FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number
0-26218
----------------------------
CNL Income Fund XVI, Ltd.
--------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3198891
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
400 E. South Street
Orlando, Florida 32801
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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
<PAGE>
CONTENTS
Part I Page
Item 1. Financial Statements:
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Partners' Capital 3
Condensed Statements of Cash Flows 4-5
Notes to Condensed Financial Statements 6-9
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 10-16
Part II
Other Information 17
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
----------------- ------------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance
for loss on land and building $30,418,876 $30,658,994
Net investment in direct financing leases 5,373,527 5,968,812
Investment in joint ventures 1,510,306 771,684
Cash and cash equivalents 1,641,160 1,673,869
Restricted cash -- 627,899
Receivables, less allowance for doubtful
accounts of $51,686 and $879 -- 31,946
Prepaid expenses 22,089 9,293
Organization costs, less accumulated
amortization of $8,050 and $6,550 1,950 3,450
Accrued rental income 1,398,364 1,192,373
----------------- -----------------
$40,366,272 $40,938,320
================= =================
LIABILITIES AND PARTNERS' CAPITAL
Construction costs payable $ $ 53,278
--
Accounts payable 2,927 2,707
Accrued and escrowed real estate
taxes payable 32,363 4,353
Distributions payable 900,000 900,000
Due to related parties 5,178 3,351
Rents paid in advance and deposits 39,871 69,705
----------------- -----------------
Total liabilities 980,339 1,033,394
Partners' capital 39,385,933 39,904,926
----------------- -----------------
$40,366,272 $40,938,320
================= =================
</TABLE>
See accompanying notes to financial statements.
1
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------- -------------- --------------
<S> <C>
Revenues:
Rental income from operating leases $ 854,766 $ 888,575 $ 2,626,090 $ 2,677,179
Adjustment to accrued rental income (433 ) -- (119,505 ) --
Earned income from direct
financing leases 133,949 175,648 469,325 527,794
Interest and other income 10,716 19,767 45,220 58,596
------------ ------------- -------------- --------------
998,998 1,083,990 3,021,130 3,263,569
------------ ------------- -------------- --------------
Expenses:
General operating and administrative 47,302 33,457 121,325 114,516
Professional services 8,320 5,684 26,271 18,996
Management fees to related parties 9,257 9,823 29,073 29,565
Real estate taxes 29,370 -- 30,209 --
State and other taxes 7 25 19,398 20,559
Loss on termination of direct
financing lease 4,471 -- 4,471 --
Depreciation and amortization 144,394 140,916 413,391 422,966
------------ ------------- -------------- --------------
243,121 189,905 644,138 606,602
------------ ------------- -------------- --------------
Income Before Equity in Earnings
of Joint Ventures, Gain on Sale of
Land and Provision for Loss on
Land and Building 755,877 894,085 2,376,992 2,656,967
Equity in Earnings of Joint Ventures 33,458 18,506 98,414 55,126
Gain on Sale of Land -- -- -- 41,148
Provision for Loss on Land and
Building (204,399 ) -- (204,399 ) --
------------ ------------- -------------- --------------
Net Income $ 584,936 $ 912,591 $ 2,271,007 $ 2,753,241
============ ============= ============== ==============
Allocation of Net Income:
General partners $ 7,327 $ 9,125 $ 24,188 $ 27,120
Limited partners 577,609 903,466 2,246,819 2,726,121
------------ ------------- -------------- --------------
$ 584,936 $ 912,591 $ 2,271,007 $ 2,753,241
============ ============= ============== ==============
Net Income Per Limited Partner Unit $ 0.13 $ 0.20 $ 0.50 $ 0.61
============ ============= ============== ==============
Weighted Average Number of Limited
Partner Units Outstanding 4,500,000 4,500,000 4,500,000 4,500,000
============ ============= ============== ==============
</TABLE>
See accompanying notes to financial statements.
