<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                   FORM 10-K/A
                                 Amendment No. 1

(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)

                             400 East South Street
                            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, Item 2. Properties, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations, Item 7A.  Quantitative and
Qualitative Disclosures about Market Risk (incorporated by reference into Item
7.)  and Item 8.  Financial Statements and Supplementary Data.

     In addition, the Form 10-K of the Partnership is being amended to include,
in Item 14(d), summarized financial information of one of its tenants,
DenAmerica Corp., as a result of the fact that this tenant leased more than 20
percent of the Partnership's total assets for the year ended December 31, 1998.

                                 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.

                                     - 1 -
<PAGE>

     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 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.
Certain lessees 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

                                     - 2 -
<PAGE>

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.

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
in-

                                     - 3 -

<PAGE>

formation 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 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 2.  Properties

     As of December 31, 1998, the Partnership owned 44 Properties.  Of the 44
Properties, 41 are owned by the Partnership in fee simple, one is owned through
joint venture arrangement and two are owned through a tenancy in common
arrangements. See Item 1. Business - Joint Venture and Tenancy in Common
Arrangements. The Partnership is not permitted to encumber its Properties under
the terms of its partnership agreement. Reference is made to the Schedule of
Real Estate and Accumulated Depreciation for a listing of the Properties and
their respective costs, including acquisition fees and certain acquisition
expenses. This schedule was filed with the Partnership's Form 10-K for the year
ended December 31, 1998.

Description of Properties

     Land. The Partnership's Property sites range from approximately 16,600 to
104,800 square feet depending upon building size and local demographic factors.
Sites purchased by the Partnership are in locations zoned for commercial use
which have been reviewed for traffic patterns and volume.

     The following table lists the Properties owned by the Partnership as of
December 31, 1998 by state.  More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with the Partnership's Form 10-K for the year ended December
31, 1998.

           State                                      Number of Properties
           -----                                      --------------------

           Arizona                                              1
           California                                           2
           Colorado                                             1
           Washington D.C.                                      1
           Florida                                              5
           Georgia                                              1
           Idaho                                                1
           Indiana                                              2
           Kansas                                               2
           Minnesota                                            2
           Missouri                                             4
           North Carolina                                       3
           New Mexico                                           3
           Nevada                                               1
           Ohio                                                 4
           Tennessee                                            1
           Texas                                                9
           Utah                                                 1

                                     - 4 -

<PAGE>

           State                                      Number of Properties
           -----                                      --------------------

                                                            ------
           TOTAL PROPERTIES:                                   44
                                                            ======

     Buildings. Each of the Properties owned by the Partnership includes a
building that is one of a Restaurant Chain's approved designs. However, the
buildings located on the six Checkers Properties are owned by the tenant while
the land parcels are owned by the Partnership. The buildings generally are
rectangular and are constructed from various combinations of stucco, steel,
wood, brick and tile. The sizes of the buildings owned by the Partnership range
from approximately 2,000 to 11,100 square feet. All buildings on Properties are
freestanding and surrounded by paved parking areas. Buildings are suitable for
conversion to various uses, although modifications may be required prior to use
for other than restaurant operations. As of December 31, 1998, the Partnership
had no plans for renovation of the Properties. Depreciation expense is computed
for buildings and improvements using the straight line method using a
depreciable life of 40 years for federal income tax purposes. As of December 31,
1998, the aggregate cost of the Properties owned by the Partnership and joint
ventures (including Properties owned through tenancy in common arrangements) for
federal income tax purposes was $37,887,606 and $3,344,166, respectively.

     The following table lists the Properties owned by the Partnership as of
December 31, 1998 by Restaurant Chain.

           Restaurant Chain                           Number of Properties
           ----------------                           --------------------

           Arby's                                               2
           Boston Market                                        5
           Checkers                                             6
           Denny's                                              9
           Golden Corral                                        6
           IHOP                                                 2
           Jack in the Box                                      5
           KFC                                                  1
           Long John Silver's                                   6
           Shoney's                                             1
           Wendy's                                              1
                                                            ------
           TOTAL PROPERTIES:                                   44
                                                            ------

     The General Partners consider the Properties to be well-maintained and
sufficient for the Partnership's operations.

     The General Partners believe that the Properties are adequately covered by
insurance.  In addition, the General Partners have obtained contingent liability
and property coverage for the Partnership.  This insurance is intended to reduce
the Partnership's exposure in the unlikely event a tenant's insurance policy
lapses or is insufficient to cover a claim relating to the Property.

     Leases. The Partnership leases the Properties to operators of selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance. Generally, a
lessee is required, under the terms of its lease agreement, to make such capital
expenditures as may be reasonably necessary to refurbish buildings, premises,
signs and equipment so as to comply with the lessee's obligations, if
applicable, under the franchise agreement to reflect the current commercial
image of its Restaurant Chain. These capital expenditures are required to be
paid by the lessee during the term of the lease. The terms of the leases of the
Properties owned by the Partnership are described in Item 1. Business - Leases.

