10-Q 1 if18.txt CNL INCOME FUND XVIII, LTD. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT of 1934 For the quarterly period ended September 30, 2002 -------------------------------------------------------------------------- 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 0-24095 --------------------------------------- CNL Income Fund XVIII, Ltd. ----------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Florida 59-3295394 ---------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 450 South Orange Avenue Orlando, Florida 32801 ---------------------------------- ----------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number (including area code) (407) 540-2000 ----------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _________ CONTENTS Part I Page Item 1. Financial Statements: Condensed Balance Sheets 1 Condensed Statements of Income 2 Condensed Statements of Partners' Capital 3 Condensed Statements of Cash Flows 4 Notes to Condensed Financial Statements 5-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-14 Item 3. Quantitative and Qualitative Disclosures about Market Risk 14 Item 4. Controls and Procedures 14 Part II Other Information 15-17 CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) CONDENSED BALANCE SHEETS

See accompanying notes to condensed financial statements. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) CONDENSED STATEMENTS OF INCOME

See accompanying notes to condensed financial statements. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) CONDENSED STATEMENTS OF PARTNERS' CAPITAL

See accompanying notes to condensed financial statements. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) CONDENSED STATEMENTS OF CASH FLOWS

See accompanying notes to condensed financial statements. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO CONDENSED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2002 and 2001 1. Basis of Presentation: The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. The financial statements reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Operating results for the quarter and nine months ended September 30, 2002, may not be indicative of the results that may be expected for the year ending December 31, 2002. Amounts as of December 31, 2001, included in the financial statements, have been derived from audited financial statements as of that date. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in Form 10-K of CNL Income Fund XVIII, Ltd. (the "Partnership") for the year ended December 31, 2001. Effective January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires that a long-lived asset be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The assessment is based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its fair value. If an impairment is recognized, the adjusted carrying amount of a long-lived asset is its new cost basis. The statement also requires that the results of operations of a component of an entity that either has been disposed of or is classified as held for sale be reported as a discontinued operation if the disposal activity was initiated subsequent to the adoption of the Standard. 2. Reclassification: Certain items in the prior year's financial statements have been reclassified to conform to 2002 presentation. These reclassifications had no effect on total partners' capital or net income. 3. Land and Buildings on Operating Leases: In January 2002, the Partnership reinvested a portion of the net sales proceeds from the 2001 sale of the property in Santa Rosa, California, in a property in Houston, Texas at an approximate cost of $1,194,100. The Partnership acquired this property from CNL Funding 2001-A, LP, an affiliate of the general partners (see Note 7). In May 2002, the Partnership sold its On the Border property in San Antonio, Texas to an unrelated third party for $500,000 and received net sales proceeds of approximately $470,300, resulting in a loss of approximately $25,700. As of December 31, 2001, the Partnership had identified this property for sale. In June 2002, the Partnership reinvested the net sales proceeds from this sale, along with the proceeds from the sale of the Boston Market property in San Antonio, Texas (see Note 6), in a Taco Cabana property in San Antonio, Texas, at an approximate cost of $896,500. The Partnership acquired this property from CNL Funding 2001-A, LP, an affiliate of the general partners (see Note 7). CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO CONDENSED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2002 and 2001 4. Investment in Joint Ventures: In January 2002, the Partnership reinvested a portion of the net sales proceeds from the 2001 sale of the property in Santa Rosa, California, in a property in Austin, Texas, as tenants-in-common, with CNL Income Fund X, Ltd., an affiliate of the general partners. The Partnership acquired this property from CNL Funding 2001-A, LP, an affiliate of the general partners (see Note 7). The Partnership and CNL Income Fund X, Ltd. entered into an agreement whereby each co-venturer will share in the profits and losses of the property in proportion to its applicable percentage interest in the property. As of September 30, 2002, the Partnership had contributed approximately $205,700 for an 18.35% interest in this property. As of September 30, 2002, Columbus Joint Venture, CNL Portsmouth Joint Venture, and TFIG Pittsburgh Joint Venture each owned and leased one property to operators of fast-food or family-style restaurants. In addition, as of September 30, 2002, the Partnership had entered into two separate tenancy-in-common arrangements, in each case with an affiliate of the general partners, each of which owned and leased one property to operators of fast-food or family-style restaurants. The following presents the combined, condensed financial information for these joint ventures and tenancy in common arrangements at:

The Partnership recognized income of $233,473 and $122,772 during the nine months ended September 30, 2002 and 2001, respectively, $77,652 and $65,191 of which was earned during the quarters ended September 30, 2002 and 2001, respectively, from these joint ventures and tenancy in-common arrangements. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO CONDENSED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2002 and 2001 5. Restricted Cash: As of December 31, 2001, the net sales proceeds of $1,664,829 from the 2001 sale of the property in Santa Rosa, California, less miscellaneous escrow fees of $2,628 were being held in an interest-bearing escrow account pending the release of funds by the escrow agent to acquire an additional property. These funds were released by the escrow agent in January 2002 and were used to acquire a property in Houston, Texas and an interest in a property in Austin, Texas (see Note 3 and Note 4). 6. Discontinued Operations: In May 2002, the Partnership sold its Boston Market property in San Antonio, Texas to an unrelated third party for approximately $515,000 and received net sales proceeds of approximately $481,325. Due to the fact that the Partnership had recorded provisions for write-down of assets in previous years, including $387,138 during the nine months ended September 30, 2001, no gain or loss on disposal of discontinued operations was recorded during the nine months ended September 30, 2002 relating to this sale. In June 2002, the Partnership reinvested these sale proceeds in an income producing property in San Antonio, Texas (see Note 3). During 2002, the Partnership entered into three separate agreements, each with an unrelated third party, to sell the Jack in the Box property in Echo Park, California, the Boston Market property in Raleigh, North Carolina and the Bennigan's property in Sunrise, Florida. The contracts for the sale of the properties in Echo Park, California and Sunrise, Florida were subsequently terminated and as a result, the Partnership reclassified the assets from real estate held for sale to land and building on operating leases, net investment in direct financing leases, and accrued rental income. In August 2002, the Partnership sold this property for $650,000 and received net sales proceeds of approximately $614,100, resulting in a loss on disposal of discontinued operations of $322,472, which the Partnership recorded during the six months ended June 30, 2002. The financial results for these properties are reflected as Discontinued Operations in the accompanying financial statements. The operating results of the discontinued operations for the above properties are as follows:

7. Related Party Transactions: During 2002, the Partnership acquired a property in Houston, Texas, and a property in San Antonio, Texas from CNL Funding 2001-A, LP, for a total purchase price of approximately $2,090,600 (see Note 3). In addition, in January 2002, the Partnership and CNL Income Fund X, Ltd, as tenants-in-common, acquired a property in Austin, Texas, from CNL Funding 2001-A, LP, for a purchase price of approximately $1,120,800 (see Note 4). CNL Funding 2001-A, LP is an affiliate of the general partners. CNL Funding 2001-A, LP had purchased and temporarily held title to the properties in order to facilitate the acquisition of the properties by the Partnership. The purchase price paid by the Partnership represented the costs incurred by CNL Funding 2001-A, LP to acquire the properties. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO CONDENSED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2002 and 2001 8. Litigation Matters: In July 1998, DJD Partners VII, LLC filed a lawsuit against Finest Foodservice, LLC and the Partnership, alleging a breach of contract that was originally entered into by Finest Foodservice, LLC and later assigned to the Partnership, in connection with the construction of a Boston Market property in Minnetonka, Minnesota. In October 1998, Finest Foodservice, LLC, the former tenant of the site in Minnetonka, Minnesota, filed for bankruptcy and rejected its lease, causing the obligations of the contract to become the responsibility of the Partnership. In May 2001, the District Court awarded a judgment of approximately $85,400 to DJD Partners VII, LLC against the Partnership, as a result of the breach of contract by Finest Foodservice, LLC. The Partnership accrued this amount as a general and administrative expense as of December 31, 2001. A motion for reconsideration and a new trial was filed and denied. The Partnership appealed the District Court's judgment but lost. 9. Concentration of Credit Risk: The following schedule presents total rental revenues from individual lessees, each representing more than 10% of the Partnership's total rental revenues (including the Partnership's share of rental revenues from joint ventures and the properties held as tenants-in-common with affiliates of the general partners) for each of the periods ended September 30:

The information denoted by N/A indicates that for each period presented, the specified chains did not represent more than 10% of the Partnership's total rental revenues. In addition, the following schedule presents total rental revenues from individual restaurant chains, each representing more than 10% of the Partnership's total rental revenues (including the Partnership's share rental revenues from joint ventures and the properties held as tenants-in-common with affiliates of the general partners) for each of the periods ended September 30:

The information denoted by N/A indicates that for each period presented, the specified chains did not represent more than 10% of the Partnership's total rental revenues. CNL INCOME FUND XVIII, LTD. (A Florida Limited Partnership) NOTES TO CONDENSED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2002 and 2001 10. Concentration of Credit Risk - Continued: Although the Partnership's properties are geographically diverse throughout the United States and the Partnership's lessees operate a variety of restaurant connects, default by any one of these lessees or restaurant chains will significantly impact the results of operations of the Partnership if the Partnership is not able to re-lease the properties in a timely manner. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CNL Income Fund XVIII, Ltd. (the "Partnership") is a Florida limited partnership that was organized on February 10, 1995, to acquire for cash, either directly or through joint venture arrangements, both newly constructed and existing restaurants, as well as land upon which restaurants were to be constructed (collectively, the "Properties"), which are leased primarily to operators of selected national and regional fast-food, family-style and casual dining restaurant chains. The leases generally are triple-net leases, with the lessees responsible for all repairs and maintenance, property taxes, insurance and utilities. As of September 30, 2001, the Partnership owned 20 Properties directly and three Properties indirectly through joint venture or tenancy in common arrangements. In addition, as of September 30, 2002, the Partnership owned 16 Properties directly and five Properties indirectly through joint venture or tenancy in common arrangements. Capital Resources Cash from operating activities (which includes cash received from tenants, distributions from joint ventures and interest and other income received, less cash paid for expenses) was $1,591,031 and $1,270,122 for the nine months ended September 30, 2002 and 2001, respectively. The increase in cash from operating activities for the nine months ended September 30, 2002, as compared to the nine months ended September 30, 2001, was primarily a result of changes in income and expenses, as described below in "Results of Operations." Other sources and uses of capital included the following during the nine months ended September 30, 2002. In January 2002, the Partnership reinvested a portion of the net sales proceeds from the 2001 sale of the Property in Santa Rosa, California in a Property in Houston, Texas, at an approximate cost of $1,194,100. In addition, in January 2002, the Partnership reinvested the remaining net sales proceeds from the 2001 sale of the Property in Santa Rosa, California in a Property in Austin, Texas, as tenants-in-common with CNL Income Fund, X, Ltd., a Florida limited partnership and an affiliate of the general partners. The Partnership acquired these Properties from CNL Funding 2001-A, LP, a Delaware limited partnership and an affiliate of the general partners. CNL Funding 2001-A, LP had purchased and temporarily held title to the Properties in order to facilitate the acquisition of the Properties by the Partnership. The purchase prices paid by the Partnership represented the costs incurred by CNL Funding 2001-A, LP to acquire the Properties. The general partners believe that the transaction, or a portion thereof, relating to the 2001 sale of the Property in Santa Rosa, California and the reinvestment of the net sales proceeds, described above, will qualify as a like-kind transaction for federal income tax purposes. The Partnership anticipates its distributions will be sufficient to enable the limited partners to pay federal and state income taxes, if any (at a level reasonably assumed by the general partners), resulting from the transaction. In May 2002, the Partnership sold its On the Border Property in San Antonio, Texas to an unrelated third party for approximately $500,000 and received net sales proceeds of approximately $470,300, resulting in a net loss of approximately $25,700. As of December 31, 2001, the Partnership had identified this Property for sale. In addition, in May 2002, the Partnership sold its Boston Market Property in San Antonio, Texas to an unrelated third party for approximately $515,000 and received net sales proceeds of approximately $481,325. Due to the fact that the Partnership had recorded provisions for write-down of assets in previous years, no gain or loss on disposal of discontinued operations was recorded during the nine months ended September 30, 2002 relating to this sale. In June 2002, the Partnership reinvested the net sales proceeds from these two sales in a Taco Cabana Property in Houston, Texas at an approximate cost of $896,500. The Partnership acquired this property from CNL Funding 2001-A, LP, a Delaware limited partnership and an affiliate of the general partners. CNL Funding 2001-A, LP had purchased and temporarily held title to the 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 CNL Funding 2001-A, LP to acquire the Property. The Partnership anticipates that its distributions will be