2
<PAGE>
CNL INCOME FUND XVI LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
---------------------------- ------------------
<S> <C>
General partners:
Beginning balance $ 99,615 $ 63,423
Net income 24,188 36,192
---------------- ---------------
123,803 99,615
---------------- ---------------
Limited partners:
Beginning balance 39,805,311 39,781,176
Net income 2,246,819 3,624,135
Distributions ($0.62 and
$0.80 per limited partner
unit, respectively) (2,790,000 ) (3,600,000 )
---------------- ---------------
39,262,130 39,805,311
---------------- ---------------
Total partners' capital $39,385,933 $39,904,926
================ ===============
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
--------------- ---------------
<S> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating Activities $ 2,759,611 $ 2,923,755
---------------- ---------------
Cash Flows from Investing Activities:
Proceeds from sale of land and building -- 610,384
Reimbursement from developer of
construction costs 161,648 --
Additions to land and buildings on
operating leases (3,545 ) (23,501 )
Investment in direct financing leases (28,403 ) (29,257 )
Investment in joint ventures (742,404 ) --
Decrease in restricted cash 610,384 --
---------------- ---------------
Net cash provided by (used
in) investing activities (2,320 ) 557,626
---------------- ---------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,790,000 ) (2,700,000 )
---------------- ---------------
Net cash used in financing
activities (2,790,000 ) (2,700,000 )
---------------- ---------------
Net Increase (Decrease) in Cash and Cash
Equivalents (32,709 ) 781,381
Cash and Cash Equivalents at Beginning
of Period 1,673,869 1,546,203
---------------- ---------------
Cash and Cash Equivalents at End of
Period $ 1,641,160 $ 2,327,584
================ ===============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
--------------- ----------------
<S> <C>
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Land and building under operating
lease exchanged for land and
building under operating lease $ 827,789 $ --
=============== ===============
Land and building under direct
financing lease exchanged for
land and building under direct
financing lease $ 761,334 $ --
=============== ===============
Net investment in direct financing
lease reclassified to land and
building on operating lease as a
result of lease termination $ 534,275 $ --
=============== ===============
Distributions declared and unpaid at
end of period $ 900,000 $ 900,000
=============== ===============
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine months Ended September 30, 1998 and 1997
1. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by
generally accepted accounting principles. The financial statements
reflect all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of management, necessary to a fair statement
of the results for the interim periods presented. Operating results for
the quarter and nine months ended September 30, 1998, may not be
indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, included in the
financial statements, have been derived from audited financial
statements as of that date.
These unaudited financial statements should be read in conjunction with
the financial statements and notes thereto included in Form 10-K of CNL
Income Fund XVI, Ltd. (the "Partnership") for the year ended December
31, 1997.
In May 1998, the Financial Accounting Standards Board reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the
Interim Financial Periods." Adoption of this consensus did not have a
material effect on the Partnership's financial position or results of
operations.
2. Land and Building on Operating Leases:
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------- -------------------
<S> <C>
Land $15,378,218 $15,259,455
Buildings 17,094,391 16,836,982
----------------- ----------------
32,472,609 32,096,437
Less accumulated depreciation (1,849,334 ) (1,437,443 )
----------------- ----------------
30,623,275 30,658,994
Less allowance for loss on land
and building (204,399 ) --
----------------- ----------------
$30,418,876 $30,658,994
================= ================
</TABLE>
6
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine months Ended September 30, 1998 and 1997
2. Land and Building on Operating Leases - Continued:
In May 1998, the tenant of the property in Madison, Tennessee exercised
its option under the terms of its lease agreement, to substitute a
replacement property for the existing, non-performing property. In
conjunction therewith, the Partnership exchanged the non-performing
Boston Market property in Madison, Tennessee for a Boston Market
property in Lawrence, Kansas. The lease for the property in Madison,
Tennessee was amended to allow the property in Lawrence, Kansas to
continue under the terms of the original lease. All closing costs were
paid by the tenant. The Partnership accounted for this as a nonmonetary
exchange of similar assets and recorded the acquisition of the property
in Lawrence, Kansas at the net book value of the property in Madison,
Tennessee. No gain or loss was recognized due to this being accounted
for as a nonmonetary exchange of similar assets.
During the nine months ended September 30, 1998, the Partnership
established an allowance for loss on land and building of $204,399,
relating to the property located in Celina, Ohio. The allowance
represents the difference between the carrying value of the property at
September 30, 1998 and the current estimate of net realizable value for
this property.
3. Net Investment in Direct Financing Leases:
In June 1998, the tenant of the property in Chattanooga, Tennessee
exercised its option under the terms of its lease agreement, to
substitute a replacement property for the existing, non-performing
property. In conjunction therewith, the Partnership exchanged the
non-performing Boston Market property in Chattanooga, Tennessee for a
Boston Market property in Indianapolis, Indiana. The lease for the
property in Chattanooga, Tennessee was amended to allow the property in
Indianapolis, Indiana to continue under the terms of the original
lease. All closing costs were paid by the tenant. The Partnership
accounted for this as a nonmonetary exchange of similar assets and
recorded the acquisition of the property in Indianapolis, Indiana at
the net book value of the property in Chattanooga, Tennessee. No gain
or loss was recognized due to this being accounted for as a nonmonetary
exchange of similar assets.
