<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
[ ] 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 333-76609
-------------
CORNERSTONE REALTY FUND, LLC
--------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 33-0827161
---------------------------------- ---------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) 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 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 X NO
--- ---
As of November 6, 2000, the Company had no units of membership interest
issued and outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
ITEM 1. FINANCIAL STATEMENTS
CORNERSTONE REALTY FUND, LLC
<S> <C>
Condensed Balance Sheets at September 30, 2000 and December 31, 1999....................2
Condensed Statements of Operations for the Three Months
ended September 30, 2000 and September 30, 1999 and the Nine Months
ended September 30, 2000 and September 30, 1999.......................................3
Condensed Statements of Cash Flows for the Nine Months ended September 30, 2000
and September 30, 1999 ...............................................................4
Notes to Condensed Financial Statements ................................................5
CORNERSTONE INDUSTRIAL PROPERTIES, LLC
Condensed Consolidated Balance Sheets at September 30, 2000 and December 31, 1999.......7
Notes to Condensed Consolidated Balance Sheets .........................................8
</TABLE>
1
<PAGE>
CORNERSTONE REALTY FUND, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------------------
(UNAUDITED)
<S> <C> <C>
Cash .................................................................. $ 4,500 $ --
Office equipment, less accumulated depreciation of $1,177 in 2000
and $751 in 1999 ................................................... 1,677 2,103
Deferred offering costs ............................................... 477,641 178,350
--------- ---------
Total assets .......................................................... $ 483,818 $ 180,453
========= =========
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities
Accounts payable ................................................... $ 114,740 $ 5,235
Advances payable to managing member ................................ 663,986 401,988
--------- ---------
778,726 407,223
Members' deficit (100,000 units authorized, none issued or outstanding) (294,908) (226,770)
--------- ---------
Total liabilities and members' deficit ................................ $ 483,818 $ 180,453
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
CORNERSTONE REALTY FUND, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------------------------------------------
<S> <C> <C> <C> <C>
Expenses
General and administrative expenses $ 12,956 $ 15,145 $ 58,933 $ 34,025
Consulting fees to related party ... 2,691 27,517 62,839 60,144
Interest expense on advances payable
to member ........................ 16,931 5,519 35,734 12,696
--------- --------- --------- ---------
Net loss ........................... $ (32,578) $ (48,181) $(157,506) $(106,865)
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CORNERSTONE REALTY FUND, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
----------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net loss .................................................................. $(157,506) $(106,865)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ......................................................... 426 345
Changes in operating assets and liabilities
Accounts payable ............................................ 109,505 (44,692)
--------- ---------
Net cash used in operating activities ..................................... (47,575) (151,212)
--------- ---------
FINANCING ACTIVITIES
Deferred offering costs ................................................... (299,291) (84,256)
Advances from managing member ............................................. 261,998 235,468
Capital contributions ..................................................... 89,368 --
--------- ---------
Net cash provided by financing activities ................................. 52,075 151,212
--------- ---------
Net change in cash ........................................................ 4,500 --
Cash at beginning of period ............................................... -- --
--------- ---------
Cash at end of period ..................................................... $ 4,500 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CORNERSTONE REALTY FUND, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
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"), as the managing
member, and Terry G. Roussel, an individual. The purpose of the Fund is to
acquire, operate and sell multi-tenant industrial properties. The Fund intends
to issue and sell in a public offering equity interests ("units") in the Fund
and to admit the new unitholders as members of the Fund.
The Fund is currently dependent on the managing member providing
capital contributions and advances in order for it to meet its obligations as
they come due. The managing member intends to continue providing such capital
contributions and advances until the initial closing of the Fund's public
offering, at which time management believes the fund will have sufficient cash
to meet its obligations as they come due.
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. BASIS OF PRESENTATION
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 statements. 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 three and nine month periods ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the
audited financial statements at that date, but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
For further information, refer to the financial statements and
footnotes thereto included in Cornerstone Realty Fund's Registration Statement
on Form S-11 filed with the Securities and Exchange Commission on June 14, 2000.
5
<PAGE>
3. RELATED PARTY TRANSACTIONS
In order to fund its initial operating costs, the Fund has received
unsecured advances amounting to $663,986 from CIP through September 30, 2000.