sufficient to enable the limited partners to pay federal and state income taxes, if any (at a level reasonably assumed by the general partners), resulting from the transaction. During 2002, the Partnership entered into an agreement with an unrelated third party to sell the Boston Market Property in Raleigh, North Carolina. In connection with the anticipated sale of the Property, the Partnership recorded a loss on disposal of assets of $322,472 during the six months ended June 30, 2002. In August 2002, the Partnership sold this Property for $650,000 and received net sales proceeds of approximately $614,100. The Partnership anticipates it will reinvest these proceeds in an additional Property. The Partnership anticipates its distributions will be sufficient to enable the limited partners to pay federal and state income taxes, if any (at a level reasonably assumed by the general partners), resulting from this transaction. During the nine months ended September 30, 2002, the Partnership entered into three promissory notes with the corporate general partner for loans in connection with the operations of the Partnership. The loans were uncollateralized, non-interest bearing and due on demand. As of September 30, 2002, the Partnership had repaid these loans in full to the corporate general partner. Currently, rental income from the Partnership's Properties and any net sales proceeds from the sale of Properties are invested in money market accounts or other short-term, highly liquid investments such as demand deposit accounts at commercial banks, money market accounts and certificates of deposit with less than a 90-day maturity date, pending the Partnership's use of such funds to invest in an additional Property, to pay Partnership expenses or to make distributions to partners. At September 30, 2002, the Partnership had $640,454 invested in such short-term investments, as compared to $226,136 at December 31, 2001. The funds remaining at September 30, 2002, will be used to invest in an additional Property, and to pay distributions and other liabilities of the Partnership. Short-Term Liquidity 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 generate net cash flow in excess of operating expenses. The Partnership's short-term liquidity requirements consist primarily of the operating expenses of the Partnership. 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. Total liabilities of the Partnership, including distributions payable, were $827,064 at September 30, 2002, as compared to $841,878 at December 31, 2001. The decrease in total liabilities was primarily due to a decrease in rents paid in advance at September 30, 2002, as compared to December 31, 2001. Total liabilities at September 30, 2002, to the extent they exceed cash and cash equivalents at September 30, 2002, will be paid from future cash from operations, loans, and in the event the general partners elect to make additional contributions, from general partners' contributions. The Partnership generally distributes cash from operations remaining after the payment of operating expenses of the Partnership, to the extent that the general partners determine that such funds are available for distribution. Based on current and anticipated future cash from operations and loans from the corporate general partner, and for the nine months ended September 30, 2001 the net sales proceeds from the sale of the portion of the Partnership's interest in TGIF Pittsburgh Joint Venture, the Partnership declared distributions to limited partners of $2,100,000 for each of the nine months ended September 30, 2002 and 2001, ($700,000 for each of the quarters ended September 30, 2002 and 2001.) This represents distributions of $0.60 per unit for each of the nine months ended September 30, 2002 and 2001, ($0.20 per unit for each applicable quarter). No distributions were made to the general partners for the quarters and nine months ended September 30, 2002 and 2001. No amounts distributed to the limited partners for the nine months ended September 30, 2002 and 2001 are required to be or have been treated by the Partnership as a return of capital for purposes of calculating the limited partners' return on their adjusted capital contributions. The Partnership intends to continue to make distributions of cash available for distribution to the limited partners on a quarterly basis. Long-Term Liquidity The Partnership has no long-term debt or other long-term liquidity requirements. Results of Operations Total rental revenues were $1,731,504 for the nine months ended September 30, 2002, as compared to $1,877,208 for the nine months ended September 30, 2001, of which $585,942 and $635,695 were earned during the third quarter of 2002 and 2001, respectively. The decrease in rental revenues during the quarter and nine months ended September 30, 2002, as compared to the same periods of 2001, was partially due to the 2001 sales of the Properties in Henderson, Nevada, and Santa Rosa, California. In July 2001, the Partnership reinvested the net sales proceeds from the sale of the Property in Henderson, Nevada, in a Property in Denver, Colorado, with CNL Income Fund VIII, Ltd., a Florida limited partnership and an affiliate of the general partners, as tenants-in-common. In January 2002, the Partnership reinvested the net sales proceeds from the sale of the Property in Santa Rosa, California in a Property in Austin, Texas, as tenants-in-common, with CNL Income Fund X, Ltd., as described above in "Capital Resources." Rental revenues are expected to remain