During the quarter and nine months ended September 30, 1998, one of the
Partnership's leases with Long John Silver's, Inc. was rejected in
connection with the tenant filing for bankruptcy. As a result, the
Partnership reclassified the asset from net investment in direct
financing leases to land and buildings on operating leases. In
accordance with Statement of Financial Accounting Standards #13,
"Accounting for Leases," the Partnership recorded the reclassified
asset at the lower of original cost, present fair value, or present
carrying amount, which resulted in a loss on the termination of a
direct financing lease of $4,471 for financial reporting purposes.
7
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine months Ended September 30, 1998 and 1997
4. Investment in Joint Ventures:
In January 1998, the Partnership acquired a 40.42% interest in an IHOP
property in Memphis, Tennessee, as tenants-in-common with affiliates of
the general partners. The Partnership accounts for its investment in
this property using the equity method since the Partnership shares
control with affiliates, and amounts relating to its investment are
included in investment in joint ventures.
In August 1998, the Partnership entered into a joint venture
arrangement, Columbus Joint Venture, with affiliates of the general
partners, to construct and hold one restaurant property. As of
September 30, 1998, the Partnership had contributed $134,507, to
purchase land and pay construction costs relating to the joint venture.
The Partnership has agreed to contribute approximately $182,946 in
additional construction costs to the joint venture. The Partnership
will have an approximate 32 percent interest in the profits and losses
of the joint venture. The Partnership accounts for its investment in
this joint venture under the equity method since the Partnership shares
control with affiliates.
Columbus Joint Venture and the Partnership and affiliates as
tenants-in-common in two separate tenancy-in-common arrangements, each
own and lease one property to operators of national fast-food and
family-style restaurants. The following presents the combined,
condensed financial information for the joint venture and the two
properties held as tenants-in-common with affiliates at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------- -------------------
<S> <C>
Land and buildings on
operating leases, less
accumulated depreciation $2,908,637 $ 941,142
Cash 9,842 8,190
Prepaid expenses 197 29
Accrued rental income 47,907 20,171
Liabilities 90,656 8,163
Partners' capital 2,875,927 961,369
Revenues 211,863 112,744
Net income 175,432 91,575
</TABLE>
The Partnership recognized income totaling $98,414 and $55,126 for the
nine months ended September 30, 1998 and 1997, respectively, from these
properties, $33,458 and $18,506 of which was earned for the quarters
ended September 30, 1998 and 1997, respectively.
8
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
Quarters and Nine months Ended September 30, 1998 and 1997
5. Concentration of Credit Risk:
The following schedule presents total rental and earned income from
individual restaurant chains, each representing more than ten percent
of the Partnership's total rental and earned income (including the
Partnership's share of total rental income from the joint venture and
the properties held as tenants-in-common with affiliates) for at least
one of the nine month periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C>
Denny's $876,194 $873,738
Golden Corral Family
Steakhouse Restaurant 703,784 710,655
Jack in the Box 417,457 417,457
Boston Market 372,579 246,975
</TABLE>
Although the Partnership's properties are geographically diverse
throughout the United States and the Partnership's lessees operate a
variety of restaurant concepts, default by any one of these restaurant
chains could significantly impact the results of operations of the
Partnership. However, the general partners believe that the risk of
such a default is reduced due to the essential or important nature of
these properties for the on-going operations of the lessees.
In October 1998, the tenant of five of the Boston Market properties
(including one property held as tenants-in-common with an affiliate of
the general partners) filed for bankruptcy. If the leases are
eventually rejected, the Partnership anticipates that rental income
relating to these properties will terminate until new tenants for the
properties are located, or until the properties are sold and the
proceeds from such sales are reinvested in additional properties.
