FORM 10-K/A
                       Securities and Exchange Commission
                             Washington, D.C. 20549

            (X)            Annual Report Pursuant to
                           Section 13 or 15(d) of the
                         Securities Exchange Act of 1934
                   For the fiscal year ended December 31, 1997
                                       or
            ( ) Transition Report Pursuant to Section 13 or 15(d) of
                       the Securities Exchange Act of 1934
                         Commission File Number 1-11998

                             FAC REALTY TRUST, INC.
             (Exact name of Registrant as specified in its charter)

           Maryland                                      56-1819372
(State or Other Jurisdiction of             (I.R.S. Employer Identification No.)
Incorporation or Organization)

          11000 Regency Parkway
         Third Floor, East Tower
          Cary, North Carolina                              27511
(Address of Principal Executive Offices)                  (Zip Code)

                                 (919) 462-8787
              (Registrant's telephone number, including area code)

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

    Title of Each Class                Name of Each Exchange on Which Registered
    -------------------                -----------------------------------------

Common Stock, $.01 par value                     New York Stock Exchange

           Securities registered pursuant to Section 12(g) of the Act:
                                      None

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 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 ___

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.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant, as of March 31, 1998, was approximately $115.5 million.

As of March 23, 1998, there were 14,275,820  shares of the  Registrant's  Common
Stock, $.01 par value, outstanding.


                       Documents Incorporated by Reference

                                      None.

                                       ii

<PAGE>

                             FAC Realty Trust, Inc.
                               Index to Form 10-K
                      For the Year Ended December 31, 1997


                                                                            Page
--------------------------------------------------------------------------------
                                     PART I

Item 1   -  Business                                                           3

Item 2   -  Properties                                                        13

Item 3   -  Legal Proceedings                                                 23

Item 4   -  Submission of Matters to a Vote of
            Security Holders                                                  24

                                     PART II

Item 5   -  Market for the Registrant's Common Equity
            and Related Stockholder Matters                                   25

Item 6   -  Selected Financial Data                                           25

Item 7   -  Management's Discussion and Analysis of
            Financial Condition and Results of Operation                      28

Item 8   -  Financial Statements and Supplementary
            Data                                                              44

Item 9   -  Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure                            44

                                    PART III

Item 10  -  Directors and Executive Officers of
            the Registrant                                                    45

Item 11  -  Executive Compensation                                            47

Item 12  -  Security Ownership of Certain Beneficial
            Owners and Management                                             55

Item 13  -  Certain Relationships and Related
            Transactions                                                      56

                                     PART IV

Item 14  -  Exhibits, Financial Statement Schedules,
            and Reports on Form 8-K                                           57

                                       2

<PAGE>

                                     PART I

Item 1 - Business

General

     FAC  Realty  Trust,  Inc.  (the  "Company"),  is  a  self-administered  and
self-managed  real estate  investment trust ("REIT").  The Company is vertically
integrated, providing acquisition, development, construction, leasing, marketing
and asset management to community and outlet center  properties.  As of December
31, 1997,  the Company  owned and operated 28 community  shopping  centers in 15
states  aggregated 3.1 million  square feet of gross  leasable area ("GLA"),  10
outlet centers in 9 states  aggregating  approximately  2.1 million square feet;
two outlet  centers  aggregating  approximately  0.1 million square feet and one
former  outlet  center which has been  converted to  commercial  office use with
approximately  0.2 million square feet that are held for sale; and approximately
182 acres of outparcel land located near or adjacent to certain of the Company's
centers.  The  Properties  are tenanted  primarily  by large  widely  recognized
retailers  and/or  manufacturers of traditional  brand-name  merchandise such as
Winn Dixie, Food Lion, K Mart, VF Factory Outlet, Inc. (Lee, Wrangler,  Jantzen,
Jansport,  Vanity Fair and Health-Tex),  9 West (Easy Spirit and Enzo), Sara Lee
Corporation (L'eggs,  Hanes, Bali, Playtex, Coach and Champion),  Levi Strauss &
Co.  (Levi's),   Nike,  Inc.,  Revlon  Inc.  (Prestige  Fragrance),   Bugle  Boy
Industries,  Inc.,  Reebok  International,  Ltd., LCI Holdings (Liz  Claiborne),
Dinnerware Plus, Inc. (Mikasa) and WestPoint Stevens (Martex).

     In June 1993, the Company completed its initial public offering (the "IPO")
which combined (i) four partnerships,  each of which had developed, acquired and
owned one factory  outlet center  (collectively,  the "CP  Properties"),  (ii) a
fifth  partnership  formed to develop an additional  factory outlet center,  and
(iii) certain assets of North-South  Management  Corporation,  which had managed
the CP Properties  since 1988.  Prior to or concurrently  with the completion of
the IPO, the Company (i) acquired the CP Properties  and (ii) acquired 21 outlet
centers from VF Corporation (the "VF  Properties")  totaling  approximately  1.7
million  square  feet.  In December  1993,  the Company  used the  proceeds of a
secondary  public  offering to purchase six additional  outlet centers  totaling
approximately 0.9 million square feet from entities and individuals constituting
the Willey  Creek  Group,  at that time one of the  largest  private  owners and
operators of outlet  centers in the  country.  In  addition,  in June 1994,  the
Company purchased three additional properties totaling approximately 0.5 million
square  feet from the  Willey  Creek  Group and in  December  1994  acquired  an
expansion of one of the initial six Willey Creek  properties.  During 1995,  the
Company opened one additional outlet center and completed  expansions of several
others.  In 1996,  the Company  completed  the outlet  center opened in 1995 and
expanded  four other  centers.  The Company  ended 1996 with  approximately  4.9
million square feet of GLA, up 5.1% from 4.6 million at December 31, 1995.