at reduced amounts while equity in earnings of joint ventures is expected to increase due to the fact that the Partnership reinvested the majority of these net sales proceeds in two Properties with affiliates of the general partners, as tenants-in-common. The Partnership used the remaining net sales proceeds from the 2001 sale of the Property in Santa Rosa, California, along with the net sales proceeds from the 2002 sales of the two Properties in San Antonio, Texas to acquire two additional Properties, as described above in "Capital Resources". The decrease in rental revenues during the quarter and nine months ended September 30, 2002, as compared to the same periods of 2001, was partially offset due to the acquisition of these two Properties, one in January 2002 and one in June 2002. Rental revenues were lower during the quarter and nine months ended September 30, 2002, as compared to the same periods of 2001, due to the fact that during 2002, the Partnership stopped recording rental revenues relating to the Partnership's Property in Stow, Ohio because the tenant was experiencing financial difficulties. In addition, rental revenues remained at reduced amounts during the quarters and nine months ended September 30, 2002 and 2001, due to the fact that the Partnership stopped recording rental revenues when the lease relating to the Boston Market Property in Minnetonka, Minnesota was rejected by the tenant in 1998 in connection with its bankruptcy proceedings and the lease related to the On the Border Property in San Antonio, Texas was terminated during 2000. In May 2002, the Partnership sold the vacant Property in San Antonio, Texas, and reinvested the net sales proceeds in a Taco Cabana Property in San Antonio, Texas, as described above in "Capital Resources". Rental revenues are expected to remain at reduced amounts until such time as the Partnership executes new leases for the Properties in Stow, Ohio and Minnetonka, Minnesota or until the Properties are sold and the proceeds from such sales are reinvested in additional Properties. The lost revenues resulting from these Properties will have an adverse effect on the results of operations of the Partnership if the Partnership is not able to re-lease the Properties in a timely manner. The Partnership is currently seeking a new tenant for the Property in Minnetonka, Minnesota. During the nine months ended September 30, 2002 and 2001, the Partnership earned $233,473 and $122,772, respectively, attributable to net income earned by joint ventures, of which $77,652 and $65,191 were earned during the quarters ended September 30, 2002 and 2001, respectively. The increase in net income earned by joint ventures for the quarter and nine months ended September 30, 2002, as compared to the same periods of 2001, was primarily due to the fact that in July 2001 and January 2002, the Partnership reinvested the majority of the net sales proceeds from the 2001 sales of the Properties in Henderson, Nevada and Santa Rosa, California, in a Property in Denver, Colorado and a Property in Austin, Texas, respectively, each with an affiliate of the general partners, as tenants-in-common. During the nine months ended September 30, 2002, four lessees, Golden Corral Corporation, Jack in the Box Inc., Chevy's, Inc. and Steak & Ale of Colorado, Inc. and S&A Properties, Corp. (affiliated under common control of Metromedia Restaurant Group) each contributed more than ten percent of the Partnership's total rental revenues (including the Partnership's share of rental revenues from Properties owned by joint ventures and tenants-in-common with affiliates of the general partners.) It is anticipated that based on the minimum rental payments required by the leases, these four lessees will continue to contribute more than ten percent of the Partnership's total rental revenues. In addition, during the nine months ended September 30, 2002, four restaurant chains, Golden Corral Family Steakhouse Restaurants, Jack in the Box, Chevy's Fresh Mex Restaurant and Bennigan's, each accounted for more than ten percent of the Partnership's total rental revenues (including the Partnership's share of rental revenues from Properties owned by joint ventures and tenants-in-common with affiliates of the general partners). It is anticipated that these four restaurant chains will each continue to account for more than ten percent of the total rental revenues 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. Operating expenses, including depreciation and amortization expense and provision for write-down of assets, were $578,904 and $1,280,776 for the nine months ended September 30, 2002 and 2001, respectively, of which $166,937 and $382,325 were incurred during the quarters ended September 30, 2002 and 2001, respectively. The decrease in operating expenses during the nine months ended September 30, 2002, as compared to the same period of 2001, was partially attributable to a decrease in the costs incurred for administrative expenses for servicing the Partnership and its Properties and a decrease in the amount of state tax expenses related to certain states in which the Partnership conducts business. The decrease in operating expenses during the quarter and nine months ended September 30, 2002, as compared to the same periods of 2001, was also partially attributable to the fact that during the nine months ended September 30, 2001, the Partnership incurred approximately $85,400 pursuant to a judgment entered against the Partnership in a lawsuit relating to the Property in