<PAGE>
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, 1999
--------------------------------------------------
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
---------------------------------------
CNL Income Fund XVI, Ltd.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3198891
- ------------------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
- ------------------------------------------- -------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 540-2000
-------------------------------
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
Notes to Condensed Financial Statements 5-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
Part II
Other Information 18-20
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- ---------------
<S> <C> <C>
ASSETS
------
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on building $ 30,622,621 $ 30,215,549
Net investment in direct financing leases 4,550,482 5,361,848
Investment in joint ventures 1,654,043 1,504,465
Cash and cash equivalents 1,212,106 1,603,589
Receivables, less allowance for doubtful accounts
of $59,103 and $89,822 in 1999 and 1998,
respectively 43,892 63,214
Prepaid expenses 11,501 13,745
Lease costs, less accumulated amortization
of $732 in 1999 11,077 --
Organization costs, less accumulated amortization
of $10,000 and $8,550 in 1999 and 1998,
respectively -- 1,450
Accrued rental income 1,678,039 1,424,781
------------------ -------------------
$ 39,783,761 $ 40,188,641
================== ===================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
Accounts payable $ 128,900 $ 1,816
Accrued construction costs payable 150,000 --
Accrued and escrowed real estate taxes payable 31,462 7,163
Distributions payable 900,000 900,000
Due to related parties 11,268 26,476
Rents paid in advance and deposits 48,137 61,262
------------------ -------------------
Total liabilities 1,269,767 996,717
Commitments and Contingencies (Note 6)
Partners' capital 38,513,994 39,191,924
------------------ -------------------
$ 39,783,761 $ 40,188,641
================== ===================
</TABLE>
See accompanying notes to condensed 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,
1999 1998 1999 1998
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases $ 774,026 $ 854,766 $ 2,378,810 $ 2,626,090
Adjustments to accrued rental income -- (433) -- (119,505)
Earned income from direct financing leases 177,275 133,949 444,836 469,325
Interest and other income 13,754 10,716 44,946 45,220
------------- ------------- -------------- -------------
965,055 998,998 2,868,592 3,021,130
------------- ------------- -------------- -------------
Expenses:
General operating and administrative 47,539 47,302 125,996 121,325
Professional services 6,418 8,320 33,478 26,271
Management fees to related party 9,200 9,257 27,313 29,073
Real estate taxes 20,028 29,370 50,048 30,209
State and other taxes -- 7 24,356 19,398
Loss on termination of direct financing lease -- 4,471 -- 4,471
Depreciation and amortization 147,999 144,394 441,086 413,391
Transaction costs 62,648 -- 178,858 --
------------- ------------- -------------- -------------
293,832 243,121 881,135 644,138
------------- ------------- -------------- -------------
Income Before Equity in Earnings of
Joint Ventures and Provision for Loss on
Building 671,223 755,877 1,987,457 2,376,992
Equity in Earnings of Joint Ventures 39,379 33,458 119,091 98,414
Provision for Loss on Building -- (204,399) (84,478) (204,399)
------------- ------------- -------------- -------------
Net Income $ 710,602 $ 584,936 $ 2,022,070 $ 2,271,007
============= ============= ============== =============
Allocation of Net Income:
General partners $ 7,106 $ 7,327 $ 20,788 $ 24,188
Limited partners 703,496 577,609 2,001,282 2,246,819
------------- ------------- -------------- -------------
$ 710,602 $ 584,936 $ 2,022,070 $ 2,271,007
============= ============= ============== =============
Net Income Per Limited Partner Unit $ 0.16 $ 0.13 $ 0.44 $ 0.50
============= ============= ============== =============
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.