   
Change of Domicile and UPREIT Conversion

     On December 17, 1997, following shareholder  approval,  the Company changed
its  domicile  from  the  State  of  Delaware  to the  State  of  Maryland.  The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland  subsidiary  FAC Realty Trust,  Inc.,  (the  "Company").  Following the
reincorporation,  on December 18, 1997,  the Company  reorganized as an umbrella
partnership  real  estate  investment  trust (an  "UPREIT").  The  Company  then
contributed  to FAC  Properties,  L.P.,  a  Delaware  limited  partnership  (the
"Operating Partnership") substantially all of its assets and liabilities, except
for legal title to 18 properties,  which remains in a wholly owned subsidiary of
the Company.  In exchange for the Company's assets, the Company received limited
partnership  interest  ("Units") in the Operating  Partnership  in an amount and
designation  that  corresponded  to the number and  designation  of  outstanding
shares of  capital  stock of the  Company at the time.  The  Company is the sole
general partner of the Operating Partnership. As additional limited partners are
admitted to the  Operating  Partnership  in  exchange  for the  contribution  of
properties, the Company's percentage ownership in the Operating Partnership will
decline.  As the Company  issues  additional  shares of capital  stock,  it will
contribute  the proceeds for that capital stock to the Operating  Partnership in
exchange  for a number of Units  equal to the number of shares  that the Company
issues.  The  Company  conducts  substantially  all of  its  business  and  owns
substantially  all of its  assets  (either  directly  or  through  subsidiaries)
through the Operating Partnership such that a Unit is economically equivalent to
a share of the Company's common stock.
    

                                       3

<PAGE>

   
The  purpose of  reincorporating  in  Maryland  and of becoming an UPREIT was as
follows:

o    The Company will realize a cost savings in annual franchise tax payments of
     approximately $150,000 by changing its state of incorporation from Delaware
     to Maryland

o    By  adopting an UPREIT  structure,  the Company  will  realize  annual cost
     savings  of  approximately  $188,000  beginning  in 1998  related  to state
     franchise tax payments on its assets located in certain states; and

o    An UPREIT may allow the Company to offer Units in the Operating Partnership
     in exchange for  ownership  interests  from  tax-motivated  sellers.  Under
     certain  circumstances,  the  exchange  of Units for a  seller's  ownership
     interest  will enable the  Operating  Partnership  to acquire  assets while
     allowing the seller to defer the tax liability  associated with the sale of
     such assets.  Effectively,  this allows the Company to use Units instead of
     sock to acquire  properties,  which  provide an advantage  over  non-UPREIT
     entities.

     The  Company  has  elected to be treated as a REIT for  Federal  income tax
purposes.  The Company  intends to continue to operate in the manner required to
maintain its REIT status.

Acquisitions and Significant Transactions
North Hills Portfolio

     In March,  1997,  the Company  purchased five  community  shopping  centers
located in the Raleigh,  North Carolina area for $32.4 million from an unrelated
third party.  The centers total  approximately  606,000  square feet and feature
anchor tenants such as  Winn-Dixie,  Food Lion,  Inc.,  K-Mart  Corporation  and
Eckerd  Drug.  The  acquisition  was funded  from the  Company's  line of credit
facility.  As a result  of the  acquisition,  the  Company  ended  1997  with 41
shopping  centers  containing an aggregate of  approximately  5.5 million square
feet of GLA.

Lazard Freres Transaction

     On February 24, 1998,  Prometheus  Southeast  Retail,  LLC ("PSR"),  a real
estate investment  affiliate of Lazard  Freres Real Estate Investors,  LLC,
entered into a definitive  agreement (the "Stock Purchase  Agreement")  with the
Company  to  make a $200  million  strategic  investment  in  the  Company  (the
"Transaction").  PSR has  committed  to purchase  $200  million in newly  issued
common  shares  of the  Company  at a  purchase  price of $9.50 per  share.  The
investment  can be made in stages,  at the Company's  option,  through March 30,
2000  allowing  the  Company  to obtain  capital  as  needed to fund its  future
acquisition  and  development  plans as well as retire debt.  Upon completion of
funding, PSR will own an equity interest in the Company of approximately 60%, on
a diluted  basis,  not including any further  issuance of Operating  Partnership
Units for transactions under contract or transactions into which the Company may
enter in the future.

     As  part  of the  Transaction,  three  representatives  of  Lazard  will be
nominated to the Company's Board of Directors, which will have a total number of
nine directors.

     On March 23, 1998, the Company issued  2,350,000 shares of its common stock
to PSR for a total  consideration  of $22.3 million (the "Initial  Purchase") as
part of the First  Closing.  In the event that the Second Closing does not occur
by September 30, 1998 or the Stock Purchase Agreement is terminated prior to the
Second  Closing  (other than as a result of PSR's  material  breach of the Stock
Purchase  Agreement),  PSR has an option under the Stock  Purchase  Agreement to
require that the Company  repurchase  the shares of Common Stock acquired in the
Initial  Purchase at a price equal to the purchase price thereof,  together with
any accrued  dividends (the "Put Option").  The Put Option may also be exercised
at any time  within two months  after the  earlier to occur of the date that the
Company fails to receive stockholder  approval of the Transaction,  the date the
Stock  Purchase  Agreement is terminated  prior to the Second Closing and August
31, 1998. The Company does not have the right to require PSR to exercise the Put
Option.  Therefore, in the event that stockholder approval of the Transaction is
not obtained and PSR does not  exercise  the Put Option  within two months,  the
shares of  Common  Stock  issued  to PSR in the  Initial  Purchase  will  remain
outstanding and the Put Option will expire.
    

                                       4

<PAGE>

   
     If the  stockholders  approve  the  Transaction,  PSR would have the right,
pursuant to a Contingent  Value Right  Agreement,  to receive on January 1, 2004
payment in cash or stock of an  aggregate  amount equal to the lesser of (a) (i)
21,052,632  shares  multiplied  by $19 per share  ($400  million)  less (ii) the
dividends  paid to PSR  through  January 1, 2004 and less (iii) the fair  market
value of the shares  purchased and (b)  4,500,000  multiplied by the fair market
value on such date.

     Whether or not the  Transaction  is fully  consummated,  the  Company  will
reimburse PSR for its expenses in  connection  with the  Transaction,  including
expenses  of  monitoring  the  Company and of  performing  its duties  under the
Transaction  Documents.  These expenses and Transaction expenses incurred by the
Company are estimated to aggregate  approximately  $3.3 million,  exclusive of a
claim by  Donaldson,  Lufkin &  Jenrette  Securities  Corporation  ("DLJ")  of a
"success  based"  advisory fee. The Company  believes that DLJ, which rendered a
fairness  opinion to the  Company,  but was not  requested  to perform any other
services in connection with the  Transaction,  is not entitled to any additional
fees or consideration.  DLJ, however,  has notified the Company that it believes
it is entitled to additional  "success  based"  advisory fees under the terms of
its  engagement  letter  with the  Company  dated May 23,  1997.  As of the date
hereof, there has been no resolution of the disagreement.