However, the general partners do not anticipate that any decrease in
rental income due to lost revenues relating to these properties will
have a material effect on the Partnership's financial position or
results of operations.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CNL Income Fund XVI, Ltd. (the "Partnership") is a Florida limited
partnership that was organized on September 2, 1993, to acquire for cash, either
directly or through joint venture arrangements, both newly constructed and
existing restaurant properties, as well as land upon which restaurants were to
be constructed (the "Properties"), which are leased primarily to operators of
national and regional fast-food and family-style restaurant chains. The leases
are triple-net leases, with the lessee responsible for all repairs and
maintenance, property taxes, insurance and utilities. As of September 30, 1998,
the Partnership owned 44 Properties, which included one Property owned by a
joint venture in which the Partnership is a co-venturer and two Properties owned
with affiliates as tenants-in-common.
Liquidity and Capital Resources
The Partnership's primary source of capital for the nine months ended
September 30, 1998 and 1997, was cash from operations (which includes cash
received from tenants, distributions from joint ventures, and interest and other
income received, less cash paid for expenses). Cash from operations was
$2,759,611 and $2,923,755 for the nine months ended September 30, 1998 and 1997,
respectively. The decrease in cash from operations for the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997, is
primarily a result of changes in income and expenses as described below in
"Results of Operations" and changes in the Partnership's working capital.
Other sources and uses of capital included the following during the
nine months ended September 30, 1998.
In January 1998, the Partnership reinvested approximately $607,900 of
the net sales proceeds it received from the sale, in March 1997, of the Property
in Oviedo, Florida, in a Property located in Memphis, Tennessee, with affiliates
of the general partners as tenants-in-common. In connection therewith, the
Partnership and the affiliates entered into an agreement whereby each
co-venturer will share in the profits and losses of the Property in proportion
to its applicable percentage interest. As of September 30, 1998, the Partnership
owned a 40.42% interest in this Property.
In addition, during the nine months ended September 30, 1998, the
Partnership received approximately $162,000 from the developer of the Property
in Farmington, New Mexico. This represents a reimbursement from the developer
upon final reconciliation of total construction costs to the total construction
costs funded by the Partnership in accordance with the development agreement. In
August 1998, the Partnership reinvested these proceeds in Columbus Joint Venture
as described below.
10
<PAGE>
Liquidity and Capital Resources - Continued
In addition, in August 1998, the Partnership entered into a joint
venture arrangement, Columbus Joint Venture, with affiliates of the general
partners, to construct and hold one restaurant Property. As of September 30,
1998, the Partnership had contributed $134,507 to purchase land and pay for
construction costs relating to the joint venture. When construction is
completed, the Partnership will have an approximate 32 percent interest in the
profits and losses of the joint venture.
Currently, cash reserves and rental income from the Partnership's
Properties are invested in money market accounts or other short-term, highly
liquid investments pending the use of such funds to pay Partnership expenses or
to make distributions to partners. At September 30, 1998, the Partnership had
$1,641,160 invested in such short-term investments, as compared to $1,673,869 at
December 31, 1997. The funds remaining at September 30, 1998, after the payment
of distributions and other liabilities, will be used to meet the Partnership's
working capital and other needs.
Total liabilities of the Partnership, including distributions payable,
decreased to $980,339 at September 30, 1998, from $1,033,394 at December 31,
1997. The decrease was primarily a result of the payment during 1998 of
construction costs accrued for certain Properties at December 31, 1997. The
general partners believe that the Partnership has sufficient cash on hand to
meet its current working capital needs.
Based on cash from operations, and for the nine months ended September
30, 1998, accumulated excess operating reserves, the Partnership declared
distributions to the limited partners of $2,790,000 and $2,700,000 for the nine
months ended September 30, 1998 and 1997, respectively ($900,000 for each of the
quarters ended September 30, 1998 and 1997). This represents distributions of
$0.62 and $0.60 per unit for the nine months ended September 30, 1998 and 1997,
respectively ($0.20 per unit for each of the quarters ended September 30, 1998
and 1997). No distributions were made to the general partners for the quarters
and nine months ended September 30, 1998 and 1997. No amounts distributed to the
limited partners for the nine months ended September 30, 1998 and 1997, are
required to be or have been treated by the Partnership as a return of capital
for purposes of calculating the limited partners' return on their adjusted
capital contributions. The Partnership intends to continue to make distributions
of cash available for distribution to the limited partners on a quarterly basis.