2
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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,
1999 1998
----------------- ---------------
<S> <C> <C>
General partners:
Beginning balance $ 131,300 $ 99,615
Net income 20,788 31,685
------------- ------------
152,088 131,300
------------- ------------
Limited partners:
Beginning balance 39,060,624 39,805,311
Net income 2,001,282 2,945,313
Distributions ($0.60 and $0.82 per
limited partner unit, respectively) (2,700,000) (3,690,000)
------------ ------------
38,361,906 39,060,624
------------ ------------
Total partners' capital $ 38,513,994 $ 39,191,924
============ ============
</TABLE>
See accompanying notes to condensed 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,
1999 1998
-------------- --------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Net Cash Provided by Operating Activities $ 2,478,838 $ 2,759,611
-------------- --------------
Cash Flows from Investing Activities:
Reimbursement of construction costs from developer
of construction costs -- 161,648
Additions to land and buildings on operating leases -- (3,545)
Investment in direct financing leases -- (28,403)
Investment in joint ventures (158,512) (742,404)
Decrease in restricted cash -- 610,384
Payment of lease costs (11,809) --
-------------- --------------
Net cash used in investing activities (170,321) (2,320)
-------------- --------------
Cash Flows from Financing Activities:
Distributions to limited partners (2,700,000) (2,790,000)
-------------- --------------
Net cash used in financing activities (2,700,000) (2,790,000)
-------------- --------------
Net Decrease in Cash and Cash Equivalents (391,483) (32,709)
Cash and Cash Equivalents at Beginning of Period 1,603,589 1,673,869
-------------- --------------
Cash and Cash Equivalents at End of Period $ 1,212,106 $ 1,641,160
============== ==============
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 $ 150,000 $ --
============== ==============
Distributions declared and unpaid at end of
period $ 900,000 $ 900,000
============== ==============
</TABLE>
See accompanying notes to condensed financial statements.
4
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CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 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 nine
months ended September 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:
September 30, December 31,
1999 1998
------------- ------------
Land $ 15,378,217 $ 15,378,217
Buildings 17,976,235 17,045,781
------------ ------------
33,354,452 32,423,998
Less accumulated depreciation (2,381,096) (1,942,192)
------------ ------------
30,973,356 30,481,806
Less allowance for loss on building (350,735) (266,257)
------------ ------------
$ 30,622,621 $ 30,215,549
============ ============
5
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
2. Land and Buildings on Operating Leases - Continued:
---------------------------------------------------
During the nine months ended September 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 September 30, 1999 and the estimated net
realizable value for the property.
3. Investment in Direct Financing Leases:
--------------------------------------
During the nine months ended September 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 lease was
recorded for financial reporting purposes.
4. Receivables:
------------
During the nine months ended September 30, 1999, the Partnership accepted a
promissory note from the former tenant of the Shoney's property in Las
Vegas, Nevada, in the amount of $52,191 representing past due rental and
other amounts, which had been included in receivables and for which the
Partnership had established an allowance for doubtful accounts, and real
estate taxes previously recorded as an expense by the Partnership. Payments
are due in 60 monthly installments of $1,220 including interest at a rate
of ten percent per annum, commencing on March 1, 2000, at which time, any
accrued and unpaid interest amounts will be capitalized into the principal
balance of the note. Due to the uncertainty of collection of the note, the
Partnership established an allowance for doubtful accounts. As of September
30, 1999, the balance in the allowance for doubtful accounts relating to
this promissory note was $55,670, including accrued interest of $3,479
represented the uncollected amounts under this promissory note.
6
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
5. Related Party Transactions:
---------------------------
On September 1, 1999, CNL American Properties Fund, Inc. ("APF"), an
affiliate of the general partners, acquired CNL Fund Advisors, Inc.
("CFA"), an affiliate who provides certain services relating to management
of the Partnership and its properties pursuant to a management agreement
with the Partnership. As a result of this acquisition, CFA became a wholly
owned subsidiary of APF; however, the terms of the management agreement
between the Partnership and CFA remain unchanged and in effect.
6. 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"). 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 fair value of the Partnership's property
portfolio and other assets was $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 first quarter of
2000, 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.
