceeds  from offering                                    |   | 2,768,602 |      |
| Deferred  offering costs repaid to managing member             |   | (123,720  | )         |
| Distributions to  unitholders                                  |   | (4,868    | )         |
| Net loss                                                       |   | (186,080  | )         |
|                                                           |   |      |      |
| Balance,  December 31, 2001                                    |   | $         | 2,173,278 |   |
| Net proceeds  from offering (unaudited)                        |   | 2,744,369 |      |
| Deferred  offering costs repaid to managing member (unaudited) |   | (120,620  | )         |
| Distributions to  unitholders (unaudited)                      |   | (20,924   | )         |
| Net loss  (unaudited)                                          |   | (97,852   | )         |
|                                                           |   |      |      |
| Balance, June  30, 2002 (unaudited)                            |   | $         | 4,678,251 |   |

 

 

The accompanyingnotes are an integral part of these financial statements.

 

F-3

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**CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)**

 

 
|                                                                         |   | **Six Months  Ended** |      |
|------------------------------------------------------------------------------|--------|-----------------------|-----------|
|                                                                         |   | **June 30,**          |      |
|                                                                         |   | **2002**              |      | **2001** |   |
|                                                                         |   |                  |      |   |   |
| OPERATING  ACTIVITIES                                                        |   |                  |      |   |   |
| Net loss                                                                     |   | $                     | (97,852   | ) | $ | (48,632 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                  |      |   |   |
| Depreciation                                                                 |   | 284                   |      | 284 |   |
| Changes in  operating assets and liabilities                                 |   |                  |      |   |   |
| Accounts payable                                                             |   | (33,355               | )         | (123 | )  |
| Net cash used in  operating activities                                       |   | (130,923              | )         | (48,471 | ) |
|                                                                         |   |                  |      |   |   |
| FINANCING  ACTIVITIES                                                        |   |                  |      |   |   |
| Advances from  managing member                                               |   | 32,092                |      | 43,971 |   |
| Repayment of  managing member advances                                       |   | (189,055              | )         | — |   |
| Net proceeds  from offering                                                  |   | 2,744,369             |      | — |   |
| Deferred  offering costs repaid to managing member                           |   | (120,620              | )         | — |   |
| Distributions to  unitholders                                                |   | (20,924               | )         | — |   |
| Net cash  provided by financing activities                                   |   | 2,445,862             |      | 43,971 |   |
|                                                                         |   |                  |      |   |   |
| Net change in  cash                                                          |   | 2,314,939             |      | (4,500 | ) |
|                                                                         |   |                  |      |   |   |
| Cash at  beginning of period                                                 |   | 2,493,073             |      | 4,500 |   |
|                                                                         |   |                  |      |   |   |
| Cash at end of  period                                                       |   | $                     | 4,808,012 |   | $ | — |   |

 

 

The accompanying notesare an integral part of these financial statements.

 

F-4

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**NOTES TOCONDENSED FINANCIAL STATEMENTS (Unaudited)**

** **

 

**1.Organization and Business**

Cornerstone Realty Fund,LLC, a California limited liability company (the “Fund”) (formerly CornerstoneMulti-Tenant Industrial Business Parks Fund, LLC and Cornerstone IndustrialProperties Income and Growth Fund I, LLC), was formed on October 28, 1998.The members of the Fund are Cornerstone Industrial Properties, LLC, aCalifornia limited liability company (“CIP” or “managing member”), as themanaging member, Terry G. Roussel, an individual, and other various unitholdersas described below.  The purpose of theFund is to acquire, operate and sell multi-tenant industrial properties. TheFund currently is issuing and selling in a public offering equity interests(“units”) in the Fund, and is admitting the new unitholders as members of theFund.

The Fund has been dependent on the managing memberproviding capital contributions and advances in order for it to meet itsobligations as they have come due. The managing member intends to continueproviding such capital contributions and advances until the proceeds from theFund’s public offering are sufficient for the Fund to meet its obligations asthey come due.  During December 2001,the Fund raised the minimum offering requirement of 6,000 units.  As of July 31, 2002, the Fund has issued12,997 units primarily to new unitholders for gross offering proceeds of$6,498,500.

 

Each member’s liability is limited pursuant to theprovisions of the Beverly-Killea Limited Liability Company Act. The term of theFund shall continue until December 31, 2010, unless terminated soonerpursuant to the operating agreement.