     Provided  that PSR is not in  material  default  under the  Stock  Purchase
Agreement,  has not breached any of its  representations  and  warranties in any
material  respect and has  satisfied  in all  material  respects  its  covenants
relating to the Initial  Purchase,  the Company  will pay PSR a break-up  fee of
$2,250,000 (the "Break-up  Fee") in the event that the Stock Purchase  Agreement
is terminated any time prior to the Second Closing. The Break-up Fee, therefore,
will be payable to PSR if the  stockholders do not approve the  Transaction.  In
addition,  in the event that a  competing  transaction  is  entered  into by the
Company on any date on or prior to the one-year anniversary of the date that the
Stock Purchase  Agreement is terminated,  the Company will pay PSR an additional
$3,000,000 (the "Topping Fee").

     Notwithstanding  the foregoing,  if a Topping Fee is payable to PSR and PSR
profits  on the  sale  of  the  shares  purchased  in the  Initial  Purchase  in
connection  with a  competing  transaction,  then PSR must pay the  Company  the
amount by which  such  profit,  the  Break-up  Fee and the  Topping  Fee  exceed
$7,750,000.

     Each of the Company's and PSR's  obligations  to effect the Second  Closing
and the  Subsequent  Closings  are  subject  to various  mutual  and  unilateral
conditions,  including,  without  limitation,  the  following:  (i)  stockholder
approval of the Transaction;  (ii) the continued qualification of the Company as
a REIT for  federal  income  tax  purposes;  (iii) the  receipt of an opinion of
counsel to the effect that the Company is a "domestically controlled" REIT; (iv)
the continuing  correctness of the  representations  and warranties in the Stock
Purchase  Agreement,   (v)  the  receipt  of  any  consents  necessary  for  the
Transaction,  and (vi) various other customary conditions.  In addition,  PSR is
not  obligated  to fund more  than  $100  million  of the  Transaction  unless a
significant portion of the Konover & Associates South transaction,  as described
below, is consummated.

Konover & Associates South Transaction

         On February 24, 1998, the Company  entered into  definitive  agreements
with  affiliates  of Konover & Associates  South,  a privately  held real estate
development firm based in Boca Raton,  Florida, to acquire 11 community shopping
centers totaling approximately 2.0 million square feet and valued at nearly $100
million. The purchase equates to approximately $24 million in equity, consisting
of the issuance of Units, at $9.50 per Unit, and/or cash, plus the assumption of
approximately $76 million in debt. At closing, $17 million of the equity will be
paid in the form of Units or cash. The remaining $7 million will be paid in cash
over a three-year  period with  interest at 7.75% per annum.  In  addition,  the
Company will issue 200,000  warrants to Mr. Simon Konover.  One hundred thousand
of the  warrants  have an  exercise  price of $9.50 per share, and the remaining
100,000  warrants have an exercise price of $12.50 per share.  The warrants vest
in 20% increments over a five-year  period and may be subject to forfeiture upon
the occurrence of certain events.

     As part of the  transaction,  the Company intends to operate under the name
"Konover  Property Trust".  The Company will remain listed on the New York Stock
Exchange and intends to change its ticker symbol from FAC to KPT, pending formal
approval by the shareholders in July, 1998. The Company will continue to operate
the  Konover  &  Associates  South  office  in Boca  Raton,  Florida  due to its
strategic location in the Southeast.

     Simon  Konover,  founder of both Konover &  Associates  South and Konover &
Associates,  Inc., a $500 million plus real estate company headquartered in West
Hartford,  Connecticut,  will become  Chairman of the Board of the Company  upon
completion of the  transaction.  He will not become an executive  officer of the
Company.
    

                                       5

<PAGE>

   
Rodwell/Kane Portfolio

     On October 7, 1997,  the Company  entered into  agreements to purchase nine
shopping  centers  located in North  Carolina and Virginia,  (the  "Rodwell/Kane
Properties")  totaling  1.0  million  square  feet,  and to  assume  third-party
management  of an  additional  1.2  million  square feet of  community  shopping
centers.  The centers to be purchased  are owned  primarily  by Roy O.  Rodwell,
Chairman and Co-Founder of Atlantic Real Estate Corporation ("ARC"), a privately
held real estate development company based in Durham, North Carolina and John M.
Kane,  Chairman  of Kane  Realty  Corporation,  a real  estate  development  and
brokerage company based in Raleigh,  North Carolina,  in a transaction valued at
$63.3 million.

     As of March  31,  1998,  the  acquisition  of  seven  of the  nine  centers
discussed  above had closed.  The acquisition of the eighth center closed on May
14,  1998.  The ninth and final  center  will be managed by the  Company  and is
expected to be acquired in the year 2000. Its acquisition prior to the year 2000
would trigger an onerous loan assumption fee.

     In exchange for their equity ownership  interests in the community centers,
Mr. Rodwell, Mr. Kane and related parties will receive approximately 1.2 million
Units in the Operating  Partnership and approximately  $3.0 million in cash. The
number of Units to be issued to the sellers was based on a $9.50 price per share
of the Company's Common Stock.  The issuance of approximately  269,000 Units and
payment of $0.8 million of cash will be deferred until the completion of certain
performance  requirements.  As part of the purchase price, the Company will also
assume  approximately  $48.8 million of fixed-rate  debt on the properties to be
acquired.

Joint Ventures

     On  September  22,  1997,  the Company  and ARC  jointly  created a limited
liability  company named Atlantic Realty LLC  ("Atlantic") to develop and manage
retail community and neighborhood  shopping centers in North Carolina.  Atlantic
currently has plans to develop  approximately one million square feet, including
outparcels,  over the next several years.  The Company and ARC will own Atlantic
equally,  with the Company serving as managing member overseeing its operations.
As of March 31,  1998,  the  Company  has  invested  $2.5  million in this joint
venture.  The  investment  in Atlantic  will be  accounted  for under the equity
method of  accounting as major  decisions  must be agreed to by both the Company
and ARC. As of March 31, 1998,  Atlantic had total assets of approximately  $8.1
million and debt of $5.6 million. The joint venture had no other operations.