7
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1999 and 1998
6. Commitments and Contingencies - Continued:
------------------------------------------
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. On
September 23, 1999, the judge assigned to the two lawsuits entered an order
consolidating the two cases. Pursuant to this order, the plaintiffs in
these cases filed a consolidated and amended complaint on November 8, 1999.
The various defendants, including the general partners, have 45 days to
respond to that consolidated complaint. 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.
8
<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 September 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 nine months ended
September 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
$2,478,838 and $2,759,611 for the nine months ended September 30, 1999 and 1998,
respectively. The decrease in cash from operations for the nine months ended
September 30, 1999, as compared to the nine months ended September 30, 1998, was
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 nine
months ended September 30, 1999.
During the nine months ended September 30, 1999, the Partnership accepted a
promissory note from the former tenant of the Shoney's Property in Las Vegas,
Nevada, in the amount of $52,191, representing past due rental and other
amounts. The note represents receivables for which the Partnership had
established an allowance for doubtful accounts, and real estate taxes previously
recorded as an expense by the Partnership. Payments are due in 60 monthly
installments of $1,220 including interest at a rate of ten percent per annum,
commencing on March 1, 2000, at which time any accrued and unpaid interest
amounts will be capitalized into the principal balance of the note. Due to the
uncertainty of the collectibility of the note, the Partnership established an
allowance for doubtful accounts and is recognizing income as collected. As of
September 30, 1999, the balance in the allowance for doubtful accounts relating
to this promissory note was $55,670, including accrued interest of $3,479. The
Partnership has ceased collection efforts on the remaining past due receivables
not converted into the promissory note.
In August 1998, the Partnership entered into a joint venture arrangement,
Columbus Joint Venture, with CNL Income Fund XII, Ltd. and CNL Income Fund
XVIII, Ltd., both Florida limited partnerships, and affiliates of the general
partners, to construct, own and lease one restaurant Property. As of September
30, 1999, the Partnership had contributed approximately $293,000, of which
approximately $158,500 was contributed during the nine months ended
9
<PAGE>
September 30, 1999, to purchase land and pay for construction costs relating to
the joint venture. As of September 30, 1999, the Partnership owned a 32.35%
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 September 30, 1999, the
Partnership had $1,212,106 invested in such short-term investments, as compared
to $1,603,589 at December 31, 1998. Cash and cash equivalents decreased during
the nine months ended September 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, as described above. The funds
remaining at September 30, 1999, will be used to pay distributions, renovation
costs for the Las Vegas Property as described below in "Results of Operations",
and other liabilities.
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 nine months
ended September 30, 1998, accumulated excess operating reserves, the Partnership
declared distributions to limited partners of $2,700,000 and $2,790,000 for the
nine months ended September 30, 1999 and 1998, respectively ($900,000 for each
of the quarters ended September 30, 1999 and 1998). This represents
distributions of $0.60 and $0.62 per unit for the nine months ended September
30, 1999 and 1998, respectively ($0.20 per unit for each of the quarters ended
September 30, 1999 and 1998). No distributions were made to the general partners
for the quarters and nine months ended September 30, 1999 and 1998. No amounts
distributed to the limited partners for the nine months ended September 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 $1,269,767 at September 30, 1999, from $996,717 at December 31,
1998. The increase in
10
<PAGE>
liabilities at September 30, 1999, was partially a result of the Partnership
accruing construction costs payable of $150,000 at September 30, 1999, as
described below. In addition, the increase in liabilities at September 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. Liabilities at September 30, 1999, to the extent they exceed
cash and cash equivalents at September 30, 1999, will be paid from future cash
from operations, or in the event the general partners elect to make capital
contributions or loans, from future general partner contributions or loans.
Long-Term Liquidity
- -------------------
The Partnership has no long-term debt or other long-term liquidity
requirements.
