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 June 30, 1999
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OR
( ) 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
0-26218
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CNL Income Fund XVI, Ltd.
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(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Florida 59-3198891
- ------------------------------------------------------ ------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 East South Street
Orlando, Florida 32801
- ------------------------------------------------------ ------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 650-1000
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</TABLE>
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
Condensed Statements of Income
Condensed Statements of Partners' Capital
Condensed Statements of Cash Flows
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Part II
Other Information
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------ -------------------
<S> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on building $ 30,635,221 $ 30,215,549
Net investment in direct financing leases 4,560,540 5,361,848
Investment in joint ventures 1,657,442 1,504,465
Cash and cash equivalents 1,233,857 1,603,589
Receivables, less allowance for doubtful accounts
of $112,153 and $89,822, respectively 88,638 63,214
Prepaid expenses 17,282 13,745
Lease costs, less accumulated amortization
of $333 in 1999 11,476 --
Organization costs, less accumulated amortization
of $10,000 and $8,550, respectively -- 1,450
Accrued rental income 1,593,617 1,424,781
------------------ -------------------
$ 39,798,073 $ 40,188,641
================== ===================
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable $ 85,275 $ 1,816
Accrued construction costs payable 15,000 --
Accrued and escrowed real estate taxes payable 17,515 7,163
Distributions payable 900,000 900,000
Due to related party 30,120 26,476
Rents paid in advance and deposits 46,771 61,262
------------------ -------------------
Total liabilities 1,094,681 996,717
Commitments and Contingencies (Note 4)
Partners' capital 38,703,392 39,191,924
------------------ -------------------
$ 39,798,073 $ 40,188,641
================== ===================
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
------------- ------------- -------------- -------------
<S> <C>
Revenues:
Rental income from operating leases $ 806,415 $ 883,229 $ 1,604,784 $ 1,771,324
Adjustments to accrued rental income -- (119,072 ) -- (119,072 )
Earned income from direct financing
leases 134,016 160,329 267,561 335,376
Interest and other income 11,239 19,743 31,192 34,504
------------- ------------- -------------- -------------
951,670 944,229 1,903,537 2,022,132
------------- ------------- -------------- -------------
Expenses:
General operating and administrative 30,838 41,002 78,457 74,023
Professional services 17,733 8,511 27,060 17,951
Management fees to related party 9,112 9,853 18,113 19,816
Real estate taxes 12,867 839 30,020 839
State and other taxes 1,191 89 24,356 19,391
Depreciation and amortization 148,233 128,081 293,087 268,997
Transaction costs 83,052 -- 116,210 --
------------- ------------- -------------- -------------
303,026 188,375 587,303 401,017
------------- ------------- -------------- -------------
Income Before Equity in Earnings of
Joint Ventures and Provision for
Loss on Building 648,644 755,854 1,316,234 1,621,115
Equity in Earnings of Joint Ventures 41,906 33,522 79,712 64,956
Provision for Loss on Building (84,478 ) -- (84,478 ) --
------------- ------------- -------------- -------------
Net Income $ 606,072 $ 789,376 $ 1,311,468 $ 1,686,071
============= ============= ============== =============
Allocation of Net Income:
General partners $ 6,628 $ 7,894 $ 13,682 $ 16,861
Limited partners 599,444 781,482 1,297,786 1,669,210
------------- ------------- -------------- -------------
$ 606,072 $ 789,376 $ 1,311,468 $ 1,686,071
============= ============= ============== =============
Net Income Per Limited Partner Unit $ 0.13 $ 0.17 $ 0.29 $ 0.37
============= ============= ============== =============
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 condensed financial statements.