     At December 31, 1998, 1997, 1996, 1995 and 1994, the properties were 89%,
100%, 100%, 100%, and 100% occupied, respectively.  The following is a schedule
of the average annual rent for each of the five years ended December 31:

                                     - 5 -
<PAGE>

<TABLE>
<CAPTION>
                                             For the Year Ended December 31:
                              1998          1997          1996          1995         1994
                          -----------   -----------    ----------   -----------    --------

<S>                        <C>           <C>           <C>           <C>           <C>
Rental Revenues (1)        $4,059,988    $4,392,092    $4,357,033    $2,698,956    $130,720
Properties                         44            42            43            41          22
Average Rent per Unit      $   92,272    $  104,574    $  101,326    $   65,828    $  5,942
</TABLE>

(1)  Rental income includes the Partnership's share of rental income from the
     Property owned through joint venture arrangements and the Properties owned
     through tenancy in common arrangements. Rental revenues have been adjusted,
     as applicable, for any amounts for which the Partnership has established an
     allowance for doubtful accounts.

     The following is a schedule of lease expirations for leases in place as of
December 31, 1998 for each of the ten years beginning with 1999 and thereafter.

                                                                  Percentage of
                                     Number      Annual Rental    Gross Annual
        Expiration Year             of Leases      Revenues       Rental Income
       -----------------           -----------  ---------------  ---------------

           1999                           --              --                --
           2000                           --              --                --
           2001                           --              --                --
           2002                           --              --                --
           2003                           --              --                --
           2004                           --              --                --
           2005                           --              --                --
           2006                           --              --                --
           2007                           --              --                --
           2008                           --              --                --
           Thereafter                     39       3,906,423            100.00%
                                       ------   -------------    --------------
           Totals (1)                     39       3,906,423            100.00%
                                       ======   =============    ==============

(1)  Excludes five Properties which were vacant at December 31, 1998.


     Leases with Major Tenants. The terms of each of the leases with the
Partnership's major tenants as of December 31, 1998 (see Item 1. Business -
Major Tenants), are substantially the same as those described in Item 1.
Business - Leases.

     Golden Corral Corporation leases six Golden Corral restaurants. The initial
term of each lease is 15 years (expiring between 2009 and 2011) and the average
minimum base annual rent is approximately $155,400 (ranging from approximately
$113,300 to $192,900).

     Foodmaker, Inc. leases five Jack in the Box restaurants. The initial term
of each lease is 18 years (expiring between 2011 and 2012) and the average
minimum base annual rent is approximately $97,400 (ranging from approximately
$88,600 to $115,600).

     DenAmerica Corp. leases nine Denny's restaurants. The initial term of each
lease is 20 years (expiring between 2014 and 2015) and the average minimum base
annual rent is approximately $111,200 (ranging from approximately $64,800 to
$220,600).

Competition

     The fast-food and family-style restaurant business is characterized by
intense competition.  The restaurants on the Partnership's Properties compete
with independently owned restaurants, restaurants which are part of local or

                                     - 6 -
<PAGE>

regional chains, and restaurants in other well-known national chains, including
those offering different types of food and service.

                                 PART II

Item 7.   Management's Discussion and Analysis of Financial Condition and
          Results of Operations

     The Partnership was organized on September 2, 1993, to acquire for cash,
either directly or through joint venture arrangements, both newly constructed
and existing restaurant Properties, as well as land upon which restaurant
Properties were to be constructed, which are leased primarily to operators of
selected national and regional fast-food and family-style Restaurant Chains.
The leases are triple-net leases, with the lessees generally responsible for all
repairs and maintenance, property taxes, insurance and utilities.  As of
December 31, 1998, the Partnership owned 44 Properties, either directly or
indirectly through joint venture or tenancy in common arrangements.

Capital Resources

     Currently, the Partnership's primary source of capital is cash from
operations (which includes cash received from tenants, distributions from the
joint venture and interest received, less cash paid for expenses).  Cash from
operations was $3,623,694, $3,780,424, and $3,753,726 for the years ended
December 31, 1998, 1997, and 1996, respectively.  The decrease in cash from
operations during 1998, as compared to 1997, and the increase during 1997, as
compared to 1996, is primarily a result of changes in income and expenses as
described in "Results of Operations" below and changes in the Partnership's
working capital.

     Other sources and uses of capital included the following during the years
ended December 31, 1998, 1997, and 1996.

     During the year ended December 31, 1996, the Partnership used its remaining
net offering proceeds to acquire two additional Properties (one of which was
undeveloped land on which a restaurant was constructed), and to establish a
working capital reserve of approximately $60,000 for Partnership purposes.

     As a result of the Partnership's tenant selling its restaurant business
located on the Partnership's Property in Appleton, Wisconsin, in April 1996, the
Partnership sold its Property for $775,000, resulting in a gain for financial
reporting purposes of $124,305.  This Property was originally acquired by the
Partnership in February 1995 and had a cost of approximately $595,100, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the
Partnership sold the Property for approximately $179,900 in excess of its
original purchase price.  In October 1996, the Partnership reinvested the net
sales proceeds in a Boston Market Property in Fayetteville, North Carolina, as
tenants-in-common with an affiliate of the General Partners.  In connection
therewith, the Partnership and its affiliate entered into an agreement whereby
each co-venturer will share in the profits and losses of the Property in
proportion to each co-venturer's interest.  The Partnership owns an 80.44%
interest in the Property.  The sale of the Property in Appleton, Wisconsin, was
structured to qualify as a like-kind exchange transaction in accordance with
Section 1031 of the Internal Revenue Code.  As a result, no gain was recognized
for federal income tax purposes.  Therefore, the Partnership was not required to
distribute any of the net sales proceeds from the sale of this Property to
Limited Partners for the purpose of paying federal and state income taxes.

