U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

 

FOR THE TRANSITION PERIOD FROM                   TO                  

Commission File Number   333-63656  

 

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

YES o    NO ý

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

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

 

 

 

 

CORNERSTONE REALTY FUND, LLC

(a California Limited Liability Company)

 

CONDENSED BALANCE 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 notes are an integral part of these financial statements.

 

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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 accompanying notes are an integral part of these financial statements.

 

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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 accompanying notes are an integral part of these financial statements.

 

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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 notes are an integral part of these financial statements.

 

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NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

 

 

1. Organization and Business

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

The Fund has been dependent on the managing member providing capital contributions and advances in order for it to meet its obligations as they have come due. The managing member intends to continue providing such capital contributions and advances until the proceeds from the Fund’s public offering are sufficient for the Fund to meet its obligations as they come due.  During December 2001, the Fund raised the minimum offering requirement of 6,000 units.  As of July 31, 2002, the Fund has issued 12,997 units primarily to new unitholders for gross offering proceeds of $6,498,500.

 

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

 

2. Summary of Significant Accounting Policies

Interim Financial Information

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

For further information, refer to the audited financial statements and footnotes thereto included in the Fund’s Annual Report on Form 10-K for the year ended December 31, 2001.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Actual results could differ materially from the estimates in the near term.

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Office Equipment

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

Income Tax Matters

It is the intent of the Fund and its members that the Fund be treated as a partnership for income tax purposes.  As a limited liability company, the Fund is subject to certain minimal taxes and fees; however, income taxes on the income or losses realized by the Fund are generally the obligation of the members.

Reclassifications

Certain reclassifications have been made to the 2001 financial statement account balances to conform to the 2002 presentation.

3. Deferred Offering Costs Advanced by Managing Member

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

 

 

Specific incremental costs incurred in connection with the offering of membership units are advanced by the managing member. These advances bear simple interest at the prevailing prime commercial lending rate (4.75% at June 30, 2002) plus two percentage points. Reimbursement of such offering costs is limited to 4% of the gross 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 offering proceeds.  Any offering costs incurred by the managing member on behalf of the Fund that are not reimbursed by the Fund will be reflected as a capital contribution to the Fund by the managing member, with an offsetting expense recognized in the Fund’s statement of operations.  Through June 30, 2002, the Fund has received

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

4. Related Party Transactions

In order to fund its initial operating costs, the Fund has received unsecured advances, including accrued interest, from CIP.  Through June 30, 2002, the Fund repaid $343,135 of these unsecured advances.  The advances bear simple interest at the prevailing prime commercial lending rate plus two percentage points.

 

 

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

 

 

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

Liquidity

As of July 31, 2002, the Fund has received $6,498,500 of gross proceeds from the sale of membership units, which have been registered for sale under the Securities Act of 1933, as amended, and under various state securities laws.  Prior to the closing of the sale of the minimum offering of 6,000 units in December 2001, the Fund’s organizational activities were financed through advances from the managing member.  A portion of those advances has been reimbursed from the proceeds received by the Fund from the offering.  The Fund will continue to incur organizational and offering expenses until it has completed the sales of its membership units.

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

The Fund will not reimburse the managing member for any amounts advanced for organizational expenses which exceed the amounts and percentages set forth in the prospectus for the offering.  Any such expenses incurred by the managing member on behalf of the Fund, that are not reimbursed by the Fund, will be reflected as a capital contribution to the Fund by the managing member with an offsetting expense recognized in the Fund’s statement of operations.

Capital Resources

The Fund intends to use the net proceeds from the sale of its units to acquire multi-tenant industrial properties and for capital improvement, operating and other reserves.  As of August 9, 2002, the Fund has identified one property which it may purchase.  This property is held in escrow and the managing member is performing due diligence procedures with respect to the proposed purchase of this property.

Results of Operations

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

Forward Looking Statements

The Private Securities Litigation Reform Act provides a “safe harbor” for certain forward-looking statements. Certain matters discussed in this filing could be characterized as forward-looking statements such as statements relating to plans for future expansion, as well as other capital spending, financing sources and effects of regulation and competition. Such forward-looking statements involve important

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risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

The Fund invests its cash and cash equivalents in government backed securities which, by their nature, are not subject to interest rate fluctuations.

 

As of June 30, 2002, the Fund had $108,143 in advances payable to its managing member.  The advances are related to loans from affiliates which, by their nature, are not subject to interest rate fluctuations.

 

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.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, 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 Chief Financial Officer of Cornerstone Ventures, Inc., the managing member of our managing member, Cornerstone Industrial Properties, LLC, required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, accompanied the filing of this report by correspondence to the Securities and Exchange Commission.

 

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