<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                           Washington, D. C.  20549
                                  FORM 10-K/A
                                Amendment No. 2

(Mark One)
[x]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934

                  For the fiscal year ended December 31, 1998
                                            -----------------

                                 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 Identification No.)
 incorporation or organization)

                            450 South Orange Avenue
                            Orlando, Florida  32801
         (Address of principal executive offices, including zip code)

      Registrant's telephone number, including area code:  (407) 650-1000

          Securities registered pursuant to Section 12(b) of the Act:

Title of each class:                     Name of exchange on which registered:
       None                                         Not Applicable

          Securities registered pursuant to Section 12(g) of the Act:

             Units of limited partnership interest ($10 per Unit)
                               (Title of class)

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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
                                         ---------      ----------

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [x]

     Aggregate market value of the voting stock held by nonaffiliates of the
registrant:  The registrant registered an offering of 4,500,000 units of limited
partnership interest (the "Units") on Form S-11 under the Securities Act of
1933, as amended.  Since no established market for such Units exists, there is
no market value for such Units.  Each Unit was originally sold at $10 per Unit.

                     DOCUMENTS INCORPORATED BY REFERENCE:
                                     None
<PAGE>

     The Form 10-K of CNL Income Fund XVI, Ltd. (the "Partnership") for the year
ended December 31, 1998 is being amended to revise the disclosure under Item 1.
Business and Item 8. Financial Statements and Supplementary Data.

                                 PART I

Item 1.  Business

     CNL Income Fund XVI, Ltd. (the "Registrant" or the "Partnership") is a
limited partnership which was organized pursuant to the laws of the State of
Florida on September 2, 1993.  The general partners of the Partnership are
Robert A. Bourne, James M. Seneff, Jr. and CNL Realty Corporation, a Florida
corporation (the "General Partners").  Beginning on September 2, 1994, the
Partnership offered for sale up to $45,000,000 of limited partnership interests
(the "Units") (4,500,000 Units at $10 per Unit) pursuant to a registration
statement on Form S-11 under the Securities Act of 1933, as amended, effective
February 23, 1994.  The offering terminated on June 12, 1995, at which date the
maximum offering proceeds of $45,000,000 had been received from investors who
were admitted to the Partnership as limited partners (the "Limited Partners").

     The Partnership was organized to acquire both newly constructed and
existing restaurant properties, as well as properties 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 "Restaurant Chains").  Net proceeds to the Partnership from its offering of
Units, after deduction of organizational and offering expenses, totalled
$39,600,000 and were used to acquire 43 Properties, including seven Properties
consisting of land only.  During the year ended December 31, 1996, the
Partnership sold a Property in Appleton, Wisconsin, and used the net sales
proceeds to acquire a Boston Market Property located in Fayetteville, North
Carolina, with an affiliate of the General Partners as tenants-in-common.
During the year ended December 31, 1997, the Partnership sold a Property in
Oviedo, Florida, and during 1998 the Partnership reinvested the net sales
proceeds from the sale of this Property in a Property in Memphis, Tennessee, as
tenants-in-common, with affiliates of the General Partners.  In addition, during
1998, the Partnership received a reimbursement from the developer of the
Property in Farmington, New Mexico upon final reconciliation of total
construction costs.  In August 1998, the Partnership used these proceeds to
enter into a joint venture arrangement, Columbus Joint Venture, with affiliates
of the General Partners, to construct and hold one restaurant Property.  As a
result of the above transactions, as of December 31, 1998, the Partnership owned
44 Properties.  The 44 Properties include six Properties consisting of land
only, interests in one Property owned through a joint venture in which the
Partnership is a co-venturer and two Properties owned with affiliates as
tenants-in-common. The lessee of the six Properties consisting of only land owns
the buildings currently on the land and has the right, if not in default under
the lease, to remove the buildings from the land at the end of the lease terms.
In general, the Partnership leases the Properties on a triple-net basis with the
lessees responsible for all repairs and maintenance, property taxes, insurance
and utilities.

     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").
APF is a real estate investment trust whose primary business is the ownership of
restaurant properties leased on a long-term, "triple-net" basis to operators of
national and regional restaurant chains.  APF has agreed to issue shares of its
common stock, par value $0.01 per share (the "APF Shares"), as consideration for
the Merger.  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.

     In the event that the Limited Partners vote against the Merger, the
Partnership will hold its Properties until the General Partners determine that
the sale or other disposition of the Properties is advantageous in view of the
Partnership's investment objectives.  In deciding whether to sell Properties,
the General Partners will consider factors such as potential capital
appreciation, net cash flow and federal income tax considerations.  Certain
lessees also have been granted options to purchase Properties, generally at the
Property's then fair market value after a specified

                                       2
<PAGE>

portion of the lease term has elapsed. The Partnership has no obligation to sell
all or any portion of a Property at any particular time, except as may be
required under property purchase options granted to certain lessees.

Leases
     Although there are variations in the specific terms of the leases, the
following is a summarized description of the general structure of the
Partnership's leases.  The leases of the Properties owned by the Partnership,
the Property owned by a joint venture in which the Partnership is a co-venturer
and Properties owned as tenants-in-common with affiliates of the General
Partners provide for initial terms ranging from 15 to 20 years (the average
being 19 years) and expire between 2009 and 2018.  All leases are on a triple-
net basis, with the lessees responsible for all repairs and maintenance,
property taxes, insurance and utilities.  The leases of the Properties provide
for minimum base annual rental payments (payable in monthly installments)
ranging from approximately $21,600 to $220,600.  All of the leases provide for
percentage rent, based on sales in excess of a specified amount.  In addition,
the majority of the leases provide that, commencing in specified lease years
(generally the sixth lease year), the annual base rent required under the terms
of the lease will increase.

     Generally, the leases of the Properties provide for two to five five-year
renewal options subject to the same terms and conditions as the initial lease.
Lessees of 33 of the Partnership's 44 Properties also have been granted options
to purchase Properties at the Property's then fair market value after a
specified portion of the lease term has elapsed.  Fair market value will be
determined through an appraisal by an independent appraisal firm.  Under the
terms of certain leases, the option purchase price may equal the Partnership's
original cost to purchase the Property (including acquisition costs), plus a
specified percentage from the date of the lease or a specified percentage of the
Partnership's purchase price, if that amount is greater than the Property's fair
market value at the time the purchase option is exercised.

     The leases also generally provide that, in the event the Partnership wishes
to sell the Property subject to that lease, the Partnership first must offer the
lessee the right to purchase the Property on the same terms and conditions, and
for the same price, as any offer which the Partnership has received for the sale
of the Property.

     During 1998, the tenant of the Properties in Madison and Chattanooga,
Tennessee exercised its option under the terms of its lease agreement, to
exchange the existing Property with a replacement Property.  In conjunction
therewith, the Partnership exchanged the Boston Market Properties in Madison and
Chattanooga, Tennessee for a Boston Market Property in each of Lawrence, Kansas
and Indianapolis, Indiana.  The leases for the original Properties were amended
to allow the new Properties to continue under the terms of the original leases;
therefore, all terms of the original leases remained unchanged.

     In January 1998, the Partnership acquired a Property in Memphis, Tennessee,
as tenants-in-common with affiliates of the General Partners.  In August 1998,
the Partnership entered into a joint venture arrangement, Columbus Joint
Venture, with affiliates of the General Partners, to construct and hold one
restaurant Property.  The lease terms for these Properties are substantially the
same as the Partnership's other leases, as described above.

     In July 1998, the tenant of the Shoney's Property in Las Vegas, Nevada,
ceased restaurant operations and vacated the Property.  In February 1999, the
Partnership entered into a lease with a new operator for this Property.  The
lease terms of the new lease are substantially the same as the Partnership's
other leases, as described above.