     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 January 1998, the Partnership reinvested the net
sales proceeds in an IHOP Property in Memphis, Tennessee, as tenants-in-common
with affiliates of the General Partners.  In connection therewith, the
Partnership and its affiliates entered into an agreement whereby each co-tenant
will share in the profits and losses of the Property in proportion to each co-
venturer's interest.  The Partnership owns a 40.42% interest in the Property.

     In April 1998, the Partnership received approximately $162,000 from the
developer of the Property in Farmington, New Mexico.  This represents a
reimbursement from the developer upon final reconciliation of total construction
costs to the total construction costs funded by the Partnership in accordance
with the development

                                     - 7 -
<PAGE>

agreement. 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 for
construction costs relating to the joint venture for a 32.35% interest in the
profits and losses of the 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.

     None of the Properties owned by the Partnership, or the joint venture or
tenancy in common arrangements in which the Partnership owns an interest, is or
may be encumbered.  Subject to certain restrictions on borrowing, however, the
Partnership may borrow funds but will not encumber any of the Properties in
connection with any such borrowing.  The Partnership will not borrow for the
purpose of returning capital to the Limited Partners.  The Partnership will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Partnership.  The General Partners further have represented
that they will use their reasonable efforts to structure any borrowing so that
it will not constitute "acquisition indebtedness" for federal income tax
purposes and also will limit the Partnership's outstanding indebtedness to three
percent of the aggregate adjusted tax basis of its Properties.  In  addition,
the Partnership will not borrow unless it first obtains an opinion of counsel
that such borrowing will not constitute acquisition indebtedness.  Affiliates of
the General Partners from time to time incur certain operating expenses on
behalf of the Partnership for which the Partnership reimburses the affiliates
without interest.

     Currently, cash reserves, rental income from the Partnership's Properties
and net sales proceeds from the sale of Properties, pending reinvestment in
additional Properties, are invested in money market accounts or other short-
term, highly liquid investments such as demand deposit accounts at commercial
banks, CDs and money market accounts with less than a 30-day maturity date,
pending the Partnership's use of such funds to pay Partnership expenses or to
make distributions to partners.  At December 31, 1998, the Partnership had
$1,603,589 invested in such short-term investments as compared to $1,673,869 at
December 31, 1997.  As of December 31, 1998, the average interest rate earned on
the rental income deposited in demand deposit accounts at commercial banks was
approximately three percent annually.  The funds remaining at December 31, 1998,
after payment of distributions and other liabilities, will be used to meet the
Partnership's working capital and other needs.

Short-Term Liquidity

     The Partnership's short-term liquidity requirements consist primarily of
the operating expenses of the Partnership.

     The Partnership's investment strategy of acquiring Properties for cash and
leasing them under triple-net leases to operators who generally meet specified
financial standards minimizes the Partnership's operating expenses.  The General
Partners believe that the leases will continue to generate cash flow in excess
of operating expenses.

     Due to low operating expenses and ongoing cash flow, the General Partners
believe that the Partnership has sufficient working capital reserves at this
time.  In addition, because all leases of the Partnership's Properties are on a
triple-net basis, it is not anticipated that a permanent reserve for maintenance
and repairs will be established at this time. To the extent, however, that the
Partnership has insufficient funds for such purposes, the General Partners will
contribute to the Partnership an aggregate amount of up to one percent of the
offering proceeds for maintenance and repairs.  The General Partners have the
right to cause the Partnership to maintain additional reserves if, in their
discretion, they determine such reserves are required to meet the Partnership's
working capital needs.

     The General Partners have the right, but not the obligation, to make
additional capital contributions if they deem it appropriate in connection with
the operations of the Partnership.

     The Partnership generally distributes cash from operations remaining after
the payment of the operating expenses of the Partnership, to the extent that the
General Partners determine that such funds are available for distribution. Based
on cash from operations, and for the year ended December 31, 1998, cumulative
excess operating reserves, the Partnership declared distributions to the Limited
Partners of $3,690,000, $3,600,000, and $3,543,751 for the years ended December
31, 1998, 1997, and 1996, respectively. This represents distributions of $0.82,
$0.80, and $0.79 per Unit for the years ended December 31, 1998, 1997, and 1996,
respectively. No amounts distributed to the Limited Partners for the years ended
December 31, 1998, 1997, and 1996, are required to be or have been treated by
the Partnership as a return of capital for purposes of calculating the Limited
Partners' return on their adjusted capital contributions. The Partnership
intends to continue to make distributions of cash available for distribution to
Limited Partners on a quarterly basis.

                                     - 8 -
<PAGE>

     In addition, during 1996, the affiliates incurred on behalf of the
Partnership $9,356 for certain acquisition expenses and during the years ended
December 31, 1998, 1997, and 1996, the affiliates incurred $125,080, $84,319,
and $105,144, respectively, for certain operating expenses. As of December 31,
1998 and 1997, the Partnership owed $26,476 and $3,351, respectively, to related
parties for such amounts, accounting and administrative services and management
fees. As of March 11, 1999, the Partnership had reimbursed the affiliates all
such amounts. Other liabilities, including distributions payable, decreased to
$970,241 at December 31, 1998, from $1,030,043 at December 31, 1997, primarily
as a result of the payment during the year ended December 31, 1998, of
construction costs accrued for certain Properties at December 31, 1997.

Long-Term Liquidity

     The Partnership has no long-term debt or other long-term liquidity
requirements.