The general partners have been informed by CNL American Properties
Fund, Inc. ("APF"), an affiliate of the general partners, that it intends to
significantly increase its asset base by proposing to acquire affiliates of the
general partners which have similar restaurant property portfolios, including
the Partnership. APF is a real estate investment trust whose primary business is
the ownership of restaurant properties leased on a long-term, "triple-net" basis
to operators of national and regional restaurant chains. Accordingly, the
general partners anticipate that APF will make an offer to acquire the
Partnership in exchange for securities of APF. The general partners have
recently retained financial and legal advisors to assist them in evaluating
11
<PAGE>
Liquidity and Capital Resources - Continued
and negotiating any offer that may be proposed by APF. However, at this time,
APF has made no such offer. In the event that an offer is made, the general
partners will evaluate it and if the general partners believe that the offer is
worth pursuing, the general partners will promptly inform the limited partners.
Any agreement to sell the Partnership would be subject to the approval of the
limited partners in accordance with the terms of the partnership agreement.
The Partnership's investment strategy of acquiring Properties for cash
and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Partnership's operating expenses.
The general partners believe that the leases will continue to generate cash flow
in excess of operating expenses.
The general partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.
Results of Operations
During the nine months ended September 30, 1997, the Partnership owned
and leased 42 wholly owned Properties (including one Property in Oviedo,
Florida, which was sold in March 1997), and during the nine months ended
September 30, 1998, the Partnership owned and leased 43 wholly owned Properties
(including two Properties in Madison and Chattanooga, Tennessee exchanged for
two Properties in Lawrence, Kansas and Indianapolis, Indiana), to operators of
fast-food and family-style restaurant chains. In connection therewith, during
the nine months ended September 30, 1998 and 1997, the Partnership earned
$2,975,910 and $3,204,973, respectively, in rental income from operating leases
(net of adjustments to accrued rental income) and earned income from direct
financing leases from these Properties, $988,282 and $1,064,223 of which was
earned during the quarters ended September 30, 1998 and 1997, respectively. The
decrease in rental and earned income during the quarter and nine months ended
September 30, 1998, as compared to the quarter and nine months ended September
30, 1997, is partially attributable to the fact that in July 1998, the tenant of
the Property in Las Vegas, Nevada ceased restaurant operations and vacated the
Property. As a result, during the nine months ended September 30, 1998, the
Partnership wrote off approximately $77,300 of accrued rental income (non-cash
accounting adjustments relating to the straight-lining of future scheduled rent
increases over the lease term in accordance with generally accepted accounting
principles) relating to this Property. The Partnership also established an
allowance for doubtful accounts during the nine months ended September 30, 1998,
of approximately $47,000 for rental and earned income amounts due from this
tenant due to the fact that collection of such amounts is questionable. The
Partnership will continue to pursue the collection of past due amounts and will
recognize such amounts as income if collected. The general partners are
currently seeking either a new tenant or buyer for this Property. The
Partnership will not recognize any rental and earned income from this Property
until a new tenant for this Property is located or until the Property is sold
and the proceeds from the sale are reinvested in an additional Property.
12
<PAGE>
Results of Operations - Continued
In addition, the decrease in rental and earned income during the
quarter and nine months ended September 30, 1998, is partially attributable to
the fact that in June 1998, the Partnership stopped receiving rental income from
the tenant, Long John Silver's, Inc, which filed for bankruptcy and rejected the
leases relating to two Properties. In addition, during the nine months ended
September 30, 1998, the Partnership wrote off approximately $42,200 of accrued
rental income (non-cash accounting adjustment relating to the straight-lining of
future scheduled rent increases over the lease term in accordance with generally
accepted accounting principles) relating to these two Properties. The general
partners are currently seeking either new tenants or purchasers for these
Properties. The Partnership will not recognize any rental and earned income from
these Properties until new tenants for these Properties are located or until the
Properties are sold and the proceeds from such sales are reinvested in
additional Properties.
In addition, the decrease in rental and earned income during the nine
months ended September 30, 1998, is partially the result of a decrease in rental
income due to the sale of the Property in Oviedo, Florida, in March 1997. The
net sales proceeds were reinvested in a Property in Memphis, Tennessee, with
affiliates of the general partners as tenants-in-common, resulting in an
increase in equity in earnings of joint venture, as described below.