     During 1998, three tenants, Long John Silver's, Inc., Finest Foodservice,
L.L.C., and Boston Chicken, Inc., filed for bankruptcy and rejected the leases
relating to four of their seven leases and ceased making rental payments to the
Partnership on the rejected leases.  The Partnership will not recognize rental
and earned income from these four 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.  As of March 11, 1999, the
Partnership has continued receiving rental payments relating to the leases not
rejected by the tenants.  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
four leases that were rejected, as described above, 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 unable to re-lease the
Properties in a timely manner.  The General Partners are currently seeking
either new tenants or purchasers for the four Properties.

                                       3
<PAGE>

Major Tenants

     During 1998, three lessees of the Partnership, Golden Corral Corporation,
Foodmaker, Inc., and DenAmerica Corp. each contributed more than ten percent of
the Partnership's total rental income.  As of December 31, 1998, Golden Corral
Corporation was the lessee under leases relating to six restaurants, Foodmaker,
Inc. was the lessee under leases relating to five restaurants, and DenAmerica
Corp. was the lessee under leases relating to nine restaurants.  It is
anticipated that based on the minimum rental payments required by the leases,
these three lessees each will continue to contribute more than ten percent of
the Partnership's total rental income in 1999. In addition, four Restaurant
Chains, Golden Corral Family Steakhouse Restaurants ("Golden Corral"), Jack in
the Box, Boston Market and Denny's, each accounted for more than ten percent of
the Partnership's total rental income during 1998.  In 1999, it is anticipated
that Golden Corral, Jack in the Box, and Denny's each will continue to
contribute more than ten percent of the Partnership's rental income to which the
Partnership is entitled under the terms of the leases.  Any failure of these
lessees or Restaurant Chains could materially affect the Partnership's income if
the Partnership is not able to re-lease the Properties in a timely manner.  As
of December 31, 1998, Golden Corral Corporation and DenAmerica Corp. each leased
Properties with an aggregate carrying value in excess of 20 percent of the total
assets of the Partnership.

Joint Venture and Tenancy in Common Arrangements

     In October 1996, the Partnership entered into an agreement to hold a Boston
Market Property as tenants-in-common, with CNL Income Fund XVII, Ltd., an
affiliate of the General Partners.  The agreement provides for the Partnership
and the affiliate to share in the profits and losses of the Property and net
cash flow from the Property, in proportion to each co-tenant's percentage
interest.  The Partnership owns an 80.44% interest in this Property.

     In addition, in January 1998, the Partnership entered into an agreement to
hold an IHOP Property in Memphis, Tennessee, as tenants-in-common, with CNL
Income Fund II, Ltd. and CNL Income Fund VI, Ltd., affiliates of the General
Partners.  The agreement provides for the Partnership and the affiliates to
share in the profits and losses of the Property and net cash flow from the
Property, in proportion to each co-tenant's percentage interest.  The
Partnership owns a 40.42% interest in this Property.

     Each of the affiliates is a limited partnership organized pursuant to the
laws of the State of Florida.  The tenancy in common agreement restricts each
co-tenant's ability to sell, transfer, or assign its interest in the tenancy in
common's Property without first offering it for sale to the remaining co-tenant.

     In addition, 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., affiliates of the General Partners, to construct and
hold one Property.  The joint venture arrangement provides for the Partnership
and its joint venture partners to share in all costs and benefits associated in
the joint venture in proportion to each partner's percentage interest in the
joint venture.  The Partnership and its joint venture partners are also jointly
and severally liable for all debts, obligations and other liabilities of the
joint venture.  When funding is complete, the Partnership expects to have an
approximate 32 percent interest in the profits and losses of this joint venture.
Each of the affiliates is a limited partnership organized pursuant to the laws
of the State of Florida.

     The use of joint venture and tenancy in common arrangements allows the
Partnership to fully invest its available funds at times at which it would not
have sufficient funds to purchase an additional property, or at times when a
suitable opportunity to purchase an additional property is not available.  The
use of joint venture and tenancy in common arrangements also provides the
Partnership with increased diversification of its portfolio among a greater
number of properties.   In addition, tenancy in common arrangements may allow
the Partnership to defer the gain for federal income tax purposes upon the sale
of the property if the proceeds are reinvested in an additional property.

Certain Management Services

     CNL Fund Advisors, Inc., an affiliate of the General Partners, provides
certain services relating to management of the Partnership and its Properties
pursuant to a management agreement with the Partnership.  Under this agreement,
CNL Fund Advisors, Inc. is responsible for collecting rental payments,
inspecting the Properties and the tenants' books and records, assisting the
Partnership in responding to tenant inquiries and notices and providing
information to the Partnership about the status of the leases and the
Properties.  CNL Fund Advisors, Inc. also assists the General Partners in
negotiating the leases.  For these services, the Partnership has agreed to pay
CNL Fund Advisors, Inc. an annual fee of one percent of the sum of gross rental
revenues from Properties wholly owned by the

                                       4
<PAGE>

Partnership plus the Partnership's allocable share of gross revenues of joint
ventures in which the Partnership is a co-venturer, but not in excess of
competitive fees for comparable services.

     The management agreement continues until the Partnership no longer owns an
interest in any Properties unless terminated at an earlier date upon 60 days'
prior notice by either party.

Employees

     The Partnership has no employees.  The officers of CNL Realty Corporation
and the officers and employees of CNL Fund Advisors, Inc. perform certain
services for the Partnership.  In addition, the General Partners have available
to them the resources and expertise of the officers and employees of CNL Group,
Inc., a diversified real estate company, and its affiliates, who may also
perform certain services for the Partnership.

Item 8.   Financial Statements and Supplementary Data

                                       5
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                                   CONTENTS
                                   --------

<TABLE>
<CAPTION>
                                                            Page
                                                            ----
<S>                                                         <C>

Report of Independent Accountants                              7

Financial Statements:

   Balance Sheets                                              8

   Statements of Income                                        9

   Statements of Partners' Capital                            10

   Statements of Cash Flows                                   11

   Notes to Financial Statements                              14

Additional Financial Information regarding Golden Corral      29
</TABLE>

                                       6
<PAGE>

                       Report of Independent Accountants
                       ---------------------------------

To the Partners
CNL Income Fund XVI, Ltd.


In our opinion, the financial statements listed in the index appearing under
item 14(a)(1) present fairly, in all material respects, the financial position
of CNL Income Fund XVI, Ltd. (a Florida limited partnership) at December 31,
1998 and 1997, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.  In addition, in our opinion, the
financial statement schedules listed in the index appearing  under item 14(a)(2)
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related financial statements.  These financial
statements and financial statement schedules are the responsibility of the
Partnership's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.  We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.



/s/ PricewaterhouseCoopers LLP


Orlando, Florida
January 26, 1999, except for Note 11 for which the date is March 11, 1999

                                       7
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                                BALANCE SHEETS
                                --------------

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                  1998                     1997
                                                                            ----------------         ----------------
                       ASSETS
                       ------
<S>                                                                          <C>                       <C>
Land and buildings on operating leases, less
   accumulated depreciation and allowance
   for loss on building                                                          $30,215,549              $30,658,994
Net investment in direct financing leases                                          5,361,848                5,968,812
Investment in joint ventures                                                       1,504,465                  771,684
Cash and cash equivalents                                                          1,603,589                1,673,869
Restricted cash                                                                           --                  627,899
Receivables, less allowance for doubtful
   accounts of $89,822 and $879                                                       63,214                   31,946
Prepaid expenses                                                                      13,745                    9,293
Organization costs, less accumulated
   amortization of $8,550 and $6,550                                                   1,450                    3,450
Accrued rental income                                                              1,424,781                1,192,373
                                                                             ---------------           --------------

                                                                                 $40,188,641              $40,938,320
                                                                             ===============           ==============


        LIABILITIES AND PARTNERS' CAPITAL
        ---------------------------------

Acquisition and construction costs payable                                       $        --              $    53,278
Accounts payable                                                                       1,816                    2,707
Accrued and escrowed real estate taxes
   payable                                                                             7,163                    4,353
Distributions payable                                                                900,000                  900,000
Due to related parties                                                                26,476                    3,351
Rents paid in advance and deposits                                                    61,262                   69,705
                                                                             ---------------           --------------
       Total liabilities                                                             996,717                1,033,394

Partners' capital                                                                 39,191,924               39,904,926
                                                                             ---------------           --------------

                                                                                 $40,188,641              $40,938,320
                                                                             ===============           ==============
</TABLE>

                See accompanying notes to financial statements.