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
------------------------- -----------------------
<S> <C>
General partners:
Beginning balance $ 131,300 $ 99,615
Net income 13,682 31,685
----------------- ------------------
144,982 131,300
----------------- ------------------
Limited partners:
Beginning balance 39,060,624 39,805,311
Net income 1,297,786 2,945,313
Distributions ($0.40 and $0.82 per
limited partner unit, respectively) (1,800,000 ) (3,690,000 )
----------------- ------------------
38,558,410 39,060,624
----------------- ------------------
Total partners' capital $38,703,392 $39,191,924
================= ==================
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 1998
---------------- ----------------
<S> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 1,600,589 $ 1,922,221
---------------- ----------------
Cash Flows from Investing Activities:
Reimbursement of construction costs
from developer -- 161,204
Investment in direct financing leases -- (31,504 )
Investment in joint ventures (158,512 ) (607,896 )
Decrease in restricted cash -- 610,384
Payment of lease costs (11,809 ) --
---------------- ----------------
Net cash provided by (used in) investing
activities (170,321 ) 132,188
---------------- ----------------
Cash Flows from Financing Activities:
Distributions to limited partners (1,800,000 ) (1,890,000 )
---------------- ----------------
Net cash used in financing activities (1,800,000 ) (1,890,000 )
---------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents (369,732 ) 164,409
Cash and Cash Equivalents at Beginning of Period 1,603,589 1,673,869
---------------- ----------------
Cash and Cash Equivalents at End of Period $ 1,233,857 $ 1,838,278
================ ================
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Land and building under operating lease exchanged
for land and building under operating lease $ -- $ 779,181
================ ================
Land and building under direct financing lease
exchanged for land and building under direct
financing lease $ -- $ 761,334
================ ================
Construction costs incurred and unpaid at end
of period $ 15,000 $ --
================ ================
Distributions declared and unpaid at end of
period $ 900,000 $ 900,000
================ ================
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
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 six months ended June 30, 1999, may not be indicative
of the results that may be expected for the year ending December 31,
1999. Amounts as of December 31, 1998, 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, 1998.
Effective January 1, 1999, the Partnership adopted Statement of
Position 98-5 "Reporting on the Costs of Start-Up Activities." The
Statement requires that an entity expense the costs of start-up
activities and organization costs as they are incurred. Adoption of
this statement did not have a material effect on the Partnership's
financial position or results of operations.
2. Land and Buildings on Operating Leases:
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------------ ------------------
<S> <C>
Land $ 15,378,217 $ 15,378,217
Buildings 17,826,235 17,045,781
------------------ ------------------
33,204,452 32,423,998
Less accumulated depreciation (2,233,496 ) (1,942,192 )
------------------ ------------------
30,970,956 30,481,806
Construction in progress 15,000 --
------------------ ------------------
30,985,956 30,481,806
Less allowance for loss on building (350,735 ) (266,257 )
------------------ ------------------
$ 30,635,221 $ 30,215,549
================== ==================
</TABLE>
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
2. Land and Buildings on Operating Leases - Continued:
During the six months ended June 30, 1999, the Partnership recorded a
provision for loss on building of $84,478 relating to the Boston Market
property in Lawrence, Kansas. The tenant of this property filed for
bankruptcy and ceased payment of rents under the terms of its lease
agreement. The allowance represents the difference between the carrying
value of the property at June 30, 1999 and the estimated net realizable
value for the property.
3. Investment in Direct Financing Leases:
During the six months ended June 30, 1999, the tenant of the Shoney's
property in Las Vegas, Nevada terminated its lease due to financial
difficulties. 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 No. 13, "Accounting for Leases," the Partnership recorded the
reclassified asset at the lower of original cost, present fair value,
or present carrying amount. No loss on termination of direct financing
leases was recorded for financial reporting purposes.