 

**2. Summary of Significant Accounting Policies**

## *Interim FinancialInformation*

The accompanyingunaudited condensed financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q and Article 10 ofRegulation S-X. Accordingly, they do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statement presentation. In the opinion ofmanagement, all adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation, have been included. Operatingresults for the six month period ended June 30, 2002 are not necessarilyindicative of the results that may be expected for the year ending December 31,2002.

For furtherinformation, refer to the audited financial statements and footnotes theretoincluded in the Fund’s Annual Report on Form 10-K for the year ended December31, 2001.

## *Use of Estimates*

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the financial statements and the reported amount of revenue andexpenses during the reporting period. Actual results could differ materiallyfrom the estimates in the near term.

F-5

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*OfficeEquipment*

Office equipmentis stated at cost. Depreciation is computed on a straight-line basis over theestimated useful lives of the related assets. The estimated useful life of theoffice equipment is five years.

*Income Tax Matters*

It is the intentof the Fund and its members that the Fund be treated as a partnership forincome tax purposes.  As a limitedliability company, the Fund is subject to certain minimal taxes and fees;however, income taxes on the income or losses realized by the Fund aregenerally the obligation of the members.

## *Reclassifications*

Certainreclassifications have been made to the 2001 financial statement accountbalances to conform to the 2002 presentation.

## ***3. Deferred Offering Costs Advanced by Managing Member***

Deferred offering costs advanced by the managingmember for the six months ended June 30, 2002 (unaudited) and for the yearended December 31, 2001 are as follows:

 

|                        |   | **Deferred  Offering Costs** |    |
|-----------------------------|--------|------------------------------|---------|
|                        |   |                         |    |
| Balance,  December 31, 2000 |   | $                            | 399,166 |   |
| Costs advanced              |   | 225,597                      |    |
| Costs repaid                |   | (123,720                     | )       |
|                        |   |                         |    |
| Balance,  December 31, 2001 |   | 501,043                      |    |
| Costs advanced              |   | 69,307                       |    |
| Costs repaid                |   | (120,620                     | )       |
|                        |   |                         |    |
| Balance, June  30, 2002     |   | $                            | 449,730 |   |

 

Specificincremental costs incurred in connection with the offering of membership unitsare advanced by the managing member. These advances bear simple interest at theprevailing prime commercial lending rate (4.75% at June 30, 2002) plus twopercentage points. Reimbursement of such offering costs is limited to 4% of thegross proceeds of the related offerings. Offering costs incurred by the managing member in excess of the 4%limitation are deferred, and will be reimbursed from future offeringproceeds.  Any offering costs incurredby the managing member on behalf of the Fund that are not reimbursed by theFund will be reflected as a capital contribution to the Fund by the managingmember, with an offsetting expense recognized in the Fund’s statement ofoperations.  Through June 30, 2002, theFund has received

F-6

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cumulative unsecuredadvances from CIP of deferred offering costs in the amount of $694,070.  Through June 30, 2002, the Fund has repaidCIP $244,340 in deferred offering costs.

**4. Related Party Transactions**

In order to fund itsinitial operating costs, the Fund has received unsecured advances, includingaccrued interest, from CIP.  ThroughJune 30, 2002, the Fund repaid $343,135 of these unsecured advances.  The advances bear simple interest at theprevailing prime commercial lending rate plus two percentage points.

 

 

The managing member and/or its affiliates are entitledto receive various fees, compensation and reimbursements as specified in theFund’s operating agreement, including commissions of 9% of the first $3,000,000of gross proceeds from the offering of units and 7% thereafter, marketing feesof 2% of gross proceeds from the offering of units less $60,000, and expenseallowances of 1.5% of gross proceeds from the offering of units.  In addition, the Fund is to reimburse CIPfor deferred offering costs advanced by CIP to the Fund in the amount of 4% ofthe gross proceeds from the offering of units. The Fund also reimburses CIP for 100% of initial operating costsadvanced to the Fund.  Deferred offeringand initial operating costs advanced to the Fund by CIP bear interest at theprevailing prime commercial lending rate plus two percentage points.

 

 

F-7

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**Item 2.                                  Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

**Liquidity**

As of July 31, 2002, the Fund has received $6,498,500of gross proceeds from the sale of membership units, which have been registeredfor sale under the Securities Act of 1933, as amended, and under various statesecurities laws.  Prior to the closingof the sale of the minimum offering of 6,000 units in December 2001, the Fund’sorganizational activities were financed through advances from the managingmember.  A portion of those advances hasbeen reimbursed from the proceeds received by the Fund from the offering.  The Fund will continue to incurorganizational and offering expenses until it has completed the sales of itsmembership units.