                                       8
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                             STATEMENTS OF INCOME
                             --------------------

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                             1998                     1997                    1996
                                                     -----------------         ----------------        ----------------
<S>                                                    <C>                       <C>                     <C>
Revenues:
 Rental income from operating leases                        $3,446,902               $3,562,920              $3,571,244
 Adjustments to accrued rental income                         (184,368)                      --                      --
 Earned income from direct financing leases                    601,587                  703,149                 726,314
 Contingent rental income                                       35,860                   35,604                  37,600
 Interest income                                                60,199                   73,634                  75,160
 Other income                                                    1,574                    7,180                   8,232
                                                     -----------------        -----------------       -----------------
                                                             3,961,754                4,382,487               4,418,550
                                                     -----------------         ----------------        ----------------
Expenses:
 General operating and administrative                          158,519                  186,934                 183,734
 Professional services                                          40,471                   25,352                  26,569
 Management fees to related parties                             38,570                   40,087                  39,206
 Real estate taxes                                               9,060                       --                      --
 State and other taxes                                          19,398                   20,559                  12,369
 Loss on termination of direct financing lease                   4,471                       --                      --
 Depreciation and amortization                                 555,360                  563,883                 552,447
 Transaction costs                                              24,652                       --                      --
                                                     -----------------         ----------------        ----------------
                                                               850,501                  836,815                 814,325
                                                     -----------------         ----------------        ----------------
Income Before Equity in Earnings of Joint
 Ventures, Gain on Sale of Land and
 Buildings, and Provision for Loss on Building               3,111,253                3,545,672               3,604,225

Equity in Earnings of Joint Ventures                           132,002                   73,507                  19,668

Gain on Sale of Land and Buildings                                  --                   41,148                 124,305

Provision for Loss on Building                                (266,257)                      --                      --
                                                     -----------------         ----------------        ----------------

Net Income                                                  $2,976,998               $3,660,327              $3,748,198
                                                     =================         ================        ================

Allocation of Net Income:
 General partners                                           $   31,685               $   36,192              $   36,239
 Limited partners                                            2,945,313                3,624,135               3,711,959
                                                     -----------------         ----------------        ----------------
                                                            $2,976,998               $3,660,327              $3,748,198
                                                     =================         ================        ================

Net Income Per Limited Partner Unit                         $     0.65               $     0.81              $     0.82
                                                     =================         ================        ================

Weighted Average Number of
 Limited Partner Units Outstanding                           4,500,000                4,500,000               4,500,000
                                                     =================         ================        ================
</TABLE>

                See accompanying notes to financial statements.

                                       9
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                       (A Florida Limited Partnership)

<TABLE>
<CAPTION>
                                       General Partners                        Limited Partners
                             --------------------------- -----------------------------------------------------------
                                               Accumulated                                  Accumulated    Syndication
                               Contributions   Earnings     Contributions  Distributions      Earnings       Costs        Total
                             ---------------  ------------ --------------  ---------------  ------------  ------------  ----------

<S>                           <C>             <C>          <C>           <C>              <C>            <C>            <C>
Balance, December 31, 1995         $1,000       $ 26,184    $45,000,000    $ (2,589,266)     $ 2,592,234   $(5,390,000)  $39,640,152

Distributions to limited
partners ($0.79 per
limited partner unit)                  --             --             --      (3,543,751)             --                  (3,543,751)
Net income                             --         36,239             --              --       3,711,959            --     3,748,198
                             --------------   -----------  -------------   --------------   -----------   -----------   -----------

Balance, December 31, 1996          1,000         62,423     45,000,000      (6,133,017)      6,304,193    (5,390,000)   39,844,599

Distributions to limited
partners ($0.80 per
limited partner unit)                  --             --             --      (3,600,000)             --                 (3,600,000)
Net income                             --         36,192             --              --       3,624,135            --    3,660,327
                             -------------    ----------   ------------    ------------     -----------   -----------   -----------

Balance, December 31, 1997          1,000         98,615     45,000,000      (9,733,017)      9,928,328    (5,390,000)  39,904,926

Distributions to limited
partners ($0.82 per
limited partner unit)                  --             --             --      (3,690,000)             --                 (3,690,000)
Net income                             --         31,685             --            --         2,945,313            --    2,976,998
                             ------------     ----------   ------------    ------------      ----------   -----------   -----------

Balance, December 31, 1998         $1,000       $130,300    $45,000,000    $(13,423,017)    $12,873,641   $(5,390,000) $39,191,924
                             ============     ==========   ============    ============      ==========   ===========   ===========

</TABLE>

                See accompanying notes to financial statements.

                                       10
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                           STATEMENTS OF CASH FLOWS
                           ------------------------
<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                            1998                      1997                     1996
                                                      ----------------          ----------------        -----------------
<S>                                                      <C>                      <C>                       <C>
Increase (Decrease) in Cash and Cash Equivalents:

Cash Flows from Operating Activities:
     Cash received from tenants                             $ 3,675,430              $ 3,881,005              $ 4,007,432
     Distributions from joint venture                           143,279                   76,212                   20,279
     Cash paid for expenses                                    (273,929)                (231,712)                (349,145)
     Interest received                                           78,914                   54,919                   75,160
                                                       ----------------         ----------------        -----------------
       Net cash provided by operating activities              3,623,694                3,780,424                3,753,726
                                                       ----------------         ----------------        -----------------

   Cash Flows from Investing Activities:
     Proceeds from sale of land and buildings                        --                  610,384                  775,000
     Reimbursement of construction costs from
       developer                                                161,648                       --                       --
     Additions to land and buildings on
       operating leases                                          (3,545)                 (23,501)              (2,355,627)
     Investment in direct financing leases                      (28,403)                 (29,257)                (405,937)
     Investment in joint ventures                              (744,058)                      --                 (775,000)
     Decrease (increase) in restricted cash                     610,384                 (610,384)                      --
                                                       ----------------         ----------------        -----------------
       Net cash used in investing activities                     (3,974)                 (52,758)              (2,761,564)
                                                       ----------------         ----------------        -----------------

   Cash Flows from Financing Activities:
     Reimbursement of acquisition costs paid by
       related parties on behalf of the Partnership                  --                       --                   (2,494)
     Distributions to limited partners                       (3,690,000)              (3,600,000)              (3,431,251)
                                                       ----------------         ----------------        -----------------
         Net cash used in financing activities               (3,690,000)              (3,600,000)              (3,433,745)
                                                       ----------------         ----------------        -----------------

Net Increase (Decrease) in Cash and Cash                        (70,280)                 127,666               (2,441,583)
 Equivalents

Cash and Cash Equivalents at Beginning of Year                1,673,869                1,546,203                3,987,786
                                                       ----------------         ----------------        -----------------

Cash and Cash Equivalents at End of Year                    $ 1,603,589              $ 1,673,869              $ 1,546,203
                                                       ================         ================        =================
</TABLE>



                See accompanying notes to financial statements.