     During  1997,  the Company  entered  into a joint  venture,  known as Mount
Pleasant  FAC  LLC,   with  AJS  Group,   to  develop  a   425,000-square   foot
retail/entertainment   shopping  center  in  Mount  Pleasant,   South  Carolina.
Construction  on the  center is  expected  to begin May  1998,  with  completion
targeted  for May 1999.  As of March 31,  1998,  the Company has  invested  $1.3
million in this  joint  venture.  This 50%  investment  in the joint  venture is
accounted for under the equity method of accounting as major  decisions  must be
agreed  to by both  the  Company  and the  AJS  Group.  The  joint  venture  had
approximately  $4.8  million of assets and $3.5 of debt at March 31,  1998.  The
joint venture had no other operations.

     During 1998, the Company  entered into a joint venture,  known as Wakefield
Commercial LLC,  primarily to develop two community  shopping  centers.  The two
retail   centers,   one   approximately   200,000  square  feet  and  the  other
approximately 300,000 square feet, will be located on 65 acres within a 500-acre
parcel of land zoned for  commercial  use. The Company will perform all leasing,
property  management  and marketing  functions for the two centers.  The Company
will hold a 50% interest in the venture, which is accounted for under the equity
method of  accounting as major  decisions  must be agreed to by both the Company
and its venture  partner.  As of March 31, 1998,  the Company had invested  $0.6
million in this joint  venture and had advanced the joint  venture $4.7 million.
The advances  carry  interest at 11% per annum.  The joint  venture had no other
operations.

     The  acquisition  and  development of the above  properties are subject to,
among other  things,  completion  of due  diligence  and various  contingencies,
including those inherent in development  projects,  such as zoning,  leasing and
financing.  There can be no assurance that all of the above transactions will be
consummated.
    


                                       6
<PAGE>

Other

     On January 7, 1998, the Company  completed the purchase of a  55,909-square
foot shopping  center  located in Danville,  Virginia.  This Food  Lion-anchored
center  was  purchased  for $3.1  million in cash,  net of $2.3  million in debt
assumed.

     On March 11, 1998, the Company closed on a $75 million,  15-year  permanent
credit facility  secured by 11 properties  previously  securing its $150 million
revolving  credit  facility.  The loan is at an  effective  rate of 7.73% and is
amortized  on a 338-month  basis.  The  proceeds  were used to pay down  certain
outstandings on the $150 million Nomura credit facility.

     During 1997,  the Company  completed  construction  of a 32,000 square foot
expansion at its Crossville,  Tennessee outlet center. In addition,  the Company
began  construction  on a 44,000  square  foot Winn Dixie at its  Wilson,  North
Carolina center. The Company is currently in the  pre-development  and marketing
stage  for a  "power"  outlet  mall  located  in Lake  Carmel,  New  York  and a
retail/entertainment  shopping center in Mt.  Pleasant,  South  Carolina.  These
projects are planned to contain in excess of 300,000 and 425,000  square feet of
GLA,   respectively.   If  appropriate  tenant  interest  is  obtained  and  the
appropriate agreements,  permits and approvals are received, the Company intends
to  commence  construction  in the Fall and  Spring  of 1998,  respectively.  No
assurance  can be  given,  however,  that  the  expansions  or  project  will be
developed and/or completed.

Business Strategy

     The Company's  business  strategy is to increase overall  shareholder value
through  acquiring and  selectively  developing  new  properties,  expanding its
existing  centers  and by  increasing  the value of its assets in the  portfolio
through proactive asset management,  leasing,  marketing and financial controls.
The following is a brief  description of the Company's current business strategy
and philosophy .

     Management.  The  Company's  management  team consists of a group of highly
experienced  real estate  professionals  with a wide variety of shopping  center
experience.  The team is headed  by its  Chief  Executive  Officer,  C.  Cammack
Morton. Since joining the Company, Mr. Morton has assembled a management team of
seasoned veterans in  finance/accounting,  asset management,  law,  development,
leasing and marketing. These members of management bring to the Company years of
experience  and  professional   accreditations  from  shopping  center  industry
organizations.  They also bring the Company  relationships  with retail shopping
and manufacturer tenants, and the financial and investment community.

     Acquisition and Portfolio Diversification. The Company believes that retail
concepts  within the retail  shopping  center  industry are merging,  and that a
diversified  shopping center portfolio will provide the best  opportunities  for
growth and overall  return to  shareholders.  To implement  this  strategy,  the
Company  intends to focus on selective  acquisitions  and  development of retail
centers.  Retail centers may include, but are not limited to, community shopping
centers,  retail/entertainment centers, "power strip" centers and "power outlet"
centers.  The Company  believes that many  opportunities  for the acquisition of
retail centers exist,  particularly in the southeastern  United States.  In such
acquisitions, the Company looks for strong demographics and traffic counts, good
visibility  and access,  and the  potential  for  enhancing  cash flows  through
increasing  rents,  re-tenanting,  remerchandising  or  future  expansions.  The
Company  intends  to  use  its  existing  tenant   relationships  to  assist  in
accomplishing its objectives.

     The 1997  acquisition of five community  shopping centers from North Hills,
Inc. was the beginning of the  implementation  of the Company's  diversification
strategy. This portfolio of properties meets the Company's acquisition criteria.
Their  proximity to the  Company's  headquarters,  together  with the  Company's
knowledge  of  the  market,   has  allowed  the  Company  to  manage  them  very
efficiently.  The estimated annualized return on the acquisition is in excess of
13%.  Most  importantly,  the Company has already  utilized its existing  tenant
relationships to remerchandise the existing centers at better market rates.

     As the Company  pursues its  diversification  strategy,  it also intends to
focus on  attracting  new  tenants to its  portfolio  to offer a wider  range of
merchandise and amenities to consumers.  These may include,  but are not limited
to, full-service restaurants, theaters, entertainment and hotels.




                                       7
<PAGE>

     Expansion and Improvements to Existing Centers. The Company intends to hold
the majority of its properties for long-term investment and, therefore,  intends
to  continue  selective  expansion  of  its  existing  centers.   The  Company's
philosophy is to expand its existing centers in response to tenant demand. Prior
to commencement of an expansion,  the Company requires a significant  percentage
of lease commitments. The Company believes that selective expansion allows it to
take advantage of management's  development experience and tenant relationships.
During the past three  years,  the Company has added  approximately  0.4 million
square feet of  expansion  space to its  centers.  The  Company  intends to fund
future expansions and improvements  primarily through internally  generated cash
flow and its revolving credit facility.