During the nine months ended September 30, 1997, the Partnership also
owned and leased one Property as tenants-in-common with an affiliate of the
general partners and during the nine months ended September 30, 1998, the
Partnership owned and leased one Property indirectly through a joint venture
arrangement and two Properties with affiliates of the general partners as
tenants-in-common. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Partnership earned $98,414 and $55,126,
respectively, attributable to net income earned by these joint ventures, $33,458
and $18,506 of which was earned during the quarters ended September 30, 1998 and
1997, respectively. The increase in net income earned by joint ventures during
the quarter and nine months ended September 30, 1998, as compared to the quarter
and nine months ended September 30, 1997, is primarily attributable to the fact
that in January 1998, the Partnership reinvested the net sales proceeds it
received from the 1997 sale of the Property in Oviedo, Florida, in an IHOP
Property in Memphis, Tennessee, with affiliates of the general partners as
tenants-in-common.
During at least one of the nine months ended September 30, 1998 and
1997, four Restaurant Chains, Denny's, Golden Corral Family Steakhouse
Restaurant, Jack in the Box, and Boston Market, each accounted for more than ten
percent of the Partnership's total rental income (including the Partnership's
share of the rental income from the Properties owned by the unconsolidated joint
venture in which the Partnership is a co-venturer and Properties owned with
affiliates as tenants-in-common). It is anticipated that, based on the minimum
rental payments required by the leases, Denny's, Golden Corral Family Steakhouse
Restaurant and Jack in the Box will continue to contribute more than ten percent
of the Partnership's total rental income during the remainder of 1998 and
subsequent years. Any failure of these restaurant chains could materially affect
the Partnership's income.
13
<PAGE>
Results of Operations - Continued
In October 1998, the tenant of five of the Boston Market Properties
(including one Property held as tenants-in-common with an affiliate of the
general partners) filed for bankruptcy. If the leases are eventually rejected,
the Partnership anticipates that rental income relating to these Properties will
terminate until new tenants or buyers for the Properties are located. However,
the general partners do not anticipate that any decrease in rental income due to
lost revenues relating to these Properties will have a material effect on the
Partnership's financial position or results of operations.
Operating expenses, including depreciation and amortization expense,
were $644,138 and $606,602 for the nine months ended September 30, 1998 and
1997, respectively, $243,121 and $189,905 of which were incurred for the
quarters ended September 30, 1998 and 1997, respectively. The increase in
operating expenses during the quarter and nine months ended September 30, 1998,
as compared to the quarter and nine months ended September 30, 1997, is
partially attributable to the fact that the Partnership accrued insurance and
real estate tax expenses as a result of Long John Silver's, Inc. filing for
bankruptcy and rejecting the leases relating to two Properties in June 1998. The
Partnership will continue to incur certain expenses, such as real estate taxes,
insurance, and maintenance relating to the Properties until new tenants or
purchasers are located. The Partnership is currently seeking either new tenants
or buyers for these Properties.
In addition, the increase in operating expenses during the quarter and
nine months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 1997, is partially attributable to the fact that during the
quarter and nine months ended September 30, 1998, the Partnership recorded
approximately $13,100 in real estate tax expense, due to the fact that in
October 1998, the tenant of five Boston Market Properties (including one
Property held as tenants-in-common with affiliates of the general partners)
filed for bankruptcy, as described above. If the tenant decides to reject the
leases, the Partnership will continue to incur certain expenses, such as real
estate taxes, insurance and maintenance until new tenants or buyers for the
Properties are located. If the tenant does not reject the leases, the
Partnership does not anticipate incurring such expenses in future periods.
As a result of the sale of the Property in Oviedo, Florida, in 1997 the
Partnership recognized a gain for financial reporting purposes of $41,148 during
the nine months ended September 30, 1997. No Properties were sold during the
nine months ended September 30, 1998.
During the quarter and nine months ended September 30, 1998, the
Partnership established an allowance for loss on land and building of $204,399
for financial reporting purposes relating to the Property in Celina, Ohio. The
loss represents the difference between the Property's carrying value at
September 30, 1998 and the current estimate of net realizable value at September
30, 1998 for this Property. No such allowance was established during the quarter
and nine months ended September 30, 1998.
14
<PAGE>
Results of Operations - Continued
In May 1998, the Financial Accounting Standards Board reached a
consensus in EITF 98-9, entitled "Accounting for Contingent Rent in the Interim
Financial Periods." Adoption of the consensus did not have a material effect on
the Partnership's financial position or results of operations.
The Year 2000 problem is the result of information technology systems
and embedded systems (products which are made with microprocessor (computer)
chips such as HVAC systems, physical security systems and elevators) using a
two-digit format, as opposed to four digits, to indicate the year. Such
information technology and embedded systems may be unable to properly recognize
and process date-sensitive information beginning January 1, 2000.
The Partnership does not have any information technology systems.