                                       11
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                     STATEMENTS OF CASH FLOWS - CONTINUED
                     ------------------------------------


<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                             1998                   1997                  1996
                                                      ---------------        ---------------       ---------------
<S>                                                   <C>                    <C>                   <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:

   Net income                                              $2,976,998             $3,660,327            $3,748,198
                                                      ---------------        ---------------       ---------------
   Adjustments to reconcile net income to
     net cash provided by operating
     activities:
       Loss on termination of direct
         financing lease                                        4,471                     --                    --
       Depreciation                                           553,360                561,883               550,447
       Amortization                                             2,000                  2,000                 2,000
       Equity in earnings of joint ventures,
         net of distributions                                  11,277                  2,705                   611
       Gain on sale of land and buildings                          --                (41,148)             (124,305)
       Provision for loss on building                         266,257                     --                    --
       Decrease (increase) in receivables                     (13,753)                26,633                58,396
       Decrease in net investment in direct
         financing leases                                      43,343                 37,684                29,269
       Increase in prepaid expenses                            (4,452)                  (119)               (8,514)
       Increase in accrued rental income                     (232,408)              (444,650)             (468,201)
       Increase in accounts payable and
         accrued expenses                                       1,919                  1,455                   517
       Increase (decrease) in due to related
         parties, excluding reimbursement
         of acquisition costs paid on behalf
         of the Partnership                                    23,125                  1,059               (76,259)
       Increase (decrease) in rents paid in
         advance and deposits                                  (8,443)               (27,405)               41,567
                                                      ---------------       ----------------       ---------------
          Total adjustments                                   646,696                120,097                 5,528
                                                      ---------------        ---------------       ---------------

Net Cash Provided by Operating Activities                  $3,623,694             $3,780,424            $3,753,726
                                                      ===============        ===============       ===============
</TABLE>



                See accompanying notes to financial statements.

                                       12
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                     STATEMENTS OF CASH FLOWS - CONTINUED
                     ------------------------------------
<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                              1998                     1997                      1996
                                                      ------------------       -------------------      --------------------
<S>                                                     <C>                      <C>                      <C>
Supplemental Schedule of Non-Cash Investing
and Financing Activities:

   Related parties paid certain acquisition
     costs on behalf of the Partnership as
     follows:                                                   $     --                  $     --                  $  9,356
                                                      ==================       ===================      ====================


   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                  $     --                  $     --
                                                      ==================       ===================      ====================

   Distributions declared and unpaid at
     December 31                                                $900,000                  $900,000                  $900,000
                                                      ==================       ===================      ====================
</TABLE>



                See accompanying notes to financial statements.

                                       13
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                         NOTES TO FINANCIAL STATEMENTS
                         -----------------------------

                 Years Ended December 31, 1998, 1997, and 1996


1.   Significant Accounting Policies:
     -------------------------------

     Organization and Nature of Business - CNL Income Fund XVI, Ltd. (the
     -----------------------------------
     "Partnership") is a Florida limited partnership that was organized for the
     purpose of acquiring both newly constructed and existing restaurant
     properties, as well as properties upon which restaurants were to be
     constructed, which are leased primarily to operators of national and
     regional fast-food and family-style restaurant chains.

     The general partners of the Partnership are CNL Realty Corporation (the
     "Corporate General Partner"), James M. Seneff, Jr. and Robert A. Bourne.
     Mr. Seneff and Mr. Bourne are also 50 percent shareholders of the Corporate
     General Partner.  The general partners have responsibility for managing the
     day-to-day operations of the Partnership.

     Real Estate and Lease Accounting - The Partnership records the acquisition
     --------------------------------
     of land and buildings at cost, including acquisition and closing costs.
     Land and buildings are leased to unrelated third parties on a triple-net
     basis, whereby the tenant is generally responsible for all operating
     expenses relating to the property, including property taxes, insurance,
     maintenance and repairs.  The leases are accounted for using either the
     direct financing or the operating methods.  Such methods are described
     below:

          Direct financing method - The leases accounted for using the direct
          financing method are recorded at their net investment (which at the
          inception of the lease generally represents the cost of the asset)
          (Note 4).  Unearned income is deferred and amortized to income over
          the lease terms so as to produce a constant periodic rate of return on
          the Partnership's net investment in the leases.

          Operating method - Land and building leases accounted for using the
          operating method are recorded at cost, revenue is recognized as
          rentals are earned and depreciation is charged to operations as
          incurred.  Buildings are depreciated on the straight-line method over
          their estimated useful lives of 30 years.  When scheduled rentals vary
          during the lease term, income is recognized on a straight-line basis
          so as to produce a constant periodic rent over the lease term
          commencing on the date the property is placed in service.

                                       14
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


1.   Significant Accounting Policies - Continued:
     -------------------------------------------

          Accrued rental income represents the aggregate amount of income
          recognized on a straight-line basis in excess of scheduled rental
          payments to date.  Whenever a tenant defaults under the terms of its
          lease, or events or changes in circumstance indicate that the tenant
          will not lease the property through the end of the lease term, the
          Partnership either reserves or writes-off the cumulative accrued
          rental income balance.

     When the properties are sold, the related cost and accumulated depreciation
     for operating leases and the net investment for direct financing leases,
     plus any accrued rental income, are removed from the accounts and gains or
     losses from sales are reflected in income.  The general partners of the
     partnership review properties for impairment whenever events or changes in
     circumstances indicate that the carrying amount of the assets may not be
     recoverable through operations.  The general partners determine whether an
     impairment in value has occurred by comparing the estimated future
     undiscounted cash flows, including the residual value of the property, with
     the carrying cost of the individual property.  If an impairment is
     indicated, the assets are adjusted to their fair value.  Although the
     general partners have made their best estimate of these factors based on
     current conditions, it is reasonably possible that changes could occur in
     the near term which could adversely affect the general partners' best
     estimate of net cash flows expected to be generated from its properties and
     the need for asset impairment write downs.

     When the collection of amounts recorded as rental or other income is
     considered to be doubtful, an adjustment is made to increase the allowance
     for doubtful accounts, which is netted against receivables, and to decrease
     rental or other income or increase bad debt expense for the current period,
     although the Partnership continues to pursue collection of such amounts.
     If amounts are subsequently determined to be uncollectible, the
     corresponding receivable and allowance for doubtful accounts are decreased
     accordingly.

     Investment in Joint Ventures - The Partnership's investments in Columbus
     ----------------------------
     Joint Venture and the properties in Corpus Christi, Texas and Memphis,
     Tennessee, each of which is held as tenants-in-common with affiliates, are
     accounted for using the equity method since the Partnership shares control
     with affiliates which have the same general partners.

     Cash and Cash Equivalents - The Partnership considers all highly liquid
     -------------------------
     investments with a maturity of three months or less when purchased to be
     cash equivalents.  Cash and cash equivalents consist of demand deposits at
     commercial banks and money market funds (some of which are backed by
     government securities).  Cash equivalents are stated at cost plus accrued
     interest, which approximates market value.

                                       15
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


1.   Significant Accounting Policies - Continued:
     -------------------------------------------

     Cash accounts maintained on behalf of the Partnership in demand deposits at
     commercial banks and money market funds may exceed federally insured
     levels; however, the Partnership has not experienced any losses in such
     accounts.  The Partnership limits investment of temporary cash investments
     to financial institutions with high credit standing; therefore, the
     Partnership believes it is not exposed to any significant credit risk on
     cash and cash equivalents.

     Organization Costs - Organization costs are being amortized over five years
     ------------------
     using the straight-line method.

     Income Taxes - Under Section 701 of the Internal Revenue Code, all income,
     ------------
     expenses and tax credit items flow through to the partners for tax
     purposes.  Therefore, no provision for federal income taxes is provided in
     the accompanying financial statements.  The Partnership is subject to
     certain state taxes on its income and property.

     Additionally, for tax purposes, syndication costs are included in
     Partnership equity and in the basis of each partner's investment.  For
     financial reporting purposes, syndication costs are netted against
     partners' capital and represent a reduction of Partnership equity and a
     reduction in the basis of each partner's investment.

     Use of Estimates - The general partners of the Partnership have made a
     ----------------
     number of estimates and assumptions relating to the reporting of assets and
     liabilities and the disclosure of contingent assets and liabilities to
     prepare these financial statements in conformity with generally accepted
     accounting principles.  The more significant areas requiring the use of
     management estimates relate to the allowance for doubtful accounts and
     future cash flows associated with long-lived assets.  Actual results could
     differ from those estimates.