     The Company's asset management team, which includes  development,  leasing,
marketing,  finance and property  management  personnel,  continually  evaluates
potential   opportunities  at  its  existing  centers  for  further   expansion,
remerchandising,  capital  improvements  and  renovation,  all in an  effort  to
increase  property  value.  The  Company  also  monitors  each  center's  sales,
occupancy and overall  performance.  Properties which may be underperforming are
considered for  re-tenanting,  change of use or in some cases sale. In addition,
the Company has an ongoing program of regular  maintenance,  periodic renovation
and capital improvement of existing facilities in an effort to increase property
values and tenants' sales.

     Development  of New  Properties.  The Company  believes that  opportunities
continue to exist to attract  tenants to newly  developed  retail  centers.  The
Company intends to selectively develop centers on new sites in high growth areas
with easy access, good visibility and strong  demographics,  where a substantial
percentage of lease  commitments  have been  obtained from tenants.  The Company
looks for sites where it believes there is potential to expand. Accordingly, the
Company  generally  acquires  a minimum  site area  sufficient  to  develop  the
initial,  and at least  one  additional  phase  of a  project,  plus  sufficient
contiguous property to be sold or otherwise developed for complementary uses.

     The Company is currently  in the  pre-development  stage of several  retail
community  centers in the North  Carolina  area.  The centers are proposed to be
anchored  primarily by well-known grocery and drug chains. If appropriate tenant
interest and necessary  approvals are  obtained,  the Company  intends to pursue
development.  No assurance  can be given,  however,  that the  projects  will be
developed.

     Strategic  Alliances.  The  Company  has  entered  into  several  strategic
alliances with well-known and experienced developers,  primarily in the Raleigh,
North Carolina area. The philosophy is to align itself with big developers whose
reputation  and/or knowledge in certain markets enhances the ability to complete
development projects.  These alliances may also lead to new tenant relationships
and/or larger portfolio acquisitions.

     Atlantic  Real  Estate  Corporation  (ARC).  As a result  of the  Company's
relationship with Roy Rodwell, on September 22, 1997, the Company and ARC formed
a limited liability company known as Atlantic Realty,  LLC to develop and manage
retail  community and neighborhood  shopping  centers in North Carolina.  Of the
nearly one million  square  feet of planned  development  the LLC has  completed
development of a 38,600 square foot center in Pembroke,  North Carolina anchored
by Food Lion. A second project known as Park Place is under  development  and if
tenant  interest  continues  the  project is  expected to be complete in Spring,
1998. Two other projects are in development.

     Wakefield.  Much  like the  Company's  alliance  with ARC,  this  strategic
alliance known as Wakefield  Commercial LLC, was formed primarily to develop two
community shopping centers.  The two retail centers, one 200,000 square feet and
the other  300,000  square  feet will be located  on 65 acres  within a 500-acre
parcel of land zoned for  commercial  use. The Company will perform all leasing,
property  management  and marketing  functions for the two centers.  This is the
fourth project to be jointly  developed and managed by Atlantic  Realty LLC. The
Company will hold a 50% interest in the venture.

     Wakefield  Commercial,  LLC  purchased  the  500-acre  parcel  of  land  in
February,  1998. The shopping  centers will be directly  adjacent to Wakefield's
residential  community,  a 2,200-acre  upscale,  mixed-use  development of 3,400
homes priced from $225,000 to $1 million; 75% of the community has been pre-sold
to  nationally  recognized  builders.  The  exclusive  community  is expected to
include a Wake County public school  campus,  public  library,  city park and an
18-hole TPC golf course.


                                       8

<PAGE>

     Mount  Pleasant.  The Company has entered into a strategic  joint  venture,
known as Mount  Pleasant,  LLC, with AJS Group, to develop a 425,000 square foot
retail/entertainment   shopping   center  in  Mt.   Pleasant,   South  Carolina.
Construction on the center,  to be named Mt. Pleasant Towne Centre, is slated to
begin in May, 1998,  with  completion  targeted for May, 1999.  Belk  Department
Stores will anchor the center with a new fashion department store concept.

     Mt.  Pleasant  Towne  Centre  will be a  unique  retail  and  entertainment
shopping center featuring upscale,  nationally  recognized fashion and specialty
tenants,  restaurants  and a movie  theater  in a quaint  village  setting.  The
center's "Main Street"  buildings and pedestrian mall area have been designed to
replicate and complement the distinctive  architectural  styles found throughout
the Carolinas' Low Country region.

     The  Company  is a 50% owner  and  provides  all  leasing,  management  and
development pertaining to this joint venture.

     Financing. The Company's policy is to finance its acquisitions,  expansions
and  developments  with the source of capital  believed by management to be most
appropriate,   which  may  include  undistributed  cash  flow,  borrowings  from
institutional lenders,  newly-issued equity securities, and debt securities on a
secured  or  unsecured  basis.  The  Company's  philosophy  is to use its  Funds
Available for  Distribution,  which the Company refers to as Funds Available for
Reinvestment,  to their  greatest  potential as a key source of  financing.  The
Company's  decision  to use its  cash  flow in this  fashion  will  result  in a
decrease in dividend  distributions  (See "Item 5 - Market for the  Registrant's
Common Equity and Related Stockholder Matters").

     Previous  sources of financing  alternatives  for the Company have included
the  issuance  by the  Company  in 1996 of $20  million of equity in the form of
convertible  preferred stock. In early 1997, a $150 million credit facility with
Nomura  Asset  Capital  Corporation  was  completed  and  secured  by 21 of  the
Company's  properties,  plus an  assignment  of the  excess  cash  flow  from 18
additional properties.  This facility was used during 1997 to fund the repayment
of  approximately  $84.5  million in debt,  $30.4  million  for the North  Hills
portfolio,   and  $11.1  million   invested  in   income-producing   properties.
Additionally,  the Company  loaned $8.5  million to Davie  Plaza  Associates,  a
related entity of Konover & Associates South.

     On March 11, 1998, the Company closed on a $75 million,  15-year  permanent
credit facility  secured by 11 properties  previously  securing its $150 million
revolving  credit  facility.  The  loan is at an  effective  rate of  7.73%,  is
amortized  on a 338-month  basis.  The  proceeds  were used to pay down  certain
outstandings on the $150 million Nomura credit facility.