Results of Operations

     The Partnership owned and leased 43 wholly owned Properties (including one
Property in Appleton, Wisconsin, which was sold in April 1996) during 1996, 42
wholly owned Properties (including one Property in Oviedo, Florida, which was
sold in March 1997) during 1997, and 43 wholly owned Properties (including two
Properties in Madison and Chattanooga, Tennessee exchanged for two Properties in
Lawrence, Kansas and Indianapolis, Indiana), during 1998. In addition, during
1997 and 1996, the Partnership owned and leased one Property with an affiliate,
as tenants-in-common, and during 1998, the Partnership was a co-venturer in a
joint venture arrangement that owned and leased one Property, and the
Partnership owned and leased two Properties with affiliates, as tenants-in-
common. As of December 31, 1998, the Partnership owned, either directly, as
tenants-in-common or through a joint venture arrangement, 44 Properties which
are generally subject to long-term, triple-net leases that provide for minimum
base annual rental amounts (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. For a further description of the Partnership's leases and Properties,
see Item 1. Business - Leases and Item 2. Properties, respectively.

     During the years ended December 31, 1998, 1997, and 1996, the Partnership
earned $3,864,121, $4,266,069, and $4,297,558, respectively, in rental income
from operating leases (net of adjustments to accrued rental income) and earned
income from direct financing leases from Properties wholly owned by the
Partnership. The decrease in rental and earned income during 1998, as compared
to 1997, is partially attributable to the fact that in July 1998, the tenant of
the Shoney's Property in Las Vegas, Nevada ceased restaurant operations and
vacated the Property. The Partnership established an allowance for doubtful
accounts during 1998 of approximately $82,500 for rental and earned income
amounts due from this tenant due to the fact that collection of such amounts is
questionable. The General Partners are pursuing collection of past due amounts
from the former tenant, and will recognize such amounts as income if collected.
In February 1999, the Partnership entered into a new lease with a new tenant for
this Property. In addition, during 1998, the Partnership wrote off approximately
$77,300 of accrued rental income (non-cash accounting adjustments relating to
the straight-lining of future scheduled rent increases over the lease term in
accordance with generally accepted accounting principles) relating to this
Property.

     In addition, rental and earned income decreased approximately $110,500
during 1998 as a result of the fact that in 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 the seven Properties
leased by these tenants. As a result, these tenants ceased making rental
payments on the four rejected leases. The Partnership has continued receiving
rental payments relating to the leases not rejected by the tenants. In
conjunction with the four rejected leases, during 1998 the Partnership wrote off
approximately $107,000 of accrued rental income (non-cash accounting adjustment
relating to the straight-lining of future scheduled rent increases over the
lease term in accordance with generally accepted accounting principles). The
General Partners are currently seeking either new tenants or purchasers for
these Properties. The Partnership will not recognize any rental and earned
income from these Properties until new tenants for these Properties are located
or until the Properties are sold and the proceeds from such sales are reinvested
in additional Properties. 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 not able to re-lease the
Properties in a timely manner.

                                     - 9 -
<PAGE>

     In addition, the decrease in rental and earned income during 1998 and 1997,
each as compared to the previous year, is partially the result of a decrease in
rental income due to the sale of the Property in Oviedo, Florida, in March 1997.
The net sales proceeds were reinvested in a Property in Memphis, Tennessee, with
affiliates of the General Partners as tenants-in-common, resulting in an
increase in equity in earnings of joint venture, as described below.  In
addition, the decrease in rental and earned income during 1997, as compared to
1996, is a result of the sale of the Property in Appleton, Wisconsin in April
1996.  The decrease during 1997 as compared to 1996 is partially offset by the
acquisition of two additional Properties in 1996 that were operational for a
full year in 1997, as compared to a partial year in 1996.

     In addition, for the years ended December 31, 1998, 1997, and 1996, the
Partnership earned $132,002, $73,507, and $19,668, respectively, attributable to
net income earned by joint ventures.  The increase in net income earned by joint
ventures during 1998, as compared to 1997, is primarily attributable to the fact
that in January 1998, the Partnership reinvested the net sales proceeds it
received from the 1997 sale of the Property in Oviedo, Florida, in an IHOP
Property in Memphis, Tennessee, with affiliates of the General Partners as
tenants-in-common.  The increase during 1997, as compared to 1996, is primarily
attributable to the fact that in October 1996, the Partnership reinvested the
net sales proceeds it received from the sale of the Property in Appleton,
Wisconsin, in a Property in Fayetteville, North Carolina, with affiliates of the
General Partners.  This Property was operational for a full year in 1997, as
compared to a partial year in 1996.

     During the year ended December 31, 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
(including the Partnership's share of rental income from the Property owned by a
joint venture and the two Properties owned with affiliates as tenants-in-
common).  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, each of these lessees will
continue to contribute more than ten percent of the Partnership's total rental
income in 1999.  In addition, during the year ended December 31, 1998, four
Restaurant Chains, 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 (including the Partnership's share of rental income from the Property
owned by a joint venture and the two Properties owned with affiliates as
tenants-in-common).  During 1998, the tenants of four Boston Market Properties
filed for bankruptcy as described below.  In 1999, it is anticipated that Golden
Corral, Jack in the Box and Denny's each will continue to account for more than
ten percent of the total 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.

     During 1998, 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.

     Operating expenses, including depreciation and amortization expense, were
$850,501, $836,815 and $814,325 for the years ended December 31, 1998, 1997, and
1996, respectively.  The increase in operating expenses during 1998, as compared
to 1997, is primarily due to the fact that the Partnership incurred $24,652 in
transaction costs relating to the General Partners retaining financial and legal
advisors to assist them in evaluating and negotiating the proposed Merger with
APF, as described below.  If the Limited Partners reject the Merger, the
Partnership will bear the portion of the transaction costs based upon the
percentage of "For" votes and the General Partners will bear the portion of such
transaction costs based upon the percentage of "Against" votes and abstentions.