                                       16
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


2.   Leases:
     ------

     The Partnership leases its land or land and buildings primarily to
     operators of national and regional fast-food and family-style restaurants.
     The leases are accounted for under the provisions of Statement of Financial
     Accounting Standards No. 13, "Accounting for Leases."  Some of the leases
     are classified as operating leases and some of the leases have been
     classified as direct financing leases.  For the leases classified as direct
     financing leases, the building portions of the property leases are
     accounted for as direct financing leases while the land portion of some of
     the leases are operating leases.  All leases are for 15 to 20 years and
     provide for minimum and contingent rentals. In  addition, the tenant pays
     all property taxes and assessments, fully maintains the interior and
     exterior of the building and carries insurance coverage for public
     liability, property damage, fire and extended coverage. The lease options
     generally allow tenants to renew the leases for two to five successive
     five-year periods subject to the same terms and conditions as the initial
     lease.  Most leases also allow the tenant to purchase the property at fair
     market value after a specified portion of the lease has elapsed.

3.   Land and Buildings on Operating Leases:
     --------------------------------------

  Land and buildings on operating leases consisted of the following at December
     31:

<TABLE>
<CAPTION>
                                                                    1998                        1997
                                                            ------------------          ------------------

<S>                                                           <C>                         <C>
        Land                                                       $15,378,217                 $15,259,455
        Buildings                                                   17,045,781                  16,836,982
                                                            ------------------          ------------------
                                                                    32,423,998                  32,096,437

        Less accumulated depreciation                               (1,942,192)                 (1,437,443)
                                                            ------------------          ------------------
                                                                    30,481,806                  30,658,994
        Less allowance for loss on
         building                                                     (266,257)                         --
                                                            ------------------          ------------------

                                                                   $30,215,549                 $30,658,994
                                                            ==================          ==================
</TABLE>

                                       17
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


3.   Land and Buildings on Operating Leases - Continued:
     --------------------------------------------------

     In March 1997, the Partnership sold its property in Oviedo, Florida, for
     $620,000 and received net sales proceeds of $610,384, resulting in a gain
     of $41,148 for financial reporting purposes.  This property was originally
     acquired by the Partnership in November 1994 and had a cost of
     approximately $509,700, excluding acquisition fees and miscellaneous
     acquisition expenses; therefore, the Partnership sold the property for
     approximately $100,700 in excess of its original purchase price.

     In May 1998, the tenant of the property in Madison, Tennessee exercised its
     option under the terms of its lease agreement, to exchange one existing
     property with a replacement property.  In conjunction therewith, the
     Partnership exchanged the Boston Market property in Madison, Tennessee for
     a Boston Market property in Lawrence, Kansas.  The lease for the property
     in Madison, Tennessee was amended to allow the property in Lawrence, Kansas
     to continue under the terms of the original lease.  All closing costs were
     paid by the tenant.  The Partnership accounted for this as a nonmonetary
     exchange of similar assets and recorded the acquisition of the property in
     Lawrence, Kansas at the net book value of the property in Madison,
     Tennessee.  No gain or loss was recognized due to this being accounted for
     as a monetary exchange of similar assets.

     During the year ended December 31, 1998, the Partnership recorded a
     provision for loss on building of $266,257, relating to the Long John
     Silver's property located in Celina, Ohio.  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 December 31, 1998, and the current
     estimate of net realizable value for this property.

     Generally, the leases provide for escalating guaranteed minimum rents
     throughout the lease term.  Income from these scheduled rent increases is
     recognized on a straight-line basis over the terms of the leases.  For the
     years ended December 31, 1998, 1997, and 1996, the Partnership recognized
     $232,408 (net of $184,368 in write-offs), $444,650, and $468,201,
     respectively, of such rental income.

                                       18
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


3.   Land and Buildings on Operating Leases - Continued:
     --------------------------------------------------

     The following is a schedule of the future minimum lease payments to be
     received on noncancellable operating leases at December 31, 1998:

<TABLE>
             <S>                                                          <C>
              1999                                                         $ 2,903,108
              2000                                                           3,029,386
              2001                                                           3,085,219
              2002                                                           3,102,234
              2003                                                           3,110,316
              Thereafter                                                    31,971,152
                                                                      ----------------

                                                                           $47,201,415
                                                                      ================
</TABLE>

     Since lease renewal periods are exercisable at the option of the tenant,
     the above table only presents future minimum lease payments due during the
     initial lease terms.  In addition, this table does not include any amounts
     for future contingent rentals which may be received on the leases based on
     a percentage of the tenant's gross sales.

4.   Net Investment in Direct Financing Leases:
     -----------------------------------------

     The following lists the components of the net investment in direct
     financing leases at December 31:

<TABLE>
<CAPTION>
                                                                             1998                     1997
                                                                     ------------------       -----------------
 <S>                                                                    <C>                      <C>
Minimum lease payments
 receivable                                                                 $11,674,487             $13,526,299
Estimated residual values                                                     1,710,925               1,932,560
Less unearned income                                                         (8,023,564)             (9,490,047)
                                                                     ------------------       -----------------
Net investment in direct
 financing leases                                                           $ 5,361,848             $ 5,968,812
                                                                     ==================       =================
</TABLE>

                                       19
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


4.   Net Investment in Direct Financing Leases - Continued:
     -----------------------------------------------------

     The following is a schedule of future minimum lease payments to be received
     on direct financing leases at December 31, 1998:

<TABLE>
              <S>                                           <C>
              1999                                                   $   684,769
              2000                                                       692,689
              2001                                                       695,755
              2002                                                       701,765
              2003                                                       706,248
              Thereafter                                               8,193,261
                                                             -------------------

                                                                     $11,674,487
                                                             ===================
</TABLE>

     The above table does not include future minimum lease payments for renewal
     periods or for contingent rental payments that may become due in future
     periods (see Note 3).

     In June 1998, the tenant of the property in Chattanooga, Tennessee
     exercised its option under the terms of its lease agreement, to exchange
     one existing property with a replacement property.  In conjunction
     therewith, the Partnership exchanged the Boston Market property in
     Chattanooga, Tennessee for a Boston Market property in Indianapolis,
     Indiana.  The lease for the property in Chattanooga, Tennessee was amended
     to allow the property in Indianapolis, Indiana to continue under the terms
     of the original lease.  All closing costs were paid by the tenant.  The
     Partnership accounted for this as a nonmonetary exchange of similar assets
     and recorded the acquisition of the property in Indianapolis, Indiana at
     the net book value of the property in Chattanooga, Tennessee.  No gain or
     loss was recognized due to this being accounted for as a nonmonetary
     exchange of similar assets.

     During the year ended December 31, 1998, one of the Partnership's leases
     with Long John Silver's, Inc. was rejected in connection with the tenant
     filing for bankruptcy.  As a result, the Partnership reclassified the asset
     from net investment in direct financing leases to land and buildings on
     operating leases.  In accordance with Statement of Financial Accounting
     Standards No. 13, "Accounting for Leases," the Partnership recorded the
     reclassified asset at the lower of original cost, present fair value, or
     present carrying amount, which resulted in a loss on the termination of a
     direct financing lease of $4,471 for financial reporting purposes.

                                       20
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


5.   Investment in Joint Ventures:
     ----------------------------

     The Partnership owns a property in Fayetteville, North Carolina, as
     tenants-in-common with an affiliate of the general partners.  The
     Partnership accounts for its investment in this property using the equity
     method since the Partnership shares control with an affiliate.  As of
     December 31, 1998, the Partnership owned an 80.44% interest in this
     property.

     In January 1998, the Partnership acquired a 40.42% interest in an IHOP
     property in Memphis, Tennessee, as tenants-in-common with affiliates of the
     general partners.  The Partnership accounts for its investment in this
     property using the equity method since the Partnership shares control with
     affiliates, and amounts relating to its investment are included in
     investment in joint ventures.