Results of Operations
- ---------------------
During the nine months ended September 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 nine months ended September
30, 1999, the Partnership owned and leased 41 wholly owned Properties, to
operators of fast-food and family-style restaurant chains. During the nine
months ended September 30, 1999 and 1998, the Partnership earned $2,823,646 and
$2,975,910, respectively, in rental income from operating leases (net of
adjustments to accrued rental income) and earned income from direct financing
leases from these Properties, $951,301 and $988,282 of which was earned during
the quarters ended September 30, 1999 and 1998, respectively. Rental and earned
income decreased approximately $175,300 during the nine months ended September
30, 1999, as compared to the nine months ended September 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, thereby partially offsetting the decrease in
rental and earned income. 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. In August 1999, Long John Silver's, Inc. assumed and
affirmed its one remaining lease, and the Partnership has continued receiving
rental payments relating to this lease. The lost revenues resulting from the
three rejected and vacant Properties 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 nine months ended
September 30, 1999, as compared to the nine months ended September 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 nine months ended September
30, 1998, the Partnership wrote off approximately $77,300 of accrued rental
income
11
<PAGE>
(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 $32,900 and $107,400 in rental and earned income during
the quarter and nine months ended September 30, 1998, respectively, prior to the
tenant vacating the Property. No rental and earned income was recognized during
the quarter and nine months ended September 30, 1999 relating to this Property.
During the nine months ended September 30, 1998, the Partnership established an
allowance for doubtful accounts of approximately $47,200 for rental and earned
income amounts due from this tenant. In February 1999, the Partnership entered
into a new lease with a new tenant for this Property for which rental payments
commenced in August 1999. In connection with the new lease, the Partnership has
agreed to fund up to $150,000 of the construction costs necessary to convert
this Property into a new concept.
During the nine months ended September 30, 1999 and 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, 1999 and 1998,
the Partnership earned $119,091 and $98,414, respectively, $39,379 and $33,458
of which was earned during the quarters ended September 30, 1999 and 1998,
respectively. The increase in net income earned by joint ventures during the
quarter and nine months ended September 30, 1999, as compared to the quarter and
nine months ended September 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, as described in "Capital Resources".
Operating expenses, including depreciation and amortization expense, were
$881,135 and $644,138 for the nine months ended September 30, 1999 and 1998,
respectively, $293,832 and $243,121 of which were incurred during the quarters
ended September 30, 1999 and 1998, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1999, as
compared to the quarter and nine months ended September 30, 1998, was partially
due to the fact that during the quarter and nine months ended September 30,
1999, the Partnership incurred $62,648 and $178,858, 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 nine months
ended September 30, 1999, was 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, due to financial
difficulties or bankruptcies, as described above. 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
12
<PAGE>
for these two Properties in the future. However, the Partnership will continue
to incur such expenses, related to the three remaining vacant Properties until
new tenants for these Properties are located or until the Properties are sold.
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.
Due to the fact that Long John Silver's, Inc. assumed and affirmed its one
remaining lease, as described above, Long John Silver's, Inc. will continue to
be responsible for real estate taxes, insurance, and maintenance relating to the
one Property it currently leases. However, the Partnership will incur such
expenses, relating to one or both of the Properties still leased by Finest
Foodservice, L.L.C. and Boston Chicken, Inc., if one or both of the leases are
rejected.
At September 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 allowance represents the difference between
the carrying value of the Property at September 30, 1999 and the estimated net
realizable value for the Property.
During the quarter and nine months ended September 30, 1998, the
Partnership established an allowance for loss on building of $204,399 for
financial reporting purposes relating to the Property in Celina, Ohio, the lease
for which was rejected by the tenant, as described above. The allowance
represented the difference between the carrying value of the Property at
September 30, 1998, 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"). 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 fair value of the Partnership's property portfolio and other
assets was $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 first quarter of 2000, 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.
13
<PAGE>
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. On September 23, 1999, the judge
assigned to the two lawsuits entered an order consolidating the two cases.