4. Commitments and Contingencies:
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with CNL American Properties Fund, Inc. ("APF"), pursuant to
which the Partnership would be merged with and into a subsidiary of APF
(the "Merger"). As consideration for the Merger, APF has agreed to
issue 2,160,474 shares of its common stock, par value $0.01 per share
(the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $20.00 per APF Share, the
price paid by APF investors (after an adjustment for a one for two
reverse stock split effective June 3, 1999) in three previous public
offerings, the most recent of which was completed in December 1998. In
order to assist the general partners in evaluating the proposed merger
consideration, the general partners retained Valuation Associates, a
nationally recognized real estate appraisal firm, to appraise the
Partnership's restaurant property portfolio. Based on Valuation
Associates' appraisal, the Partnership's property portfolio and other
assets were
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 1999 and 1998
4. Commitments and Contingencies - Continued:
valued on a going concern basis (meaning the Partnership continues
unchanged) at $42,519,005 as of December 31, 1998. The APF Shares are
expected to be listed for trading on the New York Stock Exchange
concurrently with the consummation of the Merger, and therefore, would
be freely tradable at the option of the former limited partners. At a
special meeting of the partners that is expected to be held in the
fourth quarter of 1999, limited partners holding in excess of 50% of
the Partnership's outstanding limited partnership interests must
approve the Merger prior to consummation of the transaction. If the
limited partners at the special meeting approve the Merger, APF will
own the properties and other assets of the Partnership. The general
partners intend to recommend that the limited partners of the
Partnership approve the Merger. In connection with their
recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject
the Merger, the Partnership will bear the portion of the transaction
costs based upon the percentage of "For" votes and the general partners
will bear the portion of such transaction costs based upon the
percentage of "Against" votes and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in
connection with the proposed Merger. On July 8, 1999, the plaintiffs
amended the complaint to add three additional limited partners as
plaintiffs. Additionally, on June 22, 1999, a limited partner in
certain of the CNL Income Funds served a lawsuit against the general
partners, APF, CNL Fund Advisors, Inc. and certain of its affiliates in
connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend
vigorously against the claims. See Part II - Item 1. Legal Proceedings.
In February 1999, the Partnership entered into a new lease for the
property in Las Vegas, Nevada, with a new tenant to operate the
property as a Big Boy restaurant. In connection with the agreement, the
Partnership has agreed to pay up to $150,000 in renovation costs,
$15,000 of which had been incurred and accrued as construction in
process as of June 30, 1999. The renovations are expected to be
completed in August 1999.
<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 generally triple-net leases, with the lessee responsible for all repairs and
maintenance, property taxes, insurance and utilities. As of June 30, 1999, the
Partnership owned 44 Properties, which included interests in one Property owned
through a joint venture arrangement in which the Partnership is a co-venturer
and two Properties owned with affiliates of the general partners as
tenants-in-common.
Capital Resources
The Partnership's primary source of capital for the six months ended
June 30, 1999 and 1998, 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 $1,600,589 and
$1,922,221 for the six months ended June 30, 1999 and 1998, respectively. The
decrease in cash from operations for the six months ended June 30, 1999, as
compared to the six months ended June 30, 1998, is primarily a result of changes
in income and expenses as described in "Results of Operations" below and changes
in the Partnership's working capital.
Other sources and uses of capital included the following during the six
months ended June 30, 1999.
In August 1998, the Partnership entered into a joint venture
arrangement, Columbus Joint Venture, with affiliates of the general partners, to
construct, own and lease one restaurant Property. As of June 30, 1999, the
Partnership had contributed approximately $293,000, of which approximately
$158,500 was contributed during the six months ended June 30, 1999, to purchase
land and pay for construction costs relating to the joint venture. As of June
30, 1999, the Partnership owned 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 such as demand deposit accounts in commercial banks,
certificates of deposit, and money market accounts with less than a 30-day
maturity date, pending the Partnership's use of such funds to pay Partnership
expenses or to make distributions to the partners. At June 30, 1999, the
Partnership had $1,233,857 invested in such short-term investments, as compared
to $1,603,589 at December 31, 1998. Cash and cash equivalents decreased during
the six months ended June 30, 1999, primarily as a result of the Partnership
funding additional amounts to Columbus Joint Venture to pay for construction
costs relating to the joint venture. The funds remaining at June 30, 1999, after
payment of distributions and other liabilities, will be used to pay renovation
costs for the Las Vegas Property described below and to meet the Partnership's
working capital and other needs.