     In August 1998, the Partnership entered into a joint venture arrangement,
     Columbus Joint Venture, with affiliates of the general partners, to
     construct and hold one restaurant property.  As of December 31, 1998, the
     Partnership had contributed approximately $134,500, to purchase land and
     pay construction costs relating to the joint venture.  The Partnership has
     agreed to contribute additional amounts to the joint venture relating to
     $182,900 in additional construction costs to the joint venture.  As of
     December 31, 1998, the Partnership owned a 32.35% interest in this joint
     venture.  When funding is completed, the Partnership expects to have an
     approximate 32 percent interest in the profits and losses of the joint
     venture.  The Partnership accounts for its investment in this joint venture
     under the equity method since the Partnership shares control with
     affiliates.

                                       21
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


5.   Investment in Joint Ventures - Continued:
     ----------------------------------------

     Columbus Joint Venture and the Partnership and affiliates, as tenants-in-
     common in two separate tenancy-in-common arrangements, each own and lease
     one property to operators of national fast-food and family-style
     restaurants.  The following presents the combined, condensed financial
     information for the joint venture and the properties held as tenants-in-
     common with affiliates at December 31:

<TABLE>
<CAPTION>
                                                             1998                    1997
                                                     ------------------      ------------------
<S>                                                    <C>                     <C>
        Land and buildings on operating
         lease, less accumulated
         depreciation                                        $3,274,577                $941,142
        Cash                                                      4,825                   8,190
        Prepaid expenses                                            197                      29
        Accrued rental income                                    56,105                  20,171
        Liabilities                                             477,951                   8,163
        Partners' capital                                     2,857,753                 961,369
        Revenues                                                284,333                 112,744
        Net income                                              235,485                  91,575
</TABLE>

     The Partnership recognized income totalling $132,002, $73,507, and $19,668
     for the years ended December 31, 1998, 1997, and 1996, respectively, from
     this joint venture and the properties held as tenants-in-common with an
     affiliates.

6.   Restricted Cash:
     ---------------

     As of December 31, 1997, the net sales proceeds of $610,384 from the sale
     of the property in Oviedo, Florida, plus accrued interest of $17,515, were
     being held in an interest-bearing escrow account pending the release of
     funds by the escrow agent to acquire an additional property.  In January
     1998, the funds were released from escrow and the Partnership acquired a
     40.42% interest in an IHOP property in Memphis, Tennessee, as tenants-in-
     common with affiliates of the general partners (see Note 5).

                                       22
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


7.   Allocations and Distributions:
     -----------------------------

     Generally, net income and losses of the Partnership, excluding gains and
     losses from the sale of properties, are allocated 99 percent to the limited
     partners and one percent to the general partners.  Distributions of net
     cash flow are made 99 percent to the limited partners and one percent to
     the general partners; provided, however, that the one percent of net cash
     flow to be distributed to the general partners shall be subordinated to
     receipt by the limited partners of an aggregate, eight percent, cumulative,
     noncompounded annual return on their invested capital contributions (the
     "Limited Partners' 8% Return").

     Generally, net sales proceeds from the sale of properties not in
     liquidation of the Partnership, to the extent distributed, will be
     distributed first to the limited partners in an amount sufficient to
     provide them with their Limited Partners' 8% Return, plus the return of
     their adjusted capital contributions.  The general partners will then
     receive, to the extent previously subordinated and unpaid, a one percent
     interest in all prior distributions of net cash flow and a return of their
     capital contributions.  Any remaining sales proceeds will be distributed 95
     percent to the limited partners and five percent to the general partners.

     Any gain from the sale of a property, not in liquidation of the Partnership
     is, in general, allocated in the same manner as net sales proceeds are
     distributable.  Any loss from the sale of a property is, in general,
     allocated first, on a pro rata basis, to partners with positive balances in
     their capital accounts; and thereafter, 95 percent to the limited partners
     and five percent to the general partners.

     Generally, net sales proceeds from a sale of properties in liquidation of
     the Partnership, will be used in the following order:  i) first to pay and
     discharge all of the Partnership's liabilities to creditors, ii) second, to
     establish reserves that may be deemed necessary for any anticipated or
     unforeseen liabilities or obligations of the Partnership, iii) third, to
     pay all of the Partnership's liabilities, if any, to the general and
     limited partners, iv) fourth, after allocations of net income, gains and/or
     losses, to the partners with positive capital account balances, in
     proportion to such balances, up to amounts sufficient to reduce such
     positive balances to zero, and v) thereafter, any funds remaining shall
     then be distributed 95 percent to the limited partners and five percent to
     the general partners.

     During the years ended December 31, 1998, 1997, and 1996, the Partnership
     declared distributions to the limited partners of $3,690,000, $3,600,000,
     and $3,543,751, respectively.  No distributions have been made to the
     general partners to date.

                                       23
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


8.   Income Taxes:
     ------------

     The following is a reconciliation of net income for financial reporting
     purposes to net income for federal income tax purposes for the years ended
     December 31:

<TABLE>
<CAPTION>
                                                                       1998                   1997                   1996
                                                                  -------------          --------------         --------------
<S>                                                                 <C>                    <C>                    <C>
Net income for financial reporting purposes                          $2,976,998              $3,660,327             $3,748,198

Depreciation for tax reporting purposes less
 than (in excess of) depreciation for
 financial reporting purposes                                               809                   3,576                 (1,943)

Allowance for loss on building                                          266,257                      --                     --

Direct financing leases recorded as operating
 leases for tax reporting purposes                                       43,343                  37,684                 29,269

Loss on termination of direct financing leases                            4,471                      --                     --

Equity in earnings of joint ventures for
 financial reporting purposes in excess of
 equity in earnings of joint ventures for tax
 reporting purposes                                                     (11,217)                   (477)                (1,330)

Gain on sale of land and buildings for
 financial reporting purposes less than (in
 excess of) gain for tax reporting purposes                                  --                  23,764               (124,305)

Allowance for doubtful accounts                                          88,943                  (8,996)                 6,913

Accrued rental income                                                  (232,408)               (444,650)              (468,201)

Rents paid in advance                                                    (8,443)                (27,405)                47,221

Capitalization of transaction costs for tax
 reporting purposes                                                      24,652                      --                     --

Other                                                                       212                      --                  4,008
                                                                  -------------          --------------         --------------

Net income for federal income tax purposes                           $3,153,617              $3,243,823             $3,239,830
                                                                  =============          ==============         ==============
</TABLE>

                                       24
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


9.   Related Party Transactions:
     ---------------------------

     One of the individual general partners, James M. Seneff, Jr., is one of the
     principal shareholders of CNL Group, Inc., the majority stockholder of CNL
     Fund Advisors, Inc.  The other individual general partner, Robert A.
     Bourne, serves as treasurer, director, and vice chairman of the board of
     directors of CNL Fund Advisors.  During the years ended December 31, 1998,
     1997, and 1996, CNL Fund Advisors, Inc. (hereinafter referred to as the
     "Affiliate") performed certain services for the Partnership, as described
     below.

     During the years ended December 31, 1998, 1997, and 1996, the Affiliate
     acted as manager of the Partnership's properties pursuant to a management
     agreement with the Partnership.  In connection therewith, the Partnership
     agreed to pay the Affiliate an annual, noncumulative, subordinated
     management fee of one percent of the sum of gross revenues from properties
     wholly owned by the Partnership and the Partnership's  allocable  share of
     gross revenues  from joint ventures.  The management fee, which will not
     exceed fees which are competitive for similar services in the same geo-
     graphic area, may or may not be taken, in whole or in part as to any year,
     in the sole discretion of the Affiliate.  All or any portion of the
     management fee not taken as to any fiscal year shall be deferred without
     interest and may be taken in such other fiscal year as the Affiliate shall
     determine.  The Partnership incurred management fees of $38,570, $40,087,
     and $39,206 for the years ended December 31, 1998, 1997, and 1996,
     respectively.