These advances bear simple interest at the prevailing prime commercial lending
rate plus two percentage points. Interest expense totaling $16,931 and $5,519
during the three months ended September 30, 2000 and 1999, respectively, and
$35,734 and $12,696 during the nine months ended September 30, 2000 and 1999,
respectively, was incurred on these advances. The accrued interest incurred
through September 30, 2000 has been added to the advances payable balance. These
advances and accrued interest are expected to be repaid with proceeds from the
planned offering of units. During the nine months ended September 30, 2000,
$84,868 in advances were forgiven and accounted for as a capital contribution to
the Fund.
During the three months ended September 30, 2000 and 1999, $2,691 and
$27,517, respectively, and during the nine months ended September 30, 2000 and
1999, $62,839 and $60,144, respectively, was paid to employees of CIP's managing
member for services related to the planned offering of units.
6
<PAGE>
CORNERSTONE INDUSTRIAL PROPERTIES, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------------------------
(UNAUDITED)
<S> <C> <C>
Current assets
Cash .................................................................. $ 69,501 $ 117,497
Prepaid rent .......................................................... 1,298 --
Marketable equity securities .......................................... 1,130,879 1,034,580
----------- -----------
Total current assets ..................................................... 1,201,678 1,152,077
Office equipment, less accumulated depreciation of $1,280 in 2000 and $751
in 1999 ............................................................... 14,382 2,103
Security deposits ........................................................ 7,848 --
Deferred offering costs .................................................. 674,174 325,774
----------- -----------
Total assets ............................................................. $ 1,898,082 $ 1,479,954
=========== ===========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Accounts payable ...................................................... $ 152,220 $ 10,384
Advances payable to member ............................................ 49,502 45,837
----------- -----------
201,722 56,221
Members' capital ......................................................... 1,815,341 1,533,187
Members' capital contribution note .................................... (118,981) (109,454)
----------- -----------
Members' capital, net ................................................. 1,696,360 1,423,733
----------- -----------
Total liabilities and members' capital ................................... $ 1,898,082 $ 1,479,954
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
CORNERSTONE INDUSTRIAL PROPERTIES, LLC
(A CALIFORNIA LIMITED LIABILITY COMPANY)
NOTES TO CONDENSED CONSOLIDATED BALANCE SHEETS
1. ORGANIZATION AND BUSINESS
Cornerstone Industrial Properties, LLC, a California Limited Liability
Company (the "Company"), was formed on February 5, 1999. The managing member is
Cornerstone Ventures, Inc., a California Corporation ("Ventures"). The purpose
of the Company is to sponsor, organize and serve as the managing member of
Cornerstone Realty Fund, LLC, a California Limited Liability Company ("Fund I"),
and Cornerstone Realty Fund II, LLC, a California Limited Liability Company
("Fund II") (collectively, the "Funds"). The purpose of the Funds is to acquire,
operate and sell multi-tenant industrial properties.
Each member's liability is limited pursuant to the provisions of the
Beverly-Killea Limited Liability Company Act. The term of the Company shall
continue until December 31, 2033, unless terminated sooner pursuant to the
operating agreement.
2. BASIS OF PRESENTATION
INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated balance sheets have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and footnotes and the
instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not disclose all of the information required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation, have been included.
The balance sheet at December 31, 1999 has been derived from the
audited consolidated balance sheet at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
For further information, refer to the financial statements and
footnotes thereto included in Cornerstone Realty Fund's Registration Statement
on Form S-11 filed with the Securities and Exchange Commission on June 14, 2000.
MARKETABLE EQUITY SECURITIES AND MEMBERS' CAPITAL
Marketable equity securities consist of common stock investments.