     The increase in operating expenses during 1998 is partially offset by a
decrease in depreciation expense as a result of the reimbursement of
construction costs from the developer relating to the Property in Farmington,
New Mexico, which reduced the depreciable basis of land and building on
operating leases during 1998, as described above in "Capital Resources."

                                     - 10 -
<PAGE>

     During 1998, the Partnership incurred certain expenses, such as real estate
taxes, insurance, and maintenance relating to a Shoney's Property, two Boston
Market Properties and two Long John Silver's Properties which became vacant, as
described above.  In February 1999, the Partnership entered into a new lease
with a new tenant for the Shoney's Property in Las Vegas, Nevada.  The new
tenant is responsible for real estate taxes, insurance, and maintenance relating
to this Property; therefore, the General Partners do not anticipate that the
Partnership will incur these expenses for this Property in the future.  However,
the Partnership will continue to incur certain expenses, such as real estate
taxes, insurance, and maintenance related to the four remaining vacant
Properties until new tenants for these Properties are located or until the
Properties are sold.  The Partnership is currently seeking new tenants or buyers
for these Properties.

     The increase in operating expenses during 1997, as compared to 1996, is
partially attributable to an increase in depreciation expense as the result of
the acquisition of additional Properties during 1996, and the fact that the
Properties acquired during 1996 were operational for a full year in 1997, as
compared to a partial year in 1996.  Operating expenses also increased during
1997, as a result of the Partnership incurring additional taxes relating to the
filing of various state tax returns during 1997.

     As a result of the sale of the Property in Oviedo, Florida, as described
above in "Capital Resources," the Partnership recognized a gain of $41,148 for
financial reporting purposes for the year ended December 31, 1997.  As a result
of the sale of the Property in Appleton, Wisconsin, as described in "Capital
Resources," the Partnership recognized a gain for financial reporting purposes
of $124,305 for the year ended December 31, 1996.  No Properties were sold
during 1998.

     During the year ended December 31, 1998, the Partnership recorded a
provision for loss on building of $266,257 for financial reporting purposes
relating to a Long John Silver's Property 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 Property's
carrying value at December 31, 1998 and the estimated net realizable value for
this Property.  No such allowance was established during the years ended
December 31, 1997 and 1996.

     The Partnership's leases as of December 31, 1998, are triple-net leases and
contain provisions that the General Partners believe mitigate the adverse effect
of inflation.  Such provisions include clauses requiring the payment of
percentage rent based on certain restaurant sales above a specified level and/or
automatic increases in base rent at specified times during the term of the
lease.  Management expects that increases in restaurant sales volumes due to
inflation and real sales growth should result in an increase in rental income
over time.  Continued inflation also may cause capital appreciation of the
Partnership's Properties.  Inflation and changing prices, however, also may have
an adverse impact on the sales of the restaurants and on potential capital
appreciation of the Properties.

Proposed Merger

     On March 11, 1999, the Partnership entered into an Agreement and Plan of
Merger with APF, pursuant to which the Partnership would be merged with and into
a subsidiary of APF.  As consideration for the Merger, APF has agreed to issue
4,320,947 APF Shares.  In order to assist the General Partners in evaluating the
proposed merger consideration, the General Partners retained Valuation
Associates, a nationally recognized real estate appraisal firm, to appraise the
Partnership's restaurant property portfolio.  Based on Valuation Associates'
appraisal, the fair value of the Partnership's property portfolio and other
assets was $42,519,005 as of December 31, 1998.  The APF Shares are expected to
be listed for trading on the New York Stock Exchange concurrently with the
consummation of the Merger, and, therefore, would be freely tradable at the
option of the former Limited Partners.  At a special meeting of the Limited
Partners that is expected to be held in the fourth quarter of 1999, Limited
Partners holding in excess of 50% of the Partnership's outstanding limited
partnership interests must approve the Merger prior to consummation of the
transaction.  If the Limited Partners at the special meeting approve the Merger,
APF will own the Properties and other assets of the Partnership.  The General
Partners intend to recommend that the Limited Partners of the Partnership
approve the Merger.  In connection with their recommendation, the General
Partners will solicit the consent of the Limited Partners at the special
meeting.

                                     - 11 -
<PAGE>

Year 2000 Readiness Disclosure

Overview of Year 2000 Problem

     The year 2000 problem concerns the inability of information and non-
information technology systems to properly recognize and process date sensitive
information beyond January 1, 2000.  The failure to accurately recognize the
year 2000 could result in a variety of problems from data miscalculations to the
failure of entire systems.

Information and Non-Information Technology Systems

     The Partnership does not have any information or non-information technology
systems.  The General Partners and their affiliates provide all services
requiring the use of information and non-information technology systems pursuant
to a management agreement with the Partnership.  The information technology
system of the General Partners' affiliates consists of a network of personal
computers and servers built using hardware and software from mainstream
suppliers.  The non-information technology systems of the affiliates are
primarily facility related and include building security systems, elevators,
fire suppressions, HVAC, electrical systems and other utilities.  The affiliates
have no internally generated programmed software coding to correct, because
substantially all of the software utilized by the affiliates is purchased or
licensed from external providers.  The maintenance of non-information technology
systems at the Partnership's restaurant properties is the responsibility of the
tenants of such properties in accordance with the terms of the Partnership's
leases.