     The Affiliate is also entitled to receive a deferred, subordinated real
     estate disposition fee, payable upon the sale of one or more properties,
     based on the lesser of one-half of a competitive real estate commission or
     three percent of the sales price if the Affiliate provides a substantial
     amount of services in connection with the sale.  However, if the net sales
     proceeds are reinvested in a replacement property, no such real estate
     disposition fees will be incurred until such replacement property is sold
     and the net sales proceeds are distributed.  The payment of the real estate
     disposition fee is subordinated to receipt by the limited partners of their
     aggregate Limited Partners' 8% Return, plus their invested capital
     contributions.  No deferred, subordinated real estate disposition fees have
     been incurred since inception.

     During the years ended December 31, 1998, 1997, and 1996, the Affiliate
     provided accounting and administrative services to the Partnership on a
     day-to-day basis.  The Partnership incurred $102,840, $89,270, and $118,677
     for the years ended December 31, 1998, 1997, and 1996, respectively, for
     such services.

                                       25
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


9.   Related Party Transactions - Continued:
     --------------------------------------

     During 1996, the Partnership acquired one property from an affiliate of the
     general partners, for a purchase price of $775,000.  The property is being
     held as tenants-in-common, with another affiliate of the general partners.
     The affiliate had purchased and temporarily held title to this property in
     order to facilitate the acquisition of the property by the Partnership.
     The purchase price paid by the Partnership represented the costs incurred
     by the affiliate to acquire the property, including closing costs.

     The due to related parties at December 31, 1998 and 1997 totalled $26,476
     and $3,351, respectively.

10.  Concentration of Credit Risk:
     ----------------------------

     The following schedule presents total rental and earned income from
     individual lessees, each representing more than ten percent of the
     Partnership's total rental and earned income (including the Partnership's
     share of total rental income from the joint venture and the properties held
     as tenants-in-common with affiliates) for each of the years ended December
     31:

<TABLE>
<CAPTION>
                                                     1998                    1997                    1996
                                             ------------------      ------------------      ------------------

               <S>                             <C>                     <C>                     <C>
               DenAmerica Corp.                      $1,164,160              $1,046,845              $1,051,328
               Golden Corral Corporation                971,344                 979,009                 954,476
               Foodmaker, Inc.                          558,466                 556,610                 556,610
</TABLE>

                                       26
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996

10.  Concentration of Credit Risk - Continued:
     ----------------------------------------

     In addition, the following schedule presents total rental and earned income
     from individual restaurant chains, each representing more than ten percent
     of the Partnership's total rental and earned income (including the
     Partnership's share of total rental income from the joint venture and the
     properties held as tenants-in-common with affiliates) for each of the years
     ended December 31:

<TABLE>
<CAPTION>
                                                      1998                    1997                    1996
                                              ------------------      ------------------      ------------------

              <S>                               <C>                     <C>                     <C>
              Denny's                                 $1,164,160              $1,164,928              $1,163,621
              Golden Corral Family
               Steakhouse Restaurants                    971,344                 979,009                 954,476
              Jack in the Box                            558,466                 556,610                 556,610
              Boston Market                              467,043                 329,300                 260,756
</TABLE>

     Although the Partnership's properties are geographically diverse throughout
     the United States and the Partnership's lessees operate a variety of
     restaurant  concepts, default by any one of these lessees or restaurant
     chains could significantly impact the results of operations of the
     Partnership if the Partnership is not able to re-lease the properties in a
     timely manner.

     In October 1998, Finest Foodservice, L.L.C. and Boston Chicken, Inc., the
     tenants of four Boston Market properties filed for bankruptcy and rejected
     the leases relating to two properties.  The Partnership will not recognize
     any rental and earned income from these properties until new tenants for
     the properties are located, or until the properties are sold and the
     proceeds from such sales are reinvested in additional properties.  While
     the tenants have not rejected or affirmed the remaining two leases, there
     can be no assurance that some or all of the leases will not be rejected in
     the future.  The lost revenues resulting from the two leases that were
     rejected, as described above, and the possible rejection of the remaining
     two leases could have an adverse effect on the results of operations of the
     Partnership if the Partnership is not able to re-lease these properties in
     a timely manner.

11.  Subsequent Event:
     ----------------

     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
     4,320,947 shares of its common stock, par value $0.01 per shares (the "APF
     Shares").

                                       27
<PAGE>

                           CNL INCOME FUND XVI, LTD.
                        (A Florida Limited Partnership)

                   NOTES TO FINANCIAL STATEMENTS - CONTINUED
                   -----------------------------------------

                 Years Ended December 31, 1998, 1997, and 1996


11.  Subsequent Event - Continued:
     ----------------------------

     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, 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.  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.

                                       28
<PAGE>

            Additional Financial Information regarding Golden Corral

     The attached combined statements of revenues and direct operating expenses
and combined statements of cash flows (the "Golden Corral Restaurant Property
Financial Statements") were prepared from financial information derived from the
audited financials of Golden Corral Corporation, the lessee of six restaurant
properties of the Partnership ("Golden Corral").  The Golden Corral Restaurant
Property Financial Statements depict the operating results and cash flows of the
individual properties owned by the Partnership and not the operations of Golden
Corral.  The audited financial statements of Golden Corral are not publicly
available, and Golden Corral does not make any guarantee regarding the future
operating results of the restaurant properties.  Golden Corral is able to
consolidate the cash generated from the Partnership's restaurant properties with
the cash generated from other properties not owned by the Partnership.  As a
result, cash generated from the Partnership's restaurant properties may be used
by Golden Corral to pay its obligations with respect to other properties in its
portfolio and for normal working capital purposes.  THEREFORE, THE CASH
GENERATED FROM THE GOLDEN CORRAL RESTAURANT PROPERTIES OWNED BY THE PARTNERSHIP
IS NOT NECESSARILY INDICATIVE OF GOLDEN CORRAL'S ABILITY TO PAY ITS LEASE
OBLIGATIONS WITH RESPECT TO SUCH PROPERTIES.

                                       29
<PAGE>

INDEPENDENT AUDITORS' REPORT
----------------------------

To the Board of Directors and Stockholders
Golden Corral Corporation and Subsidiaries
Raleigh, North Carolina


We have audited the accompanying combined statements of revenues and direct
operating expenses and cash flows of the Six Golden Corral restaurants included
in CNL Income Fund XVI, Ltd. ("Six Golden Corral Restaurants") for the years
ended December 30, 1998 and December 31, 1997.  These statements are the
responsibility of Golden Corral Corporation's management.  Our responsibility is
to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As described in Note 1, the accompanying financial statements were prepared
solely to comply with the rules and regulations of the Securities and Exchange
Commission for inclusion in the Form    10-K/A of CNL Income Fund XVI, Ltd. and
are not intended to be a complete presentation of the results of operations and
cash flows of the Six Golden Corral Restaurants.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined revenues and direct operating
expenses and cash flows of the Six Golden Corral Restaurants for the years ended
December 30, 1998 and December 31, 1997, in conformity with generally accepted
accounting principles.