Marketable equity securities are stated at market value as determined by the
most recently traded price of each security at the balance sheet date. All
marketable securities are defined as trading securities or available-for-sale
securities under the provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES. Management determines the appropriate classification of its
investments in marketable securities at the time of purchase and reevaluates
such determination at each balance sheet date. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and unrealized
8
<PAGE>
2. BASIS OF PRESENTATION (CONTINUED)
MARKETABLE EQUITY SECURITIES AND MEMBERS' CAPITAL (continued)
holding gains and losses are included in earnings. Equity securities not
classified as trading securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported as a separate component of members' capital. The cost
of investments sold is determined on the specific identification or the
first-in, first-out method. As of September 30, 2000 and December 31, 1999, all
marketable equity securities are classified as trading securities and are
carried on the balance sheet at their aggregate fair value. The cost of and
unrealized gain on these securities are $1,003,636 and $127,243, respectively,
at September 30, 2000, and $1,007,600 and $26,980, respectively, at December 31,
1999. The marketable equity securities were contributed to the Company by
certain members as their capital contributions. The purpose of the contributions
was to maintain the Company's net worth as specified in the operating agreement,
as amended. The operating agreement requires that the securities be held in
segregated accounts of the Company ("Special Accounts") apart from other assets
and that the Special Accounts are not to be used by the Company for any purpose
other than to maintain the Company's net worth as specified in the operating
agreement. If any of the assets in the Special Accounts are used to pay Company
expenses or fund any of the Company's investees, the funds withdrawn are to earn
interest at the prevailing prime commercial lending rate plus two percentage
points. Any amounts withdrawn from the Special Accounts, plus interest thereon,
are to be repaid into the Special Accounts prior to any other payments or
distributions to the members. The funds in the Special Accounts are to be
invested at the direction of the contributing members or their designees. In the
event that the aggregate fair market value of the assets held in any Special
Account is less than the initial capital contribution of the contributing
member, then the Manager may require such member to make an additional capital
contribution to the extent of the difference. In the event such member defaults
in making an additional capital contribution, the Company may obtain the
shortfall from a third party and may dilute the defaulting member's equity
ownership percentage as specified in the operating agreement. Any member that
contributed into a Special Account may request a distribution of all of the
balance in the account upon 120 days notice. The Company is obligated to
distribute the balance if it is able to secure an equal amount of replacement
capital from an existing or new member, otherwise, the Company is not obligated
to distribute such balances to the requesting member.
DEFERRED OFFERING COSTS
Specific incremental costs incurred in connection with the offering of
membership units in the Funds are deferred and charged against the gross
proceeds of the related offerings. Deferred costs related to aborted offerings
are expensed in the period the offering is aborted.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY
The fund is in the organizational stage. The fund's organizational
activities have been financed to date through advances from Cornerstone
Industrial Properties, LLC, the fund's managing member. The fund will continue
to incur organizational and offering expenses until it has completed the sale of
the units in the fund's initial public offering. The fund is currently dependent
on its ability to obtain capital contributions and advances in order for it to
meet its obligations as they become due. The managing member believes that it
has sufficient liquid assets available to finance all capital contributions that
will be required to pay for the fund's obligations as they come due prior to the
closing of the minimum offering (see the managing member's balance sheet
included elsewhere in this quarterly report on Form 10-Q). In the event that the
managing member does not have sufficient liquid assets, the terms of its
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.
Provided the fund is able to sell the minimum offering of 6,000 units,
the fund will use the gross offering proceeds received from the sale of units to
pay offering and other organizational expenses and to reimburse the managing
member for amounts advanced for organizational and other expenses. 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. The fund has not identified any properties which
it may purchase and has not made any material commitment for capital
expenditures.
RESULTS OF OPERATIONS
The fund is in the organizational stage and the fund has generated no
revenues. The fund's expenses, including interest on advances, aggregated
$32,578 and $48,181 for the three months ended September 30, 2000 and 1999,
respectively, and aggregated $157,506 and $106,865 for the nine months ended
September 30, 2000 and 1999, respectively. Organizational and other start-up
expenses and associated losses are expected to continue until the organization
of the fund is completed.
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 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
As of September 30, 2000, the fund had $663,986 in unsecured advances
payable to its managing member. These advances have no specified maturity date
and bear interest at the prevailing prime commercial lending rate plus two
percentage points and, accordingly, are subject to interest rate fluctuations.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Inapplicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Inapplicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Inapplicable.
ITEM 5. OTHER INFORMATION.
Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None.
11
<PAGE>
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.
November 13, 2000 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 and
Principal Financial Officer)
12
