**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  MARCH 31, 2002**                                                                                 |
|       |   |                                                                                                                               |
| **o**      |   | **TRANSITION REPORT PURSUANT TO  SECTION 13**

**OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                                 |
|       |   |                                                                                                                               |
|       |   | **FOR THE TRANSITION PERIOD FROM                   TO** |

 

**Commission File Number   333-63656  **

**CORNERSTONE REALTY FUND, LLC**(EXACT NAME OF REGISTRANTAS SPECIFIED IN ITS CHARTER)

 

| **California**                     |   | **33-0827161**       |
|------------------------------------|--------|----------------------|
| (State  or other jurisdiction      |   | (IRS  Employer       |
| of  incorporation or organization) |   | Identification  No.) |

 

**4590MACARTHUR BLVD., SUITE 610, NEWPORT BEACH, CALIFORNIA 92660**(ADDRESS OF PRINCIPALEXECUTIVE OFFICES)

 

**949-852-1007**

(ISSUER’STELEPHONE NUMBER)

 

**Not Applicable**(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCELAST 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   NO  ý   

As of April 30,2002, the Company had 9,130 units of membership interest issued andoutstanding.

 

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**PART I -FINANCIAL INFORMATION**

 

 

**Item 1.****                                                          ****Financial Statements**

**CornerstoneRealty Fund, LLC**

Condensed Balance Sheets atMarch 31, 2002 and December 31, 2001

CondensedStatements of Operations for the Three Months  ended March 31, 2002 and March 31,2001

 

CondensedStatements of  Members’ Capital(Deficit) for the Three Months ended  March 31, 2002 and for the year endedDecember 31, 2001

 

CondensedStatements of Cash Flows for the Three Months ended  March 31, 2002 and March 31, 2001

 

Notesto Condensed Financial Statements

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited LiabilityCompany)**

 

**CONDENSED BALANCE SHEETS**

 

 

**ASSETS**

 
|                                                                                  |   | **March 31,  2002** |      | **December  31, 2001** |   |
|---------------------------------------------------------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                                                                  |   | **(Unaudited)**     |      |                   |   |
|                                                                                  |   |                |      |                   |   |
| Cash  and cash equivalents                                                            |   | $                   | 3,275,578 |                   | $      | 2,493,073 |   |
| Office  equipment, less accumulated depreciation of $2,126 in 2002 and $1,984 in 2001 |   | 728                 |      | 870                    |   |
| Total assets                                                                          |   | $                   | 3,276,306 |                   | $      | 2,493,943 |   |

 

**LIABILITIES AND MEMBERS’ CAPITAL**

 
| Accounts  payable                                                                                                                            |   | $         | 42,092    |      | $      | 55,559    |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
| Advances  payable to managing member                                                                                                         |   | 118,264   |      | 265,106   |   |
|                                                                                                                                         |   | 160,356   |      | 320,665   |   |
| Members’ capital (100,000 units authorized, 8,469 units issued and  outstanding in 2002 and 6,186 units issued and outstanding in 2001) |   | 3,115,950 |      | 2,173,278 |   |
| Total liabilities and members’ capital                                                                                                  |   | $         | 3,276,306 |      | $      | 2,493,943 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited LiabilityCompany)**

 

**CONDENSED STATEMENTS OF OPERATIONS(Unaudited)**

 

 
|                                                    |   | **Three  Months Ended**

**March 31,** |    |
|---------------------------------------------------------|--------|----------------------------------------|---------|
|                                                    |   | **2002**                               |    | **2001** |   |
| Interest and dividend income                            |   | $                                      | 11,798  |   | $ | — |   |
| Expenses                                                |   |                                   |    |   |   |
| General and administrative expenses                     |   | $                                      | (32,311 | ) | $ | (1,835 | ) |
| Interest expense on advances payable to managing member |   | (12,794                                | )       | (17,306 | ) |
| Total expenses                                          |   | (45,105                                | )       | (19,141 | ) |
|                                                    |   |                                   |    |   |   |
| Net  loss                                               |   | $                                      | (33,307 | ) | $ | (19,141 | ) |

 