Short-Term Liquidity
The Partnership's short-term liquidity requirements consist primarily
of the operating expenses of the Partnership.
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.
The Partnership generally distributes cash from operations remaining
after the payment of operating expenses of the Partnership, to the extent that
the general partners determine that such funds are available for distribution.
Based on current and anticipated future cash from operations, and for the six
months ended June 30, 1998, accumulated excess operating reserves, the
Partnership declared distributions to limited partners of $1,800,000 and
$1,890,000 for the six months ended June 30, 1999 and 1998, respectively
($900,000 for each of the quarters ended June 30, 1999 and 1998). This
represents distributions of $0.40 and $0.42 per unit for the six months ended
June 30, 1999 and 1998, respectively ($0.20 per unit for each applicable
quarter). No distributions were made to the general partners for the quarters
and six months ended June 30, 1999 and 1998. No amounts distributed to the
limited partners for the six months ended June 30, 1999 and 1998, 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.
Total liabilities of the Partnership, including distributions payable,
increased to $1,094,681 at June 30, 1999, from $996,717 at December 31, 1998.
The increase in liabilities at June 30, 1999 was partially a result of the
Partnership accruing transaction costs relating to the proposed merger with CNL
American Properties Fund, Inc. ("APF"), as described below. In addition, the
increase in liabilities at June 30, 1999 was partially a result of the
Partnership accruing construction costs payable of $15,000 at June 30, 1999 as
described below. The general partners believe that the Partnership has
sufficient cash on hand to meet its current working capital needs.
In February 1999, the Partnership entered into a new lease for the
Property located in Las Vegas, Nevada, with a new tenant to operate the Property
as a Big Boy restaurant. In connection with the agreement, the Partnership has
agreed to fund up to $150,000 in conversion costs associated with this Property,
$15,000 of which had been incurred and accrued as of June 30, 1999. The
renovations are expected to be completed in August 1999.
Long-Term Liquidity
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
During the six months ended June 30, 1998, the Partnership owned and
leased 43 wholly owned Properties (which included two Properties in Madison and
Chattanooga, Tennessee that were exchanged for two Properties in Lawrence,
Kansas and Indianapolis, Indiana), and during the six months ended June 30,
1999, the Partnership owned and leased 41 wholly owned Properties, to operators
of fast-food and family-style restaurant chains. During the six months ended
June 30, 1999 and 1998, the Partnership earned $1,872,345 and $1,987,628,
respectively, in rental income from operating leases (net of adjustments to
accrued rental income) and earned income from direct financing leases from these
Properties, $940,431 and $924,486 of which was earned during the quarters ended
June 30, 1999 and 1998, respectively. Rental and earned income decreased
approximately $115,300 during the six months ended June 30, 1999, as compared to
the six months ended June 30, 1998, as a result of the fact that in 1998 three
tenants filed for bankruptcy and rejected the leases relating to four of the
seven Properties leased by these tenants. As a result, these tenants ceased
making rental payments on the four rejected leases. The Partnership has
continued receiving rental payments relating to the three leases not rejected by
the tenants. In March 1999, the Partnership entered into a new lease with a new
tenant for one of the vacant Properties for which rental payments commenced in
April 1999. The general partners are currently seeking either new tenants or
purchasers for the three remaining rejected and vacant Properties. The
Partnership will not recognize any rental and earned income from these vacant
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. While the tenants have not rejected or affirmed the
remaining three leases, there can be no assurance that some or all of these
leases will not be rejected in the future. The lost revenues resulting from the
three rejected and vacant Properties and the possible rejection of the three
remaining leases could have an adverse effect on the results of operations of
the Partnership if the Partnership is not able to re-lease the Properties in a
timely manner.