The Y2K Team

     In early 1998, the General Partners and their affiliates formed a Year 2000
committee (the "Y2K Team") for the purpose of identifying, understanding and
addressing the various issues associated with the year 2000 problem.  The Y2K
Team consists of the General Partners and members from their affiliates,
including representatives from senior management, information systems,
telecommunications, legal, office management, accounting and property
management.

Assessing Year 2000 Readiness

     The Y2K Team's initial step in assessing year 2000 readiness consists of
identifying any systems that are date-sensitive and, accordingly, could have
potential year 2000 problems.  The Y2K Team has conducted inspections,
interviews and tests to identify which of the systems used by the Partnership
could have a potential year 2000 problem.

     The information system of the General Partners' affiliates is comprised of
hardware and software applications from mainstream suppliers.  Accordingly, the
Y2K Team has contacted and is evaluating documentation from the respective
vendors and manufacturers to verify the year 2000 compliance of their products.
The Y2K Team has also requested and is evaluating documentation from the non-
information technology systems providers of the affiliates.

     In addition, the Y2K Team has requested and is evaluating documentation
from other companies with which the Partnership has material third party
relationships.  Such third parties, in addition to the providers of information
and non-information technology systems, consist of the Partnership's transfer
agent and financial institutions.  The Partnership depends on its transfer agent
to maintain and track investor information and its financial institutions for
availability of cash.

     As of September 15, 1999, the Y2K Team had received responses from
approximately 60% of the third parties.  All of the responses were in writing.
Of the third parties responding, all indicated that they are currently year 2000
compliant or will be year 2000 compliant prior to the year 2000.  Although the
Y2K Team continues to receive positive responses from the companies with which
the Partnership has third party relationships regarding their year 2000
compliance, the General Partners cannot be assured that the third parties have
adequately considered the impact of the year 2000.

     In addition, the Y2K Team has requested documentation from the
Partnership's tenants.  The Y2K Team is in the process of evaluating the
responses and expects to complete this process by October 31, 1999.  The
Partnership has also instituted a policy of requiring any new tenants to
indicate that their systems are year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.

                                     - 12 -
<PAGE>

Achieving Year 2000 Compliance

     The Y2K Team has identified and completed upgrades of the hardware
equipment that was not year 2000 compliant.  In addition, the Y2K Team has
identified and completed upgrades of the software applications that were not
year 2000 compliant, although the General Partners cannot be assured that the
upgrade solutions provided by the vendors have addressed all possible year 2000
issues.

     The cost for these upgrades and other remedial measures is the
responsibility of the General Partners and their affiliates.  The General
Partners do not expect that the Partnership will incur any costs in connection
with year 2000 remedial measures.

Assessing the Risks to the Partnership of Non-Compliance and Developing
Contingency Plans

Risk of Failure of Information and Non-Information Technology Systems Used by
the Partnership

     The General Partners believe that the reasonably likely worst case scenario
with regard to the information and non-information technology systems used by
the Partnership is the failure of one or more of these systems as a result of
year 2000 problems.  Because the Partnership's major source of income is rental
payments under long-term triple-net leases, any failure of information or non-
information technology systems used by the Partnership is not expected to have a
material impact on the results of operations of the Partnership.  Even if such
systems failed, the payment of rent under the Partnership's leases would not be
affected.  In addition, the Y2K Team is expected to correct any Y2K problems
within the control of the General Partners and their affiliates before the year
2000.

     The Y2K Team has determined that a contingency plan to address this risk is
not necessary at this time.  However, if the Y2K Team identifies additional
risks associated with the year 2000 compliance of the information or non-
information technology systems used by the Partnership, the Y2K Team will
develop a contingency plan if deemed necessary at that time.

Risk of Inability of Transfer Agent to Accurately Maintain Partnership Records

     The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's transfer agent is that the transfer agent will
fail to achieve year 2000 compliance of its systems and will not be able to
accurately maintain the records of the Partnership.  This could result in the
inability of the Partnership to accurately identify its Limited Partners for
purposes of distributions, delivery of disclosure materials and transfer of
units.  The Y2K Team has received certification from the Partnership's transfer
agent of its year 2000 compliance.  Despite the positive response from the
transfer agent, the General Partners cannot be assured that the transfer agent
has addressed all possible year 2000 issues.

     The Y2K Team has developed a contingency plan pursuant to which the General
Partners and their affiliates would maintain the records of the Partnership
manually, in the event that the systems of the transfer agent are not year 2000
compliant.  The General Partners and their affiliates would have to allocate
resources to internally perform the functions of the transfer agent.  The
General Partners do not anticipate that the additional cost of these resources
would have a material impact on the results of operations of the Partnership.

Risk of Loss of Short-Term Liquidity from Failure of Financial Institutions to
Achieve Year 2000 Compliance

     The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's financial institutions is that some or all of
its funds on deposit with such financial institutions may be temporarily
unavailable.  The Y2K Team has received responses from 93% of the Partnership's
financial institutions indicating that their systems are currently year 2000
compliant or are expected to be year 2000 compliant prior to the year 2000.
Despite the positive responses from the financial institutions, the General
Partners cannot be assured that the financial institutions have addressed all
possible year 2000 issues.  The loss of short-term liquidity could affect the
Partnership's ability to pay its expenses on a current basis.  The General
Partners do not anticipate that a loss of short-term liquidity would have a
material impact on the results of operations of the Partnership.