The accompanyingnotes are an integral part of these financial statements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited LiabilityCompany)**

 

**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)           |   | 1,021,639 |      |
| Deferred offering costs repaid to managing member (unaudited) |   | (45,660   | )         |
| Net loss   (unaudited)                              |   | (33,307   | )         |
|                                                          |   |      |      |
| Balance,  March 31, 2002   (unaudited)              |   | $         | 3,115,950 |   |

 

The accompanyingnotes are an integral part of these financial statements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited LiabilityCompany)**

 

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

 

 
|                                                                         |   | **Three  Months Ended**

**March 31,** |      |
|------------------------------------------------------------------------------|--------|----------------------------------------|-----------|
|                                                                         |   | **2002**                               |      | **2001** |   |
| OPERATING ACTIVITIES                                                         |   |                                   |      |   |   |
| Net  loss                                                                    |   | $                                      | (33,307   | ) | $ | (19,141 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |   |                                   |      |   |   |
| Depreciation                                                                 |   | 142                                    |      | 142 |   |
| Changes in operating assets and liabilities  Accounts payable                |   | (4,353                                 | )         | (3,942 | ) |
| Net cash used in operating activities                                        |   | (37,518                                | )         | (22,941 | ) |
|                                                                         |   |                                   |      |   |   |
| FINANCING ACTIVITIES                                                         |   |                                   |      |   |   |
| Advances from managing member                                                |   | 12,795                                 |      | 18,441 |   |
| Repayment of managing member advances                                        |   | (168,751                               | )         | — |   |
| Net proceeds from offering                                                   |   | 1,021,639                              |      | — |   |
| Deferred offering costs repaid to managing member                            |   | (45,660                                | )         | — |   |
| Net  cash provided by financing activities                                   |   | 820,023                                |      | 18,441 |   |
|                                                                         |   |                                   |      |   |   |
| Net change in cash                                                           |   | 782,505                                |      | (4,500 | ) |
|                                                                         |   |                                   |      |   |   |
| Cash at beginning of period                                                  |   | 2,493,073                              |      | 4,500 |   |
|                                                                         |   |                                   |      |   |   |
| Cash  at end of period                                                       |   | $                                      | 3,275,578 |   | $ | — |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited LiabilityCompany)**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)**

 

 

**1.Organization and Business**

CornerstoneRealty Fund, LLC, a California limited liability company (the “Fund”) (formerlyCornerstone Multi-Tenant Industrial Business Parks Fund, LLC and CornerstoneIndustrial Properties Income and Growth Fund I, LLC), was formed onOctober 28, 1998. The members of the Fund are Cornerstone IndustrialProperties, LLC, a California limited liability company (“CIP” or “managingmember”), as the managing member, and Terry G. Roussel, an individual. Thepurpose of the Fund is to acquire, operate and sell multi-tenant industrialproperties. The Fund intends to issue and sell in a public offering equityinterests (“units”) in the Fund and to admit the new unitholders as members ofthe Fund.

The Fund has been dependenton the managing member providing capital contributions and advances in orderfor it to meet its obligations as they have come due. The managing memberintends to continue providing such capital contributions or advances until theproceeds from the Fund’s public offering are sufficient for the Fund to meetits obligations as they come due. During December 2001, the Fund raised the minimum offering requirementof 6,000 units.  As of April 30, 2002,the Fund has issued 9,130 units primarily to new unitholders for gross offeringproceeds of $4,565,000.

 

Each member’s liability islimited pursuant to the provisions of the Beverly-Killea Limited LiabilityCompany Act. The term of the Fund shall continue until December 31, 2010,unless terminated sooner pursuant to the operating agreement.

 

**2. Summary of SignificantAccounting Policies**

## **InterimFinancial Information**

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 three month period ended March 31, 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.