The decrease in rental and earned income during the six months ended
June 30, 1999, as compared to the six months ended June 30, 1998, is also
attributable to the fact that in July 1998, the tenant of the Shoney's Property
in Las Vegas, Nevada vacated the Property and ceased making rental payments on
this Property. As a result, during the quarter and six months ended June 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 write-off of
accrued rental income was partially offset by the fact that the Partnership
recorded approximately $28,200 and $62,700 in rental and earned income during
the quarter and six months ended June 30, 1998, respectively, prior to the
tenant vacating the Property. No rental and earned income was recognized during
the quarter and six months ended June 30, 1999 relating to this Property. During
the six months ended June 30, 1999, the Partnership established an allowance for
doubtful accounts of approximately $20,700 for rental and earned income amounts
due from this tenant because collection of such amounts is questionable. The
general partners are pursuing collection of past due amounts from the former
tenant and will recognize such amounts as income if collected. In February 1999,
the Partnership entered into a new lease with a new tenant for this Property for
which rental payments are expected to commence during the third quarter of 1999.
During the six months ended June 30, 1999 and 1998, the Partnership
owned and leased two Properties with affiliates of the general partners as
tenants-in-common and during the six months ended June 30, 1999, the Partnership
owned and leased one additional Property indirectly through a joint venture
arrangement. In connection therewith, during the six months ended June 30, 1999
and 1998, the Partnership earned $79,712 and $64,956, respectively, $41,906 and
$33,522 of which was earned during the quarters ended June 30, 1999 and 1998,
respectively. The increase in net income earned by joint ventures during the
quarter and six months ended June 30, 1999, as compared to the quarter and six
months ended June 30, 1998, was primarily attributable to the fact that in
August 1998, the Partnership invested in Columbus Joint Venture with affiliates
of the general partners.
Operating expenses, including depreciation and amortization expense,
were $587,303 and $401,017 for the six months ended June 30, 1999 and 1998,
respectively, $303,026 and $188,375 of which were incurred during the quarters
ended June 30, 1999 and 1998, respectively. The increase in operating expenses
during the quarter and six months ended June 30, 1999, as compared to the
quarter and six months ended June 30, 1998, was partially due to the fact that
the Partnership incurred $83,052 and $116,210, respectively, in transaction
costs relating to the general partners retaining financial and legal advisors to
assist them in evaluating and negotiating the proposed Merger with APF, as
described below. If the limited partners reject the Merger, the Partnership will
bear the portion of the transaction costs based upon the percentage of "For"
votes and the general partners will bear the portion of such transaction costs
based upon the percentage of "Against" votes and abstentions.
In addition, the increase in operating expenses during the quarter and
six months ended June 30, 1999, is partially due to the fact that the
Partnership incurred certain expenses, such as real estate taxes, insurance, and
maintenance relating to a Shoney's Property, two Boston Market Properties and
two Long John Silver's Properties which became vacant during 1998, or during the
six months ended June 30, 1999 due to financial difficulties or bankruptcies, as
described above. In addition, the increase in operating expenses was partially
attributable to an increase in depreciation expense due to the fact that during
1998, the Partnership reclassified these leases from net investment in direct
financing leases to land and buildings on operating leases as a result of the
lease terminations. The Partnership entered into new leases with new tenants for
the Shoney's Property in Las Vegas, Nevada and the Long John Silver's Property
in Celina, Ohio in February and March 1999, respectively. The new tenants are
responsible for real estate taxes, insurance, and maintenance relating to these
two Properties; therefore, the general partners do not anticipate that the
Partnership will incur these expenses for these two Properties in the future.
However, the Partnership will continue to incur certain expenses, such as real
estate taxes, insurance, and maintenance related to the three remaining vacant
Properties until new tenants for these Properties are located or until the
Properties are sold. The Partnership is currently seeking new tenants or buyers
for these Properties. In addition, the Partnership will incur certain expenses
such as real estate taxes, insurance, and maintenance relating to one or more of
the three Properties still leased by Long John Silver's, Inc., Finest
Foodservice, L.L.C., and Boston Chicken, Inc., if one or more of the leases are
rejected.