     Based upon the responses received from the Partnership's financial
institutions and the inability of the Y2K Team to identify a suitable
alternative for the deposit of funds that is not subject to potential year 2000
problems, the Y2K Team has determined not to develop a contingency plan to
address this risk.

                                     - 13 -
<PAGE>

Risks of Late Payment or Non-Payment of Rent by Tenants

     The General Partners believe that the reasonably likely worst case scenario
with regard to the Partnership's tenants is that some of the tenants may make
rental payments late as the result of the failure of the tenants to achieve year
2000 compliance of their systems used in the payment of rent, the failure of the
tenant's financial institutions to achieve year 2000 compliance, or the
temporary disruption of the tenants' businesses.  The Y2K Team is in the process
of requesting responses from the Partnership's tenants indicating the extent to
which their systems are currently year 2000 compliant or are expected to be year
2000 compliant prior to the year 2000.  The General Partners cannot be assured
that the tenants have addressed all possible year 2000 issues.  The late payment
of rent by one or more tenants would affect the results of operations of the
Partnership in the short-term.

     The General Partners are also aware of predictions that the year 2000
problem, if uncorrected, may result in a global economic crisis.  The General
Partners are not able to determine if such predictions are true.  A widespread
disruption of the economy could affect the ability of the Partnership's tenants
to pay rent and, accordingly, could have a material impact on the results of
operations of the Partnership.

     Because payment of rent is under the control of the Partnership's tenants,
the Y2K Team is not able to develop a contingency plan to address these risks.
In the event of late payment or non-payment of rent, the General Partners will
assess the remedies available to the Partnership under its lease agreements.

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

     Not applicable.

Item 8.   Financial Statements and Supplementary Data

                                     - 14 -
<PAGE>

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

                                   CONTENTS
                                   --------





                                                            Page
                                                            ----

Report of Independent Accountants                             15

Financial Statements:

   Balance Sheets                                             16

   Statements of Income                                       17

   Statements of Partners' Capital                            18

   Statements of Cash Flows                                   19

   Notes to Financial Statements                              22

Additional Financial Information regarding Golden Corral      38

                                     - 15 -
<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

                                     - 16 -
<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.

                                     - 17 -
<PAGE>

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

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

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                         1998             1997            1996
                                                  --------------       ----------      ----------

Revenues:
<S>                                                   <C>              <C>             <C>
 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.

                                     - 18 -
<PAGE>

<TABLE>
<CAPTION>
                                                         CNL INCOME FUND XVI, LTD.
                                                      (A Florida Limited Partnership)

                                                       STATEMENTS OF PARTNERS' CAPITAL
                                                       -------------------------------
                                                Years Ended December 31, 1998, 1997, and 1996

                                    General Partners                                    Limited Partners
                             ------------------------------  -------------------------------------------------------------------
                                               Accumulated                                         Accumulated      Syndication
                              Contributions     Earnings      Contributions    Distributions         Earnings          Costs
                             ---------------  -------------  ---------------  --------------      --------------  -------------
<S>                                   <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)

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

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

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

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

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

 Balance, December 31, 1998  $        1,000   $    130,300   $   45,000,000   $  (13,423,017)     $  12,873,641   $  (5,390,000)
                             ===============  =============  ===============  ==============      ==============  =============
</TABLE>



                                Total
                            ------------

 Balance, December 31, 1995   $39,640,152

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

 Balance, December 31, 1996   39,844,599

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

 Balance, December 31, 1997    39,904,926

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

 Balance, December 31, 1998 $ 39,191,924
                            ============

                See accompanying notes to financial statements.

                                     - 19 -
<PAGE>

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

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


<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                            1998             1997               1996
                                                          --------         --------           --------

Increase (Decrease) in Cash and Cash Equivalents:
<S>                                                <C>                   <C>               <C>
     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.

                                      -20-
<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.

                                      -21-
<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.

                                      -22-
<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.

                                      -23-
<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.

                                      -24-
<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.

                                      -25-
<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:

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

           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
                                             =============      =============

                                      -26-
<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.

                                      -27-
<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:

              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
                                                      ==============

     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:

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

          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
                                               =============    =============

                                      -28-
<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:

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

                                                         $11,674,487
                                                       =============

     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.

                                      -29-
<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.

                                       30
<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:

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

     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).

                                       31
<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.

                                       32
<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>

                                       33
<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.

                                       34
<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:

                                            1998          1997          1996
                                        ------------  ------------  ------------

           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

                                       35
<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:

                                            1998          1997          1996
                                       -------------  ------------  ------------

          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

     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").

                                       36
<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.

                                       37
<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.  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.

                                       38
<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.


Raleigh, North Carolina                                KPMG LLP
November 5, 1999

                                       39
<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.
------------------------------------------------------------------------------

                                       40
<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.
------------------------------------------------------------------------------

                                       41
<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,

                                       42
<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
                                                  ========  ========

                                       43
<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.

                                       44
<PAGE>

                                 PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  The following documents are filed as part of this report.

     1.   Financial Statements

          Report of Independent Accountants

          Balance Sheets at December 31, 1998 and 1997

          Statements of Income for the years ended December 31, 1998, 1997, and
          1996

          Statements of Partners' Capital for the years ended December 31, 1998,
          1997, and 1996

          Statements of Cash Flows for the years ended December 31, 1998, 1997,
          and 1996

          Notes to Financial Statements

     2.   Financial Statement Schedules

          Schedule II - Valuation and Qualifying Accounts for the years ended
          December 31, 1998, 1997, and 1996

          Schedule III - Real Estate and Accumulated Depreciation at December
          31, 1998

          Notes to Schedule III - Real Estate and Accumulated Depreciation at
          December 31, 1998

          All other Schedules are omitted as the required information is
          inapplicable or is presented in the financial statements or notes
          thereto.