The Fund has been dependent on the managing memberproviding capital contributions and advances in order for it to meet itsobligations as they have come due.  Themanaging member intends to continue providing such capital contributions andadvances until the proceeds from the Fund’s public offering are sufficient forthe Fund to meet its obligations as they come due.  If necessary, the terms of the managing member’s operatingagreement indicate that its members may be asked to make additionalcontributions; however, its members are not committed by any contract to makesuch additional contributions or provide any other financial assistance.  In the event its members choose not to makesuch additional contributions, its managing member would be entitled to look toa third party to fund any shortfall and may reduce the percentage interest ofits non-contributing members.

The Fund will not reimburse the managing member forany amounts advanced for organizational expenses which exceed the amounts andpercentages set forth in the prospectus for the offering.  Any such expenses incurred by the managingmember on behalf of the Fund, that are not reimbursed by the Fund, will bereflected as a capital contribution to the Fund by the managing member with anoffsetting expense recognized in the Fund’s statement of operations.

**Capital Resources**

The Fund intends to use the net proceeds from the saleof its units to acquire multi-tenant industrial properties and for capitalimprovement, operating and other reserves. As of August 9, 2002, the Fund has identified one property which it maypurchase.  This property is held inescrow and the managing member is performing due diligence procedures withrespect to the proposed purchase of this property.

**Results of Operations**

The Fund is in the organizational stage and the Fundhas generated no operating revenues. The Fund’s expenses, including interest on advances, aggregated $124,272and $48,632 for the six months ended June 30, 2002 and 2001, respectively. Organizational and other start-up expenses andassociated losses are expected to continue until the organization of the Fundis completed.  The Fund will continue tohave losses until rental revenues from properties acquired exceed operating andother expenses of the Fund.

**ForwardLooking Statements**

ThePrivate Securities Litigation Reform Act provides a “safe harbor” for certainforward-looking statements. Certain matters discussed in this filing could becharacterized as forward-looking statements such as statements relating toplans for future expansion, as well as other capital spending, financingsources and effects of regulation and competition. Such forward-lookingstatements involve important

3

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risksand uncertainties that could cause actual results to differ materially fromthose expressed in such forward-looking statements.

**Item 3.    Quantitative and Qualitative Disclosures About Market Risk**

TheFund invests its cash and cash equivalents in government backed securitieswhich, by their nature, are not subject to interest rate fluctuations.

 

Asof June 30, 2002, the Fund had $108,143 in advances payable to its managingmember.  The advances are related toloans from affiliates which, by their nature, are not subject to interest ratefluctuations.

 

**PART II - OTHER INFORMATION**

**Item 1.    Legal Proceedings.**

                Not applicable.

**Item 2.****          ****Changes in Securities and Use of Proceeds****.**

                Not applicable.

**Item 3.****          ****Defaults Upon Senior Securities****.**

                Not applicable.

**Item 4.****          ****Submission of Matters to a Vote of Security Holders****.**

                Not applicable.

**Item 5.****          ****Other Information****.**

                Not applicable.

**Item 6.****          ****Exhibits and Reports on Form 8–K****.**

**(a)****                                 ****Exhibits**

None.

**(b)****                                 ****Reports on Form 8-K**

None.

4

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**SIGNATURES**

In accordance with the requirements of the ExchangeAct, the Registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
| August 14, 2002 | CORNERSTONE REALTY FUND, LLC |
|-----------------|------------------------------|
|            |                         |
|            | By:                          | CORNERSTONE INDUSTRIAL PROPERTIES, LLC |
|            | Its Managing Member          |
|            |                         |
|            | By:                          | CORNERSTONE VENTURES, INC. |
|            | Its Manager                  |
|            |                         |
|            |                         |
|            | By:                          | ­/s/ TERRY G. ROUSSEL |
|            |                         | Terry G. Roussel, President |
|            |                         | (Principal Executive Officer, |
|            |                         | Principal Financial Officer and |
|            |                         | Principal Accounting Officer) |
|                 |                              |  |  |  |  |  |  |

 

The written statements of the Chief Executive Officer and ChiefFinancial Officer of Cornerstone Ventures, Inc., the managing member of ourmanaging member, Cornerstone Industrial Properties, LLC, required pursuant to18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002, accompanied the filing of this report bycorrespondence to the Securities and Exchange Commission.

 

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