Minnetonka, Minnesota. The general partners appealed the judgment but lost and are considering their options. No such expense was incurred during the quarter and nine months ended September 30, 2002. In addition, the decrease in operating expenses during the quarter and nine months ended September 30, 2002, was partially due to the fact that the Partnership incurred certain property expenses such as insurance, repairs and maintenance, legal fees and real estate taxes relating to the vacant Properties owned by the Partnership in each respective period. Between June 2001 and May 2002, the Partnership sold three of the vacant Properties and did not incur any additional expenses relating to these Properties after the sales occurred. However, the Partnership will continue to incur these expenses relating to the remaining vacant Property until the Property is sold or until the Partnership finds a new tenant. During the quarters and six months ended June 30, 2002 and 2001, the Partnership incurred certain operating expenses relating to the On the Border Property in San Antonio, Texas because the Partnership owned the building and leased the land. In 2000, the tenant of this Property vacated the Property and ceased restaurant operations. In accordance with an agreement executed in conjunction with the execution of the initial lease, the ground lessor, the tenant and the Partnership agreed that the Partnership would be provided certain rights to help protect its interest in the building in the event of a default by the tenant under the terms of the initial lease. As a result of the default by the tenant and in order to preserve its interest in the building, during the nine months ended September 30, 2002 and 2001, the Partnership incurred approximately $46,200 and $73,200, respectively, in rent expense relating to the ground lease of the Property. In addition, during the quarter and nine months ended September 30, 2001, the Partnership recognized a provision for write-down of assets of $112,109 and $321,239, respectively. The provision represented the difference between the Property's carrying value and its estimated fair value. In May 2002, the Partnership sold this Property, and recorded an additional loss of $25,694, as described above in "Capital Resources." Effective January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires that a long-lived asset be tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The assessment is based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss is recognized when the carrying amount of a long-lived asset exceeds its fair value. If an impairment is recognized, the adjusted carrying amount of a long-lived asset is its new cost basis. The statement also requires that the results of operations of a component of an entity that either has been disposed of or is classified as held for sale be reported as a discontinued operation if the disposal activity was initiated subsequent to the adoption of the Standard. During the nine months ended September 30, 2002, the Partnership identified and sold two Properties that met the criteria of this standard and were classified as Discontinued Operations in the accompanying financial statements. The two Properties were vacant and the proceeds from the sales were reinvested in income producing Properties. As a result of the sale of the Property in San Antonio, Texas, the Partnership recognized a loss of $25,694, during the nine months ended September 30, 2002. This Property had been identified for sale as of December 31, 2001. As a result of the sale of the Property in Timonium, Maryland, the Partnership recognized a loss of $18,855, during the nine months ended September 30, 2001. As a result of the sale of the Property in Henderson, Nevada the Partnership recognized a gain of $177,865 during the quarter and nine months ended September 30, 2001. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 4. CONTROLS AND PROCEDURES The general partners maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in the Partnership's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The principal executive and financial officers of the corporate general partner have evaluated the Partnership's disclosure controls and procedures within 90 days prior to the filing of this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective. Subsequent to the above evaluation, there were no significant changes in internal controls or other factors that could significantly affect these controls, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II. OTHER INFORMATION Item 1. Legal Proceedings. In July 1998, DJD Partners VII, LLC filed a lawsuit against Finest Foodservice, LLC and CNL Income Fund XVIII, Ltd., DJD Partners VII, LLC v. Finest Foodservice, LLC, et al, Case No. CT 98-014942, in the District Court of the Fourth Judicial District of Hennepin County, Minnesota, alleging a breach of a contract entered into by Finest Foodservice, LLC and assigned to CNL Income Fund XVIII, Ltd. in connection with the construction of a Boston Market property in Minnetonka, Minnesota. In October 1998 Finest Foodservice, LLC filed for bankruptcy and rejected its lease, causing the obligations of the contract to become the responsibility of CNL Income Fund XVIII, Ltd. On May 4, 2001, the District Court awarded a judgment of approximately $85,400 to the plaintiff. CNL Income Fund XVIII, Ltd. appealed the District Court's judgment but lost. The general partners are considering their options. Item 2. Changes in Securities. Inapplicable. Item 3. Default upon Senior Securities. Inapplicable. Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable. Item 5. Other Information. Inapplicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits **3.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund XVIII, Ltd. (Filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-11, No. 33-90998-01, incorporated herein by reference.) **3.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund XVIII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on March 21, 1996, and incorporated herein by reference.) **4.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund XVIII, Ltd. (Filed as Exhibit 3.2 to Registrant's Registration Statement on Form S-11, No. 33-90998-01 and incorporated herein by reference.) **4.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund XVIII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on March 21, 1996, and incorporated herein by reference.) **4.3 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS Escrow and Transfer Agency, Inc. and between CNL Income Fund XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating to the Distribution Reinvestment Plans (Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **5.1 Opinion of Baker & Hostetler as to the legality of the securities being registered by CNL Income Fund XVIII, Ltd. (Filed as Exhibit 5.2 to Amendment No. Three to the Registrant's Registration Statements on Form S-11, No. 33-90998, incorporated herein by reference.) **8.1 Opinion of Baker & Hostetler regarding certain material tax issues relating to CNL Income Fund XVIII, Ltd. (Filed as Exhibit 8.1 to Amendment No. Three to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **8.2 Opinion of Baker & Hostetler regarding certain material issues relating to the Distribution Reinvestment Plan of CNL Income Fund XVIII, Ltd. (Filed as Exhibit 8.4 to Amendment No. Three to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **8.3 Amended Opinion of Baker & Hostetler regarding certain material issues relating to CNL Income Fund XVIII, Ltd. (Filed as Exhibit 8.5 to Post-Effective Amendment No. Four to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.1 Management Agreement between CNL Income Fund XVIII, Ltd. and CNL Fund Advisors, Inc. (Included as Exhibit 10.1 to Form 10-K filed with the Securities and Exchange Commission on March 20, 1997, and incorporated herein by reference.) **10.2 Assignment of Management Agreement from CNL Fund Advisors, Inc. to CNL APF Partners, LP. (Filed as Exhibit 10.2 to Form 10-Q filed with the Securities and Exchange Commission on August 9, 2001, and incorporated herein by reference.) **10.3 Assignment of Management Agreement from CNL APF Partners, LP to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.3 to Form 10-Q filed with the Securities and Exchange Commission on August 13, 2002, and incorporated herein by reference.) **10.4 Form of Joint Venture Agreement for Joint Ventures with Unaffiliated Entities (Filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.5 Form of Joint Venture Agreement for Joint Ventures with Affiliated Programs (Filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.6 Form of Development Agreement (Filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.7 Form of Indemnification and Put Agreement (Filed as Exhibit 10.6 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.8 Form of Unconditional Guarantee of Payment and Performance (Filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.9 Form of Lease Agreement for Existing Restaurant (Filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.10 Form of Lease Agreement for Restaurant to be Constructed (Filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.11 Form of Premises Lease for Golden Corral Restaurant (Filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.12 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS Escrow and Transfer Agency, Inc. and between CNL Income Fund XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating to the Distribution Reinvestment Plans (Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.13 Form of Cotenancy Agreement with Unaffiliated Entity (Filed as Exhibit 10.12 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.14 Form of Cotenancy Agreement with Affiliated Entity (Filed as Exhibit 10.13 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.15 Form of Registered Investor Advisor Agreement (Filed as Exhibit 10.14 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **99.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) **99.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) (b) Reports on Form 8-K No reports on Form 8-K were filed during the quarter ended September 30, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DATED this 6th day of November, 2002. CNL INCOME FUND XVIII, LTD. By:CNL REALTY CORPORATION General Partner By:/s/ James M. Seneff, Jr. ---------------------------- JAMES M. SENEFF, JR. Chief Executive Officer (Principal Executive Officer) By:/s/ Robert A. Bourne ---------------------------- ROBERT A. BOURNE President and Treasurer (Principal Financial and Accounting Officer) CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF CORPORATE GENERAL PARTNER PURSUANT TO RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, James M. Seneff, Jr., the Chief Executive Officer of CNL Realty Corporation, the corporate general partner of CNL Income Fund XVIII, Ltd. (the "registrant"), certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 6, 2002 /s/ James M. Seneff, Jr. ------------------------- James M. Seneff, Jr. Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICER OF CORPORATE GENERAL PARTNER PURSUANT TO RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert A. Bourne, President and Treasurer of CNL Realty Corporation, the corporate general partner of CNL Income Fund XVIII, Ltd. (the "registrant") certify that: 1. I have reviewed this quarterly report on Form 10-Q of the registrant; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 6, 2002 /s/ Robert A. Bourne -------------------------- Robert A. Bourne President and Treasurer EXHIBIT INDEX Exhibit Number (c) Exhibits **3.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund XVIII, Ltd. (Filed as Exhibit 3.2 to the Registrant's Registration Statement on Form S-11, No. 33-90998-01, incorporated herein by reference.) **3.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund XVIII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on March 21, 1996, and incorporated herein by reference.) **4.1 Affidavit and Certificate of Limited Partnership of CNL Income Fund XVIII, Ltd. (Filed as Exhibit 3.2 to Registrant's Registration Statement on Form S-11, No. 33-90998-01 and incorporated herein by reference.) **4.2 Amended and Restated Agreement of Limited Partnership of CNL Income Fund XVIII, Ltd. (Included as Exhibit 4.2 to Form 10-K filed with the Securities and Exchange Commission on March 21, 1996, and incorporated herein by reference.) **4.3 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS Escrow and Transfer Agency, Inc. and between CNL Income Fund XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating to the Distribution Reinvestment Plans (Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **5.1 Opinion of Baker & Hostetler as to the legality of the securities being registered by CNL Income Fund XVIII, Ltd. (Filed as Exhibit 5.2 to Amendment No. Three to the Registrant's Registration Statements on Form S-11, No. 33-90998, incorporated herein by reference.) **8.1 Opinion of Baker & Hostetler regarding certain material tax issues relating to CNL Income Fund XVIII, Ltd. (Filed as Exhibit 8.1 to Amendment No. Three to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **8.2 Opinion of Baker & Hostetler regarding certain material issues relating to the Distribution Reinvestment Plan of CNL Income Fund XVIII, Ltd. (Filed as Exhibit 8.4 to Amendment No. Three to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **8.3 Amended Opinion of Baker & Hostetler regarding certain material issues relating to CNL Income Fund XVIII, Ltd. (Filed as Exhibit 8.5 to Post-Effective Amendment No. Four to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.1 Management Agreement between CNL Income Fund XVIII, Ltd. and CNL Fund Advisors, Inc. (Included as Exhibit 10.1 to Form 10-K filed with the Securities and Exchange Commission on March 20, 1997, and incorporated herein by reference.) **10.2 Assignment of Management Agreement from CNL Fund Advisors, Inc. to CNL APF Partners, LP. (Filed as Exhibit 10.2 to Form 10-Q filed with the Securities and Exchange Commission on August 9, 2001, and incorporated herein by reference.) **10.3 Assignment of Management Agreement from CNL APF Partners, LP to CNL Restaurants XVIII, Inc. (Included as Exhibit 10.3 to Form 10-Q filed with the Securities and Exchange Commission on August 13, 2002, and incorporated herein by reference.) **10.4 Form of Joint Venture Agreement for Joint Ventures with Unaffiliated Entities (Filed as Exhibit 10.2 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.5 Form of Joint Venture Agreement for Joint Ventures with Affiliated Programs (Filed as Exhibit 10.3 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.6 Form of Development Agreement (Filed as Exhibit 10.5 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.7 Form of Indemnification and Put Agreement (Filed as Exhibit 10.6 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.8 Form of Unconditional Guarantee of Payment and Performance (Filed as Exhibit 10.7 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.9 Form of Lease Agreement for Existing Restaurant (Filed as Exhibit 10.8 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.10 Form of Lease Agreement for Restaurant to be Constructed (Filed as Exhibit 10.9 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.11 Form of Premises Lease for Golden Corral Restaurant (Filed as Exhibit 10.10 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.12 Form of Agreement between CNL Income Fund XVII, Ltd. and MMS Escrow and Transfer Agency, Inc. and between CNL Income Fund XVIII, Ltd. and MMS Escrow and Transfer Agency, Inc. relating to the Distribution Reinvestment Plans (Filed as Exhibit 4.4 to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.13 Form of Cotenancy Agreement with Unaffiliated Entity (Filed as Exhibit 10.12 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.14 Form of Cotenancy Agreement with Affiliated Entity (Filed as Exhibit 10.13 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **10.15 Form of Registered Investor Advisor Agreement (Filed as Exhibit 10.14 to Amendment No. One to the Registrant's Registration Statement on Form S-11, No. 33-90998, incorporated herein by reference.) **99.1 Certification of Chief Executive Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) **99.2 Certification of Chief Financial Officer of Corporate General Partner Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Filed herewith.) EXHIBIT 99.1 EXHIBIT 99.2

CNL INCOME FUND XVIII LTD 10-Q