Affiliates of the general partners provide all services requiring the use of
information technology systems pursuant to a management agreement with the
Partnership. The maintenance of embedded systems, if any, at the Partnership's
properties is the responsibility of the tenants of the properties in accordance
with the terms of the Partnership's leases. The general partners and affiliates
have established a team dedicated to reviewing the internal information
technology systems used in the operation of the Partnership, and the information
technology and embedded systems and the Year 2000 compliance plans of the
Partnership's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of the affiliates of the
general partners consists of a network of personal computers and servers that
were obtained from major suppliers. The affiliates utilize various
administrative and financial software applications on that infrastructure to
perform the business functions of the Partnership. The inability of the general
partners and affiliates to identify and timely correct material Year 2000
deficiencies in the software and/or infrastructure could result in an
interruption in, or failure of, certain of the Partnership's business activities
or operations. Accordingly, the general partners and affiliates have requested
and are evaluating documentation from the suppliers of the affiliates regarding
the Year 2000 compliance of their products that are used in the business
activities or operations of the Partnership. The costs expected to be incurred
by the general partners and affiliates to become Year 2000 compliant will be
incurred by the general partners and affiliates; therefore, these costs will
have no impact on the Partnership's financial position or results of operations.
The Partnership has material third party relationships with its
tenants, financial institutions and transfer agent. The Partnership depends on
its tenants for rents and cash flows, its financial institutions for
availability of cash and its transfer agent to maintain and track investor
information. If any of these third parties are unable to meet their obligations
to the Partnership because of the Year 2000 deficiencies, such a failure may
have a material impact on the Partnership. Accordingly, the general partners
have requested and are evaluating documentation from the Partnership's tenants,
financial institutions, and transfer agent relating to their Year 2000
compliance plans. At this time, the general partners have not yet received
sufficient certifications to be assured that the tenants, financial
institutions, and transfer agent
15
<PAGE>
Results of Operations - Continued
have fully considered and mitigated any potential material impact of the Year
2000 deficiencies. Therefore, the general partners do not, at this time, know of
the potential costs to the Partnership of any adverse impact or effect of any
Year 2000 deficiencies by these third parties.
The general partners currently expect that all year 2000 compliance
testing and any necessary remedial measures on the information technology
systems used in the business activities and operations of the Partnership will
be completed prior to June 30, 1999. Based on the progress the general partners
and affiliates have made in identifying and addressing the Partnership's Year
2000 issues and the plan and timeline to complete the compliance program, the
general partners do not foresee significant risks associated with the
Partnership's Year 2000 compliance at this time. Because the general partners
and affiliates are still evaluating the status of the systems used in business
activities and operations of the Partnership and the systems of the third
parties with which the Partnership conducts its business, the general partners
have not yet developed a comprehensive contingency plan and are unable to
identify "the most reasonably likely worst case scenario" at this time. As the
general partners identify significant risks related to the Partnership's Year
2000 compliance or if the Partnership's Year 2000 compliance program's progress
deviates substantially from the anticipated timeline, the general partners will
develop appropriate contingency plans.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
Item 2. Changes in Securities. 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 - None.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DATED this 11th day of November, 1998.
CNL INCOME FUND XVI, LTD.
By: CNL REALTY CORPORATION
General Partner
By: /s/ James M. Seneff, Jr.
------------------------------
JAMES M. SENEFF, JR.
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Robert A. Bourne
-----------------------------
ROBERT A. BOURNE
President and Treasurer
(Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet of CNL Income Fund XVI, Ltd. at September 30, 1998, and its statement of
income for the nine months then ended and is qualified in its entirety by
reference to the Form 10-Q of CNL Income Fund XVI, Ltd. for the nine months
ended September 30, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 1,641,160
<SECURITIES> 0
<RECEIVABLES> 51,686
<ALLOWANCES> 51,686
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 32,268,210
<DEPRECIATION> 1,849,334
<TOTAL-ASSETS> 40,366,272
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 39,385,933
<TOTAL-LIABILITY-AND-EQUITY> 40,366,272
<SALES> 0
<TOTAL-REVENUES> 3,021,130
<CGS> 0
<TOTAL-COSTS> 644,138
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,271,007
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,271,007
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,271,007
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>Due to the nature of its industry, CNL Income Fund XVI, Ltd. has an
unclassified balance sheet; therefore, no values are shown above for current
assets and current liabilities.
</FN>
</TABLE>