     3.   Exhibits

          3.1  Affidavit and Certificate of Limited Partnership of CNL Income
               Fund XVI, Ltd. (Included as Exhibit 3.2 to Registration Statement
               No. 33-69968-01 on Form S-11 and incorporated herein by
               reference.)

          4.1  Affidavit and Certificate of Limited Partnership of CNL Income
               Fund XVI, Ltd. (Included as Exhibit 3.2 to Registration Statement
               No. 33-69968-01 on Form S-11 and incorporated herein by
               reference.)

          4.2  Amended and Restated Agreement of Limited Partnership of CNL
               Income Fund XVI, Ltd. (Included as Exhibit 4.2 to Form 10-K filed
               with the Securities and Exchange Commission on March 30, 1995,
               and incorporated herein by reference.)

                                       45
<PAGE>

          10.1 Management Agreement between CNL Income Fund XVI, Ltd. and CNL
               Investment Company (Included as Exhibit 10.1 to Form 10-K filed
               with the Securities and Exchange Commission on March 30, 1995,
               and incorporated herein by reference.)

          10.2 Assignment of Management Agreement from CNL Investment Company to
               CNL Income Fund Advisors, Inc. (Included as Exhibit 10.2 to Form
               10-K filed with the Securities and Exchange Commission on March
               30, 1995, and incorporated herein by reference.)

          10.3 Assignment of Management Agreement from CNL Income Fund Advisors,
               Inc. to CNL Fund Advisors, Inc. (Included as Exhibit 10.3 to Form
               10-K filed with the Securities and Exchange Commission on April
               1, 1996, and incorporated herein by reference.)

          27   Financial Data Schedule

(b)  The Registrant filed no reports on Form 8-K during the period October 1,
     1998 through December 31, 1998.

(c)  Not applicable.

(d)  Other Financial Information.

      (i) The following summarized financial information is filed as part of
          this report as a result of the fact that one of the Partnership's
          tenants, DenAmerica Corp., leased more than 20 percent of the
          Partnership's total assets for the year ended December 31, 1998.  The
          summarized financial information presented for DenAmerica Corp. and
          Subsidiaries as of December 31, 1998 and 1997 and the years ended
          December 31, 1998, 1997, and 1996, was obtained from the Form 10-K
          filed by DenAmerica Corp. and Subsidiaries with the Securities and
          Exchange Commission for the year ended December 31, 1998.

     (ii) The Partnership has also filed herewith other financial information as
          part of this report in Part III, Item 8 because a tenant of the
          Partnership, Golden Corral Corporation, leased more than 20 percent of
          the Partnership's total assets for the year ended December 31, 1998.
          The financial information filed is for the six Golden Corral
          restaurant properties leased by Golden Corral and includes the
          following: Independent Auditors' Report of KPMG LLP, the Combined
          Statements of Revenues and Direct Operating Expenses, the Combined
          Statements of Cash Flows and the Notes to Combined Statements of
          Revenues and Direct Operating Expenses and Cash Flows.

                                       46

<PAGE>

                       DenAmerica Corp. and Subsidiaries
                            Selected Financial Data
                                 (in Thousands)

Consolidated Balance Sheet Data:
-------------------------------

<TABLE>
<CAPTION>
                                                       December 31,
                                             1998                       1997
                                         ------------               ------------
<S>                                      <C>                        <C>
Current Assets                              $ 13,416                   $ 41,967
Noncurrent Assets                            121,091                    128,297
Current Liabilities                           58,254                     78,384
Noncurrent Liabilities                        79,587                     90,632

Consolidated Statements of Operations Data:
------------------------------------------

<CAPTION>
                                                                         Year Ended December 31,
                                                                   1998            1997            1996
                                                                ----------      ----------      ----------
<S>                                                             <C>             <C>             <C>
Gross revenues                                                   $255,956        $300,579        $241,480
Costs and expenses (including income tax expense/benefit)         261,984         321,556         239,865
                                                                ---------       ---------       ---------

Income (Loss) before extraordinary item                            (6,028)        (20,977)          1,615

Extraordinary gain (loss) - Net of tax benefit of $331 and
 tax provision of $914                                              1,371              --            (497)
                                                                ---------       ---------       ---------

Net income (loss)                                                  (4,657)        (20,977)          1,118

Preferred stock dividend and accretion                                 --              --            (149)
                                                                ---------       ---------       ---------

Net income (loss) applicable to common shareholders              $ (4,657)       $(20,977)       $    969
                                                                =========       =========       =========
</TABLE>

                                       47
<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 28th day of
October, 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.

                                       48
<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>
<CAPTION>
               Signature                           Title                            Date
               ---------                           -----                            ----
<S>                                     <C>                                    <C>
/s/ Robert A. Bourne                    President, Treasurer and               October 28, 1999
------------------------------------    Director (Principal Financial
Robert A. Bourne                        and Accounting Officer)


/s/ James M. Seneff, Jr.                Chief Executive Officer and            October 28, 1999
------------------------------------    Director (Principal Executive
James M. Seneff, Jr.                    Officer)
</TABLE>

                                       49