Pursuant to this order, the plaintiffs in these cases filed a consolidated and
amended complaint on November 8, 1999. The various defendants, including the
general partners, have 45 days to respond to that consolidated complaint. 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
- ------------------------------
Overview of Year 2000 Problem
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. The failure to accurately
recognize the year 2000 could result in a variety of problems from data
miscalculations to the failure of entire systems.
Information and Non-Information Technology Systems
The Partnership does not have any information or non-information technology
systems. The general partners and their affiliates 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 general partners' affiliates 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 are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities. The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers. The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.
The Y2K Team
In early 1998, the general partners and their affiliates formed a Year 2000
committee (the "Y2K 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 their affiliates,
including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management.
14
<PAGE>
Assessing Year 2000 Readiness
The Y2K Team's initial step in assessing year 2000 readiness consisted of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems. The Y2K Team has conducted inspections, interviews
and tests to identify which of the systems used by the Partnership could have a
potential year 2000 problem.
The information system of the general partners' affiliates is comprised of
hardware and software applications from mainstream suppliers. Accordingly, the
Y2K Team has contacted and is evaluating documentation from the respective
vendors and manufacturers to verify the year 2000 compliance of their products.
The Y2K Team has also requested and is evaluating documentation from the
non-information technology systems providers of the affiliates.
In addition, the Y2K Team has requested and is evaluating documentation
from other companies with which the Partnership has material third party
relationships. Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Partnership's transfer
agent and financial institutions. The Partnership depends on its transfer agent
to maintain and track investor information and its financial institutions for
availability of cash.
As of September 30, 1999, the Y2K Team had received responses from
approximately 62 percent of the third parties. All of the responses were in
writing. Of the third parties responding, all indicated that they are currently
year 2000 compliant or will be year 2000 compliant prior to the year 2000.
Although the Y2K Team continues 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 third parties
have adequately considered the impact of the year 2000.
In addition, the Y2K Team has requested documentation from the
Partnership's tenants. As of September 30, 1999, the Y2K Team had received
responses from approximately 69 percent of the tenants. All of the responses
were in writing. Of the tenant's responding, all indicated that they are
currently year 2000 compliant or will be year 2000 compliant prior to the year
2000. The general partners cannot be assured that the tenants have adequately
considered the impact of the year 2000. The Partnership has also instituted a
policy of requiring any new tenants to indicate that their systems are year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Achieving Year 2000 Compliance
The Y2K Team has identified and completed upgrades for its hardware
equipment that was not year 2000 compliant. In addition, the Y2K Team has
identified and completed upgrades of the software applications that were not
year 2000 compliant, although the general partners cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.
15
<PAGE>
The cost for these upgrades and other remedial measures is the
responsibility of the general partners and their affiliates. The general
partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.
Assessing the Risks to the Partnership of Non-Compliance and Developing
Contingency Plans
Risk of Failure of Information and Non-Information Technology Systems Used by
the Partnership
The general partners believe that the reasonably likely worst case scenario
with regard to the information and non-information technology systems used by
the Partnership is the failure of one or more of these systems as a result of
year 2000 problems. Because the Partnership's major source of income is rental
payments under long-term triple-net leases, any failure of information or
non-information technology systems used by the Partnership is not expected to
have a material impact on the results of operations of the Partnership. Even if
such systems failed, the payment of rent under the Partnership's leases would
not be affected. In addition, the Y2K Team is expected to correct any Y2K
problems within the control of the general partners and their affiliates before
the year 2000.
The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time. However, if the Y2K Team identifies additional risks
associated with the year 2000 compliance of the information or non-information
technology systems used by the Partnership, the Y2K Team will develop a
contingency plan if deemed necessary at that time.