   
     On March 23, 1998, the Company issued  2,350,000 shares of its common stock
to PSR for a total  consideration of $22.3 million as part of the first closings
of the Lazard Transaction as described above.
    

     The Company  also entered into a line of credit for $2.5 million with First
Union National Bank. The line is tied to the Company's operating accounts and is
utilized to maximize the Company's cashflow on a daily basis.

     The  Company may enter into  additional  mortgage  indebtedness  related to
certain joint venture development projects. The Company's philosophy is that any
joint venture borrowings would be based upon terms and conditions as its own.

     Any additional debt financing, including additional lines of credit, may be
secured by  mortgages  on the  Properties.  Such  mortgages  may be  recourse or
non-recourse or  cross-collateralized  or may contain cross-default  provisions.
The Company does not have a policy  limiting the number of mortgages that may be
placed on, or the amount of indebtedness  that may be secured by, any particular
property,  however;  current mortgage financing  instruments do limit additional
indebtedness on such properties.

     Marketing.  Management  believes  that the major  goal of  marketing  is to
maximize sales and increase the net asset value of the  Properties.  The Company
has analyzed the  Properties  based on net operating  income (NOI) and created a
marketing  strategy to prioritize the marketing and leasing needs of each center
to better utilize marketing dollars. The marketing efforts are primarily focused
on the larger centers  located in markets with regional  customer draw.  Each of
the  Properties  has  a  marketing   manager   responsible  for  developing  and
implementing marketing strategies.

                                       9

<PAGE>

     Marketing  plans for each center are prepared by the marketing  manager for
use by the  merchants,  as well as for  internal  use by the  Company's  leasing
department.  Each marketing plan details goals, strategies and tactics to create
awareness,  generate  traffic and maximize  sales at the  Properties.  Marketing
efforts also include  utilizing an advertising  agency  specializing in shopping
center marketing,  television, radio and print advertising,  billboards, special
events, promotions and a public relations program.

     On a corporate level,  information  packages and the Company's internet web
site are continually  updated in an effort to communicate  more effectively with
the  investment  community.  The  web  site  includes  a guest  book to  monitor
investment community interest.

     Operating  Practices.  The Company is a  vertically  integrated,  providing
acquisition, development,  construction, leasing, marketing and asset management
services.  The Company  believes it can increase  value to its  shareholders  by
conducting the vast majority of these services in-house.  Each area has been set
up along functional lines, with the Company's property  management and marketing
areas being  staffed by  individuals  with industry  accreditations  such as CSM
(Certified Shopping Center Manager) and CMD (Certified Marketing Director).

     The  Company's  leasing  department  has also been  staffed to address  the
Company's philosophy regarding the changing retail environment and the Company's
diversification  strategy. The staff has individuals experienced in all areas of
retail leasing,  such as outlets,  power centers,  community  centers,  regional
malls and  specialty  centers.  This  breadth of  experience  has brought to the
Company a broader  range of tenant  relationships  to  position  the Company for
growth.

     The  Company  believes  that  increased  focus on  financial  controls  and
information systems (IS) will be critical over the next several years to enhance
the analysis and  communication  of financial data. In order to accomplish this,
the Company has staffed its finance  area with  professionals  with  specialized
knowledge in real estate finance and acquisition analysis.  The IS department is
continually  focused on processes  which will enhance the  Company's  systems to
allow all  personnel  easy access to all  financial  and lease data in a concise
format.

Policies with Respect to Certain Activities

   
     The  following   supplements  the  discussion  of  the  Company's   primary
management, portfolio diversification,  expansion and improvements, development,
financing,  marketing  and  operations  strategies  set forth  elsewhere in this
report.  The Company's policies with respect to those activities and the matters
discussed  in this  section  have  been  determined  by the  Company's  Board of
Directors  and may be amended or revised from time to time at the  discretion of
the Board of Directors without a vote of the Company's shareholders.

Investment Policies

     At all times, it is the policy of the Company to make investments in such a
manner as to be  consistent  with the  requirements  of the Code to qualify as a
REIT unless, because of changed circumstances, the Board of Directors determines
that it is no longer in the best  interests of the Company to qualify as a REIT.
Other than the  limitations  provided  in the Code,  the  Company  has no stated
policy  (i) that  limits a certain  percentage  of  Company  assets  from  being
invested  in any one type of  investment  or in any one  property  or (ii)  that
limits the  percentage  of  securities  of any one issuer  which the Company may
acquire.

     The Company may develop new properties,  purchase or lease income-producing
properties for long-term  investment,  expand and improve the properties it owns
or sell such properties, in whole or in part, when circumstances warrant. Equity
investments may be subject to existing mortgage financing and other indebtedness
which have priority over the Company's equity interest. These properties include
outlet centers and community  shopping  centers  across the United  States.  See
"Business Strategy  --Acquisition and Portfolio  Diversification," "-- Expansion
and  Improvements to Existing  Centers," and "-- Development of New Properties."
The Company's  organizational  structure and financing  strategy is conducive to
operating  such investments. See  "Business Strategy -- Operating Practices" and
" -- Financing" above.

     The Company  invests in real estate and interests in real estate  primarily
for the purpose of  producing  income in the  long-term,  but the  Company  also
considers  the  potential  for  long-term  appreciation  when making  investment
decisions.
    


                                       10

<PAGE>

   
     While the Company has emphasized,  and intends to continue its emphasis, in
equity real estate investments, it may, in its discretion,  invest in mortgages.
The Company has not  previously  invested in mortgages  and the Company does not
presently  intend to invest to a  significant  extent in  mortgages  or deeds of
trust,  but it may  invest  in  participating  or  convertible  mortgages  if it
concludes  that it may  benefit  from the cash flow or any  appreciation  in the
value of the subject property.  Such property would include  community  shopping
centers or outlet centers.

     The Company may also participate with other entities in property  ownership
through joint ventures or other types of co-ownership.  The Company has invested
in real estate interests through joint ventures that intend to develop community
shopping  centers  or  retail/entertainment   shopping  centers.  See  "Business
Strategy -- Strategic Alliances" above for more detail.