/s/  KPMG LLP
Raleigh, North Carolina
November 5, 1999

                                       30
<PAGE>

SIX GOLDEN CORRAL RESTAURANTS

Combined Statements of Revenues and Direct Operating Expenses
For The Years Ended December 30, 1998 and December 31, 1997
------------------------------------------------------------------------------

                                                      1998            1997
                                                 --------------  --------------

Revenues
 Net restaurant sales                              $10,767,301     $10,569,637
 Royalty income                                         85,834          82,257
                                                   -----------     -----------
                                                    10,853,135      10,651,894
                                                   -----------     -----------

Direct Operating Expenses
 Cost of sales                                       4,468,210       4,099,962
 Labor and labor expense                             2,998,193       2,779,430
 Manager controllables                               1,403,006       1,240,048
 Non-controllables                                   2,526,418       2,532,565
 Bonus expense                                         152,846         168,792
                                                   -----------     -----------
                                                    11,548,673      10,820,797
                                                   -----------     -----------
Net Loss                                           $  (695,538)    $  (168,903)
                                                   ===========     ===========



                See accompanying notes to financial statements.
------------------------------------------------------------------------------

                                       31
<PAGE>

SIX GOLDEN CORRAL RESTAURANTS

Combined Statements of Cash Flows
For The Years Ended December 30, 1998 and December 31, 1997
------------------------------------------------------------------------------

                                                       1998            1997
                                                   -----------     -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss                                           $  (695,538)    $  (168,903)
(Decrease) Increase In Cash Due To Changes In
   Receivables                                          (5,285)         (2,152)
   Inventories                                         (36,977)         (9,273)
   Other current assets                                   (261)          7,691
   Accounts payable                                     13,578          79,481
   Accrued liabilities                                 (11,198)         (6,153)
                                                   -----------     -----------
                                                      (735,681)        (99,309)
                                                   -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES
   Increase in amounts due to Golden Corral            643,129         201,939
    Corporation                                    -----------     -----------
                                                       643,129         201,939
                                                   -----------     -----------
NET (DECREASE) INCREASE IN CASH                        (92,552)        102,630

CASH, BEGINNING                                        225,730         123,100
                                                   -----------     -----------

CASH, ENDING                                       $   133,178     $   225,730
                                                   ===========     ===========



                See accompanying notes to financial statements.
------------------------------------------------------------------------------

                                       32
<PAGE>

SIX GOLDEN CORRAL RESTAURANTS

Notes to Combined Statements of Revenues and Direct Operating Expenses and
Cash Flows
December 30, 1998 and December 31, 1997
------------------------------------------------------------------------------

1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

   The Six Golden Corral Restaurants are parties to leasing arrangements for
   land and building leases with CNL Income Fund XVI, Ltd. The Restaurants are
   located in Farmington, New Mexico, Rosenburg, Texas, Fort Collins, Colorado,
   Independence, Missouri and Baytown, Texas, as well as one affiliated
   franchised unit in Hickory, North Carolina. These restaurants are either
   operated by Golden Corral Corporation or a franchisee of Golden Corral
   Corporation and subsidiaries. The accompanying combined financial statements
   present the revenues and direct operating costs and the related cash flows of
   the Six Golden Corral Restaurants.

   The combined financial statements have been prepared to comply with the rules
   and regulations of the Securities and Exchange Commission for the inclusion
   in the Form 10-K/A of CNL Income Fund XVI, Ltd. and are not intended to be a
   complete presentation of the financial position, results of operations and
   cash flows as if the Six Golden Corral Restaurants had operated as a stand-
   alone company. The Six Golden Corral Restaurants were not operated as a
   stand-alone business within Golden Corral Corporation and the presentation
   does not include certain indirect expenses of the Six Golden Corral
   Restaurants which were incurred by Golden Corral Corporation. Therefore, the
   accompanying combined financial statements are not representative of the
   complete financial position, results of operations or cash flows of the Six
   Golden Corral Restaurants for the periods presented.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

   Use of Estimates - The combined statements of the Six Golden Corral
   ----------------
   Restaurants are presented on the accrual basis in conformity with generally
   accepted accounting principles, which require management to make estimates
   and assumptions that affect the reported amounts of assets, liabilities,
   revenues and expenses during the reporting period, and of contingent assets
   and liabilities at the date of the financial statements. Actual results could
   differ from these estimates.

   Fiscal Year - The Restaurants use a thirteen four-week period, fifty-
   -----------
   two/fifty-three week fiscal year with the year ending on the Wednesday
   closest to December 31. The years ended December 30, 1998 and December 31,
   1997, included fifty-two weeks.

   Inventories - Inventories are valued at the lower of first-in, first-out cost
   -----------
   or market.

   Income Taxes - Income taxes have not been provided in the financial
   ------------
   statements as the Six Golden Corral Restaurants are part of Golden Corral
   Corporation and Subsidiaries and income taxes were not allocated to the
   individual restaurant level.

   Royalties - Earnings from royalty fees accrue based on a percentage of the
   ---------
   franchisee's net sales.

   Non-controllables - Non-controllables consist of expenses for land and
   -----------------
   building rent, equipment rent,

                                       33
<PAGE>

    advertising, general liability insurance, property taxes and licenses, and
    administrative services paid by the restaurant.

3.  LEASE ARRANGEMENTS

    CNL Income Fund XVI, Ltd. and the Six Golden Corral Restaurants are parties
    to various leasing arrangements for restaurant facilities. Leases for
    restaurant facilities are for terms of 15 years with cancellation provisions
    and purchase or substitution provisions on certain leases and generally
    provide for minimum rentals plus a percentage of sales in excess of stated
    amounts. The Six Golden Corral Restaurants are obligated for the cost of
    property taxes, insurance and maintenance.

    Lease Obligations - Minimum rental payments due under leases having terms in
    -----------------
    excess of one year at December 30, 1998 are as follows:

       1999                                    $   933,000
       2000                                        933,000
       2001                                        933,000
       2002                                        933,000
       2003                                        933,000
       Later years                               5,858,000
                                               -----------
       Total minimum lease commitments         $10,523,000
                                               ===========

    Expense - Rent expense for restaurant facilities is included in non-
    -------
    controllables and is summarized below:

                                                 1998       1997
                                              ---------  ---------
       Minimum rentals on operating leases     $762,000   $772,000
       Contingent rentals                        42,000     30,000
                                               --------   --------
                                               $804,000   $802,000
                                               ========   ========

    Subleases - The affiliated franchised unit in Hickory, North Carolina is
    ---------
    subleased under a lease cancelable with twenty days notice on payment of a
    cancellation fee equal to twelve months' rent and the franchisee pays rent
    directly to the landlord.

4.  RELATED PARTY TRANSACTIONS

    The following summarizes transactions with related parties:

                                                    1998      1997
                                                 ---------  --------
Amounts paid to Golden Corral Corporation
   and Subsidiaries for:

Administrative services, included in              $538,877  $528,800
   non-controllables                              ========  ========

Equipment rent, included in non-controllables     $635,923  $629,845
                                                  ========  ========

                                       34
<PAGE>

Workers' compensation insurance, included         $177,721  $139,796
   in labor and labor expenses                    ========  ========

General liability insurance, included in          $129,636  $150,695
   non-controllables                              ========  ========

Advertising, included in non-controllables        $157,306  $153,564
                                                  ========  ========

Royalty income received from affiliated           $ 85,834  $ 82,257
 franchisee                                       ========  ========

   Excess cash generated by the Six Golden Corral Restaurants is transferred to
   Golden Corral Corporation.  Cash shortfalls by the Six Golden Corral
   Restaurants are funded by Golden Corral Corporation.

5. SUBSEQUENT EVENTS

   In August, 1999, the operating restaurants in Independence, Missouri and Fort
   Collins, Colorado were franchised.  Subleases were signed with the two
   franchisees of the properties.

                                       35
<PAGE>

                                 SIGNATURES


     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 17th day of
December, 1999.

                                 CNL INCOME FUND XVI, LTD.

                                 By: CNL REALTY CORPORATION
                                     General Partner

                                     /s/ Robert A. Bourne
                                     --------------------
                                     ROBERT A. BOURNE, President


                                 By: ROBERT A. BOURNE
                                     General Partner

                                     /s/ Robert A. Bourne
                                     --------------------
                                     ROBERT A. BOURNE


                                 By: JAMES M. SENEFF, JR.
                                     General Partner

                                     /s/ James M. Seneff, Jr.
                                     ------------------------
                                     JAMES M. SENEFF, JR.

                                       36
<PAGE>

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<S>                                           <C>                                     <C>

        Signature                                        Title                                Date
        ---------                                        -----                                -----

/s/ Robert A. Bourne                    President, Treasurer and Director               December 17, 1999
------------------------------------   (Principal Financial and Accounting
Robert A. Bourne                                     Officer)



/s/ James M. Seneff, Jr.               Chief Executive Officer and Director             December 17, 1999
------------------------------------      (Principal Executive Officer)
James M. Seneff, Jr.
</TABLE>

                                       37