At June 30, 1999, the Partnership recorded a provision for loss on
building in the amount of $84,478 for financial reporting purposes relating to a
Boston Market Property in Lawrence, Kansas the lease for which was rejected by
the tenant, as described above. The tenant of this property filed for bankruptcy
and ceased payments of rents under the terms of its lease agreement. The
allowance represents the difference between the carrying value of the Property
at June 30, 1999 and the estimated net realizable value for the Property.
Proposed Merger
On March 11, 1999, the Partnership entered into an Agreement and Plan
of Merger with APF, pursuant to which the Partnership would be merged with and
into a subsidiary of APF (the "Merger"). As consideration for the Merger, APF
has agreed to issue 2,160,474 shares of its common stock, par value $0.01 per
share (the "APF Shares") which, for the purposes of valuing the merger
consideration, have been valued by APF at $20.00 per APF Share, the price paid
by APF investors (after an adjustment for a one for two reverse stock split
effective June 3, 1999) in three previous public offerings, the most recent of
which was completed in December 1998. In order to assist the general partners in
evaluating the proposed merger consideration, the general partners retained
Valuation associates, a nationally recognized real estate appraisal firm, to
appraise the Partnership's restaurant property portfolio. Based on Valuation
Associates' appraisal, the Partnership's property portfolio and other assets
were valued on a going concern basis (meaning the Partnership continues
unchanged) at $42,519,005 as of December 31, 1998. The APF Shares are expected
to be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and therefore, would be freely tradable at the
option of the former limited partners. At a special meeting of the partners that
is expected to be held in the fourth quarter of 1999, limited partners holding
in excess of 50% of the Partnership's outstanding limited partnership interests
must approve the Merger prior to consummation of the transaction. If the limited
partners at the special meeting approve the Merger, APF will own the properties
and other assets of the Partnership. The general partners intend to recommend
that the limited partners of the Partnership approve the Merger. In connection
with their recommendation, the general partners will solicit the consent of the
limited partners at the special meeting. If the limited partners reject the
Merger, the Partnership will bear the portion of the transaction costs based
upon the percentage of "For" votes and the general partners will bear the
portion of such transaction costs based upon the percentage of "Against" votes
and abstentions.
On May 11, 1999, four limited partners in several of the CNL Income
Funds served a lawsuit against the general partners and APF in connection with
the proposed Merger. On July 8, 1999, the plaintiffs amended the complaint to
add three additional limited partners as plaintiffs. Additionally, on June 22,
1999, a limited partner in certain of the CNL Income Funds served a lawsuit
against the general partners, APF, CNL Fund Advisors, Inc. and certain of its
affiliates in connection with the proposed Merger. The general partners and APF
believe that the lawsuits are without merit and intend to defend vigorously
against the claims. See Part II - Item 1.
Legal Proceedings.
Year 2000 Readiness Disclosure
The Year 2000 problem concerns the inability of information and
non-information technology systems to properly recognize and process date
sensitive information beyond January 1, 2000. As of June 30, 1999 the
Partnership did not have any information or non-information technology systems.
The general partners and certain of the affiliates of the general partners
provide all services requiring the use of information and non-information
technology systems pursuant to a management agreement with the Partnership. The
information technology system of the affiliates of the general partners consists
of a network of personal computers and servers built using hardware and software
from mainstream suppliers. The non-information technology systems of the
affiliates of the general partners are primarily facility related and include
building security systems, elevators, fire suppressions, HVAC, electrical
systems and other utilities. The affiliates of the general partners have no
internally generated programmed software coding to correct because substantially
all of the software utilized by the general partners and affiliates is purchased
or licensed from external providers. The maintenance of non-information
technology systems at the Partnership's Properties is the responsibility of the
tenants of the Properties in accordance with the terms of the Partnership's
leases.