     Subject to the percentage of ownership  limitations  and gross income tests
which must be  satisfied  to qualify as a REIT,  the  Company may also invest in
securities  of  concerns  engaged  in  real  estate  activities,  such  as  land
improvement or investments in outlet centers, or in securities of other issuers.
As disclosed above, the Company has not over the last three years invested,  and
does not intend to invest, in the securities of any other issuer for the purpose
of  exercising  control.  In any event,  the  Company  does not intend  that its
investments in securities would require the Company to register as an investment
company under the  Investment  Company Act of 1940, and the Company would divest
securities before any such registration would be required.

Policies with Respect to Certain Other Activities

     The Company may, but does not presently intend to, make  investments  other
than as described above. The Company's  policies  regarding  certain  activities
(and the extent to which it has engaged in such activities during the last three
years) follow:

(i)    The Company has authority to issue senior securities.  The Company issued
       $19.2 million of convertible  preferred  (Series A) stock in 1996, but it
       has not otherwise issued senior securities.

(ii)   The Company is  authorized  and will continue to borrow funds to fuel its
       growth.  See  "Business  Strategy  --  Financing"  above.  See  "Notes to
       Consolidated  Financial  Statements"  for  a  summary  of  borrowings  at
       December 31, 1997 and 1996.

(iii)  The  Company has  authority  to make loans to others and has done so on a
       limited basis (see Note 5 to the Consolidated Financial Statements).  The
       Company  has no  immediate  plans  to lend  money to  other  entities  or
       persons,  except for loans to Officers  secured by their ownership of the
       Company's  vested  stock.  The Board has  approved  loans to  Officers to
       enable them to retain their Company stock.

(iv)   The Company does not invest in the securities of any other issuer for the
       purpose of  exercising  control,  however,  the Company may in the future
       acquire all or  substantially  all of the  securities  or assets of other
       REITs,  management  companies or similar  entities where such investments
       would be consistent with the Company's investment policies.

(v)    The  Company  has  not  engaged  in  trading,   underwriting   or  agency
       distribution or resale of securities of other issuers and does not intend
       to do so.

(vi)   The Company engages in the purchase and sale of investment properties, as
       described  in more  detail  throughout  this  section  and the  "Business
       Strategy" section.

(vii)  The Company has  authority to offer shares of its capital  stock or other
       senior securities in exchange for property,  but it has not issued Common
       Stock or any senior  securities  in exchange for property.  However,  the
       Company has  acquired  property in  exchange  for Units in the  Operating
       Partnership.

(viii) The Company has the authority to  repurchase  or otherwise  reacquire its
       Common Stock or any other securities, although it has not done so (except
       to replace certain  compensatory shares of restricted stock with options)
       and has no plans to do so.

(ix)   The Company has issued and intends to continue  issuing annual reports to
       shareholders,  informing  them of the status of the Company  with audited
       financial statements attached to the report.

     All  transactions,  including  lending  and  borrowing  money,  between the
Company and its affiliates  must also be approved by a majority of the Company's
directors who are  "Independent"  (which is generally defined in the Articles of
Incorporation of the Company as a non-employee  director who is not an affiliate
of the Company).
    


                                       11

<PAGE>

Major Tenant

     VF Corporation,  which is one of the world's largest apparel manufacturers,
has the largest  number of stores and square  footage in the Company's  property
portfolio  with 34  stores  (25 of  which  anchor  the  Company's  centers)  and
approximately  1,226,000  square feet  representing  25% of the Company's  total
square  footage.  VF  Corporation,   through  its  operating   subsidiaries  and
divisions,  designs,  manufactures and markets clothing apparel. Rental revenues
from  VF  Factory  Outlet,  Inc.  ("VFFO"),  a  subsidiary  of  VF  Corporation,
represented approximately 11% of the Company's 1997 rental revenues. The Company
could be adversely  affected in the event of the bankruptcy or insolvency of, or
a downturn in the business of, VFFO or in the event that VFFO does not renew its
leases as they expire. Since VFFO is the anchor tenant in 25 of the Company's 41
centers,  the  failure of VFFO to renew its leases or  otherwise  to continue to
operate in one or more of the centers  could have a material  adverse  impact on
the  performance  of other  tenants in the affected  center (and may permit some
tenants to terminate their leases) and on the Company. No other tenant accounted
for more than 6.0% of the Company's base rental revenues or aggregate leased GLA
during 1997.

     VFFO has 21 leases with the  Company  for  initial  terms of 10 years which
were  executed  in  June  1993.  These  leases  with  VFFO  provide  that if the
expansions  of  certain  of  the  Company's  outlet  centers  are  completed  as
scheduled, the initial terms of these leases will expire ten years from the date
such expansions are completed.  To date,  seven of those leases had been amended
to extend their  maturity  dates  between July 2004 and March 2006.  Pursuant to
these  leases,  VFFO is  obligated  to pay  certain  increases  in  common  area
maintenance  expenses  and its pro rata  share of  insurance  expenses  and real
estate taxes, and certain operating expenses. Additionally,  certain stores (six
in total) may cease operations  during the term of their leases if VFFO does not
meet a break-even point in these locations for three consecutive  years. No more
than two of these  VFFO  stores  may  close in any year and the  tenant is still
obligated for the payment of all rental  obligations  for the remaining term. As
of December 31, 1997 all six  locations  had income in excess of the  break-even
point.  See "Item 2 - Properties - Planned  Expansions"  for a discussion of the
Company's satisfaction of obligations to expand VFFO Properties.

Competition

     In seeking new investment  opportunities,  the Company  competes with other
real estate investors,  including pension funds, foreign investors,  real estate
partnerships, other real estate investment trusts and other domestic real estate
companies.  On  properties  presently  owned by the  Company  or in which it has
investments, the Company and its tenants and borrowers compete with other owners
of like properties for tenants and/or  customers  depending on the nature of the
investment.  Management  believes that the Company is well positioned to compete
effectively for new investments and tenants.

Environmental Matters

     Phase I  environmental  site  assessments  and  when  applicable,  Phase II
assessments (which generally did not include environmental sampling,  monitoring
or laboratory  analysis)  have been completed by the Company with respect to all
of   its    properties    either   as    required    by   a   lender   or   upon
acquisition/development. No studies are dated prior to 1995.

     The  Company's  policy going  forward is to obtain new  environmental  site
assessments on all acquisition or development properties prior to purchase.