## **Useof 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.

## **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.

 

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## **IncomeTax Matters**

It is the intentof the Fund and its members that the Fund be treated as a partnership forincome tax purposes. As a limited liability company, the Fund is subject tocertain minimal taxes and fees; however, income taxes on the income or lossesrealized by the Fund are generally 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 ManagingMember**

                Deferredoffering costs advanced by the managing member for the three months ended March31, 2002 (unaudited) and for the year ended 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             |   | 43,531                      |    |
| Costs  repaid               |   | (45,660                     | )       |
| Balance,  March 31, 2002    |   | $                           | 498,914 |   |

 

Specificincremental costs incurred in connection with the offering of membership unitsare advanced by the managing member. These advances bear simple interest at the prevailing prime commerciallending rate plus two percentage points. Reimbursement of such offering costs is limited to 4% of the gross proceedsof the related offerings.  Offeringcosts incurred by the managing member in excess of the 4% limitation aredeferred, and will be reimbursed from future offering proceeds.  Any offering costs 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.  Through March 31, 2002, the Fund hasreceived cumulative unsecured advances from CIP of deferred offering costs inthe amount of $668,294.  Through March31, 2002, the Fund repaid CIP $169,380 in deferred offering costs.  At March 31, 2002, unreimbursed deferredoffering costs advanced by CIP totaled $498,914.

**4. Related Party Transactions**

In order to fund itsinitial operating costs, the Fund has received unsecured advances, includingaccrued interest, from CIP.  ThroughMarch 31, 2002, the Fund repaid $322,831 of these unsecured advances.  At March 31, 2002, advances payable to themanaging member were $118,264.  Theseadvances bear simple interest at the prevailing prime commercial lending rateplus two percentage points.

 

During the three monthsended March 31, 2002 and 2001, the managing member provided the Fund withoffice space at no charge.

 

The managing member and/orits affiliates are entitled to receive various fees, compensation andreimbursements as specified in the Fund’s operating agreement, includingcommissions of 9% of the first $3,000,000 of gross proceeds from the offeringof units and 7% thereafter, marketing fees of 2% of gross proceeds 

 

 

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from the offering of units less $60,000, andexpense allowances 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.

 

**Item 2.                                  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

As of April 30, 2002, the fund has received $4,565,000of 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 oradvances until the proceeds from the fund’s public offering are sufficient for thefund to meet its obligations as they come due. If necessary, the terms of the managing member’s operating agreementindicate that its members may be asked to make additional contributions;however, its members are not committed by any contract to make such additionalcontributions 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.

**CapitalResources**.

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. The fund has not identified any properties which it may purchase and hasnot made any material commitment for capital expenditures.  The managing member believes prices formulti-tenant industrial properties will be more favorable within the next sixmonths and the fund will have more money and be able to make better acquisitions.

**Results ofOperations**.

The fund is in the organizational stage and the fundhas generated no operating revenues. The fund’s expenses, including interest on advances, aggregated $45,105for the quarter ended March 31, 2002 and aggregated $19,141 for the quarterended March 31, 2001.  Organizationaland other start-up expenses and associated losses are expected to continueuntil the organization of the fund is completed.  The fund will continue to have losses until rental revenues fromproperties acquired exceed operating and other expenses of the fund.

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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-looking statements involve important risks anduncertainties that could cause actual results to differ materially from thoseexpressed in such forward-looking statements.

**Item 3.                    Quantitative and Qualitative Disclosures AboutMarket Risk**

Thefund invests its cash and cash equivalents in FDIC insured savings accountswhich, by their nature, are not subject to interest rate fluctuations.

Asof March 31, 2002, the fund had $118,264 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.    `               LegalProceedings.**

                                Not applicable.

**Item 2.****          ****                Changesin Securities and Use of Proceeds.**

                                Not applicable.

**Item 3.****          ****                DefaultsUpon Senior Securities.**

                                Not applicable.

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

                                Not applicable.

**Item 5.****          ****                OtherInformation.**

                                Notapplicable.

**Item 6.****          ****                Exhibitsand Reports on Form 8–K.**

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

                                None.

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

                                None.

 

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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.
| June 4, 2002 |   | CORNERSTONE REALTY FUND,  LLC |
|--------------|--------|-------------------------------|
|         |   |                          |
|         |   | By:                           | CORNERSTONE INDUSTRIAL  PARTNERS, 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) |
|              |        |                               |  |  |  |  |  |  |

 

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