In early 1998, the general partners and affiliates formed a Year 2000
team, for the purpose of identifying, understanding and addressing the various
issues associated with the Year 2000 problem. The Y2K Team consists of the
general partners and members from certain of the affiliates of the general
partners, including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management. The Y2K Team's initial step in assessing the Partnership's Year 2000
readiness consists of identifying any systems that are date-sensitive and,
accordingly, could have potential Year 2000 problems. The Y2K Team is in the
process of conducting inspections, interviews and tests to identify which of the
Partnership's systems could have a potential Year 2000 problem.
The information system of the affiliates of the general partners is
comprised of hardware and software applications from mainstream suppliers.
Accordingly, the Y2K Team is in the process of contacting the respective vendors
and manufacturers to verify the Year 2000 compliance of their products. In
addition, the Y2K Team has also requested and is evaluating documentation from
other companies with which the Partnership has a material third party
relationship, including the Partnership's tenants, vendors, financial
institutions and the Partnership's 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. The Y2K Team has also requested and is evaluating documentation
from the non-information technology systems providers of the affiliates of the
general partners. Although the general partners continue to receive positive
responses from the companies with which the Partnership has third party
relationships regarding their Year 2000 compliance, the general partners cannot
be assured that the tenants, financial institutions, transfer agent, other
vendors and system providers have adequately considered the impact of the Year
2000. The general partners are not able to measure the effect on the operations
of the Partnership of any third party's failure to adequately address the impact
of the Year 2000.
The general partners and their affiliates have identified and have
implemented upgrades for certain hardware equipment. In addition, the general
partners and their affiliates have identified certain software applications
which will require upgrades to become Year 2000 compliant. The general partners
expect that all of these upgrades, as well as any other necessary remedial
measures on the information technology systems used in the business activities
and operations of the Partnership, to be completed by September 30, 1999,
although, the general partners cannot be assured that the upgrade solutions
provided by the vendors have addressed all possible Year 2000 issues. The
general partners do not expect the aggregate cost of the Year 2000 remedial
measures to be material to the results of operations of the Partnership.
The general partners and their affiliates have received certification
from the Partnership's transfer agent of its Year 2000 compliance. Due to the
material relationship of the Partnership with its transfer agent, the Y2K Team
is evaluating the Year 2000 compliance of the systems of the transfer agent and
expects to have the evaluation completed by September 30, 1999. Despite the
positive response from the transfer agent and the evaluation of the transfer
agent's system by the Y2K Team, the general partners cannot be assured that the
transfer agent has addressed all possible Year 2000 issues. In the event that
the systems of the transfer agent are not Year 2000 compliant, the general
partners and their affiliates will have to allocate resources to internally
perform the functions of the transfer agent. The general partners do not
anticipate that the additional cost of these resources would have a material
impact on the Partnership.
Based upon the progress the general partners and their affiliates have
made in addressing the Year 2000 issues and their plan and timeline to complete
the compliance program, the general partners do not foresee significant risks
associated with Year 2000 compliance at this time. The general partners and
their affiliates plan to address their significant Year 2000 issues prior to the
Partnership being affected by them; therefore, we have not developed a
comprehensive contingency plan. However, if the general partners and their
affiliates identify significant risks related to their Year 2000 compliance, or
if their progress deviates from the anticipated timeline, the general partners
and their affiliates will develop contingency plans as deemed necessary at that
time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On May 11, 1999, four limited partners in several CNL Income Funds
served a derivative and purported class action lawsuit filed April
22, 1999 against the general partners and APF in the Circuit Court
of the Ninth Judicial Circuit of Orange County, Florida, alleging
that the general partners breached their fiduciary duties and
violated provisions of certain of the CNL Income Fund partnership
agreements in connection with the proposed Merger. The plaintiffs
are seeking unspecified damages and equitable relief. On July 8,
1999, the plaintiffs filed an amended complaint which, in addition
to naming three additional plaintiffs, includes allegations of
aiding and abetting and conspiring to breach fiduciary duties,
negligence and breach of duty of good faith against certain of the
defendants and seeks additional equitable relief. As amended, the
caption of the case is Jon Hale, Mary J. Hewitt, Charles A. Hewitt,
Gretchen M. Hewitt Bernard J. Schulte, Edward M. and Margaret Berol
Trust, and Vicky Berol v. James M. Seneff, Jr., Robert A. Bourne,
CNL Realty Corporation, and CNL American Properties Fund, Inc., Case
No. CIO-99-0003561.