Risk of Inability of Transfer Agent to Accurately Maintain Partnership Records
The general partners believe that the reasonably likely worst case scenario
with regard to the Partnership's transfer agent is that the transfer agent will
fail to achieve year 2000 compliance of its systems and will not be able to
accurately maintain the records of the Partnership. This could result in the
inability of the Partnership to accurately identify its limited partners for
purposes of distributions, delivery of disclosure materials and transfer of
units. The Y2K Team has received certification from the Partnership's transfer
agent of its year 2000 compliance. Despite the positive response from the
transfer agent, the general partners cannot be assured that the transfer agent
has addressed all possible year 2000 issues.
The Y2K Team has developed a contingency plan pursuant to which the general
partners and their affiliates would maintain the records of the Partnership
manually, in the event that the systems of the transfer agent are not year 2000
compliant. The general partners and their affiliates would 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 results of operations of the Partnership.
Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance
The general partners believe that the reasonably likely worst case scenario
with regard to the Partnership's financial institutions is that some or all of
its funds on deposit with such
16
<PAGE>
financial institutions may be temporarily unavailable. The Y2K Team has received
responses from 93% of the Partnership's financial institutions indicating that
their systems are currently year 2000 compliant or are expected to be year 2000
compliant prior to the year 2000. Despite the positive responses from the
financial institutions, the general partners cannot be assured that the
financial institutions have addressed all possible year 2000 issues. The loss of
short-term liquidity could affect the Partnership's ability to pay its expenses
on a current basis. The general partners do not anticipate that a loss of
short-term liquidity would have a material impact on the results of operations
of the Partnership.
Based upon the responses received from the Partnership's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.
Risks of Late Payment or Non-Payment of Rent by Tenants
The general partners believe that the reasonably likely worst case scenario
with regard to the Partnership's tenants is that some of the tenants may make
rental payments late as the result of the failure of the tenants to achieve year
2000 compliance of their systems used in the payment of rent, the failure of the
tenant's financial institutions to achieve year 2000 compliance, or the
temporary disruption of the tenants' businesses. The Y2K Team is in the process
of requesting responses from the Partnership's tenants indicating the extent to
which their systems are currently year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000. The general partners cannot be assured
that the tenants have addressed all possible year 2000 issues. The late payment
of rent by one or more tenants would affect the results of operations of the
Partnership in the short-term.
The general partners are also aware of predictions that the year 2000
problem, if uncorrected, may result in a global economic crisis. The general
partners are not able to determine if such predictions are true. A widespread
disruption of the economy could affect the ability of the Partnership's tenants
to pay rent and, accordingly, could have a material impact on the results of
operations of the Partnership.
Because payment of rent is under the control of the Partnership's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, the general partners will
assess the remedies available to the Partnership under its lease agreements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
17
<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.
On September 23, 1999, Judge Lawrence Kirkwood entered an order
consolidating the two cases under the caption In re: CNL Income Funds
-----------------------
Litigation, Case No. 99-3561. Pursuant to this order, the plaintiffs in
----------------------------
these cases filed a consolidated and amended complaint on November 8,
1999, and the various defendants, including the general partners, have
45 days to respond to that consolidated complaint.
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.
----------------------------------------------------
18
<PAGE>
Item 5. Other Information. Inapplicable.
------------------
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, and
as amended October 27, 1999 (Filed as Appendix B to the
Prospectus Supplement for the Registrant, constituting a
part of Amendment No. 3 to the Registration Statement of
APF on Form S-4, File No. 333-74329.)
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.)
19
<PAGE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1999.
20
<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 10th day of November, 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>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF CNL INCOME FUND XVI, LTD. AT SEPTEMBER 30, 1999, 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, 1999.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,212,106
<SECURITIES> 0
<RECEIVABLES> 102,995
<ALLOWANCES> 59,103
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 33,003,717
<DEPRECIATION> 2,381,096
<TOTAL-ASSETS> 39,783,761
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 38,513,994
<TOTAL-LIABILITY-AND-EQUITY> 39,783,761
<SALES> 0
<TOTAL-REVENUES> 2,868,592
<CGS> 0
<TOTAL-COSTS> 881,135
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,022,070
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,022,070
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,022,070
<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>