On June 22, 1999, a limited partner of several CNL Income Funds
served a purported class action lawsuit filed April 29, 1999 against
the general partners and APF, Ira Gaines, individually and on behalf
of a class of persons similarly situated, v. CNL American Properties
Fund, Inc., James M. Seneff, Jr., Robert A. Bourne, CNL Realty
Corporation, CNL Fund Advisors, Inc., CNL Financial Corporation
a/k/a CNL Financial Corp., CNL Financial Services, Inc. and CNL
Group, Inc., Case NO. CIO-99-3796, in the Circuit Court of the Ninth
Judicial Circuit of Orange County, Florida, alleging that the
general partners breached their fiduciary duties and that APF aided
and abetted their breach of fiduciary duties in connection with the
proposed Merger. The plaintiff is seeking unspecified damages and
equitable relief.
Item 2. Changes in Securities. Inapplicable.
Item 3. Default upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
Item 5. Other Information. Inapplicable.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Agreement and Plan of Merger by and between the
Registrant and CNL American Properties Fund,
Inc. ("APF") dated March 11, 1999 and as amended
on June 4, 1999 (Filed as Appendix B to the
Prospectus Supplement for the Registrant,
constituting a part of Amendment No. 1 to the
Registration Statement of APF on Form S-4, File
No. 74329.)
3.1 Affidavit and Certificate of Limited Partnership
of CNL Income Fund XVI, Ltd. (Included as
Exhibit 3.2 to Registration Statement No.
33-69968-01 on Form S-11 and incorporated herein
by reference.)
4.1 Affidavit and Certificate of Limited Partnership
of CNL Income Fund XVI, Ltd. (Included as
Exhibit 3.2 to Registration Statement No.
33-69968-01 on Form S-11 and incorporated herein
by reference.)
4.2 Amended and Restated Agreement of Limited
Partnership of CNL Income Fund XVI, Ltd.
(Included as Exhibit 4.2 to Form 10-K filed with
the Securities and Exchange Commission on March
30, 1995, and incorporated herein by reference.)
10.1 Management Agreement between CNL Income Fund
XVI, Ltd. and CNL Investment Company (Included
as Exhibit 10.1 to Form 10-K filed with the
Securities and Exchange Commission on March 30,
1995, and incorporated herein by reference.)
10.2 Assignment of Management Agreement from CNL
Investment Company to CNL Income Fund Advisors,
Inc. (Included as Exhibit 10.2 to Form 10-K
filed with the Securities and Exchange
Commission on March 30, 1995, and incorporated
herein by reference.)
10.3 Assignment of Management Agreement from CNL
Income Fund Advisors, Inc. to CNL Fund Advisors,
Inc. (Included as Exhibit 10.3 to Form 10-K
filed with the Securities and Exchange
Commission on April 1, 1996, and incorporated
herein by reference.)
27 Financial Data Schedule (Filed herewith.)
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June
30, 1999.
<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 August, 1999.
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 June 30, 1999, and its statement of income
for the six months then ended and is qualified in its entirety by reference to
the Form 10-Q of CNL Income Fund XVI, Ltd. for the six months ended June 30,
1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,233,857
<SECURITIES> 0
<RECEIVABLES> 200,791
<ALLOWANCES> 112,153
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 32,868,717
<DEPRECIATION> 2,233,496
<TOTAL-ASSETS> 39,798,073
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 38,703,392
<TOTAL-LIABILITY-AND-EQUITY> 39,798,073
<SALES> 0
<TOTAL-REVENUES> 1,903,537
<CGS> 0
<TOTAL-COSTS> 587,303
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,311,468
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,311,468
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,311,468
<EPS-BASIC> 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>