     None of these environmental  assessments or subsequent updates revealed any
environmental  liability that management  believes would have a material adverse
effect on the Company.  No  assurances  can be given that (i) the  environmental
assessments detected all environmental  hazards, (ii) future laws, ordinances or
regulations  will not  impose any  material  environmental  liability,  or (iii)
current  environmental  conditions  of the  Properties  will not be  affected by
tenants,  by properties in the vicinity of the  Properties,  or by third persons
unrelated to the Company.

     The  Vacaville,  California  property  and  one of the  community  shopping
centers  have  conditions  which may pose a risk of  environmental  liability at
these properties.  The Company believes that releases of petroleum products from
underground storage tanks located at adjacent properties may have affected these
properties.  In each  instance  where  remediation  has  been  determined  to be
necessary, the Company believes that the third



                                       12

<PAGE>

   
parties responsible for any contamination have accepted  responsibility therefor
and intend to remediate the effects of any such contamination.  The Company also
believes that these  responsible  parties have  sufficient  resources to conduct
such  remediation.  There can be no  assurance,  however,  that the  responsible
parties will adequately complete remediation of any contamination.  However, due
to the  potential  environmental  issues  associated  with the  property and the
properties adjacent to the Company's property,  the Company has accrued $500,000
for the potential  remediation cost of the property.  If the responsible parties
do not complete such remediation,  the Company may be required to do so, and the
expenses  associated  with such  remediation may be material.  In addition,  the
investigation or remediation of such  contamination (by the responsible  parties
or by the Company) may impose  limitations upon the Company's ability to use the
properties.  Additionally,  the lender on the Vacaville  property  required that
$150,000 be deposited  into an escrow  account,  together with $4,200 in monthly
deposits,  to be used, if necessary,  to perform  certain  possible  remediation
work.  Management believes that these amounts will not be used given the results
of the environmental audits.
    

     The Company believes that it is in compliance in all material respects with
Federal, state and local ordinances and regulations regarding hazardous or toxic
substances.  Neither the Company,  nor, to the Company's  knowledge,  any of its
predecessor  entities or  transferors  have been  notified  by any  governmental
authority as to it being designated as a potential  responsible  party or of any
material  non-compliance,  liability or other  environmental claim in connection
with any of the Properties.  The Company is not aware of any other environmental
condition with respect to any of its  properties  that it believes would involve
any substantial expenditure.

Insurance

     Management  believes  that each of the  Properties  is covered by  adequate
fire,  flood,  property and, in the case of the  Vacaville and Lathrop  centers,
earthquake  insurance  provided by  reputable  companies  and with  commercially
reasonable deductibles and limits.

Employees

     As of March 31, 1998,  the Company  employed  207  persons,  90 of whom are
located  primarily at the Company's  headquarters in Cary,  North Carolina.  The
remaining  117  employees are property  management,  marketing  and  maintenance
personnel  located at the  Properties.  The Company  believes that its relations
with its employees are good.

Item 2 - Properties

     As of December 31, 1997, the  properties  (the  "Properties")  owned by the
Company consist of: (1) 28 community  shopping centers in 15 states  aggregating
approximately  3,090,000  square  feet;  (2)  10  outlet  centers  in  9  states
aggregating   approximately  2,120,000  square  feet;  (3)  two  outlet  centers
aggregating  approximately  150,000  square feet and one former  factory  outlet
center which has been  converted  to  commercial  office use with  approximately
150,000 square feet that are held for sale; and (4) approximately 182.3 acres of
outparcel land located near or adjacent to certain of the Company's  centers and
are being marketed for lease or sale.




                                       13
<PAGE>

     The  following  table sets forth the location  of, and certain  information
relating to, the Properties as of December 31, 1997:

<TABLE>
<CAPTION>
                                                     Total          Total            Percentage      Percentage      Percentage of
       State                                         Number          GLA              of Total     Of Total Rental   GLS in Leased
                                                   Of Centers     (Sq. Ft.)             GLA         Revenue (1)
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>         <C>                  <C>            <C>               <C>  
Operating Properties:
Community Centers
Arizona                                                 2           294,788              5.4%           4.4%              90.0%
Florida                                                 1            83,962              1.5%           1.0%             100.0%
Georgia                                                 1           140,025              2.5%           1.5%              71.9%
Illinois                                                1            91,063              1.7%           0.7%              73.2%
Iowa                                                    1           112,405              2.0%           1.3%              92.3%
Kentucky                                                3           304,402              5.5%           4.3%              98.7%
Louisiana                                               2           220,281              4.0%           3.5%              97.7%
Mississippi                                             1           124,412              2.3%           0.8%              93.7%
Missouri                                                1            83,464              1.5%           1.0%             100.0%
Nebraska                                                1            89,646              1.6%           1.2%              93.3%
Nevada                                                  1           229,958              4.2%           4.0%              69.6%
North Carolina                                          5           605,485             11.0%          10.7%              98.1%
Tennessee                                               2           193,137              3.5%           2.0%              95.1%
Texas                                                   6           515,412              9.4%           6.8%              89.7%
                                                   ----------------------------------------------------------------------------
Subtotal (Community  Centers                                                                                       
                                                       28         3,088,440             56.1%          43.2%              96.3%
                                                                                                                   
Outlet Centers                                                                                                     
Alabama                                                 1           111,909              2.0%           1.5%              97.7%
California                                              1           447,725              8.1%          16.6%              96.6%
Maine                                                   1            24,620              0.5%           1.0%             100.0%
Missouri                                                1           287,522              5.2%           5.1%              81.2%
New York                                                1            43,650              0.8%           1.2%             100.0%
North Carolina                                          1           355,756              6.5%           8.0%              99.7%
Tennessee                                               2           437,064              7.9%          11.0%              96.1%
Utah                                                    1           185,281              3.4%           3.5%             100.0%
Washington                                              1           223,383              4.1%           6.7%             100.0%
                                                   ----------------------------------------------------------------------------
Subtotal (Outlet Centers)                              10         2,116,910             38.5%          54.6%              96.3%
                                                   ----------------------------------------------------------------------------
Subtotal (Operating  Properties)                                                                                
                                                       38         5,205,350             94.6%          97.8%              93.4%
                                                   ----------------------------------------------------------------------------
                                                                                                              
Properties Held for Sale:
Arizona                                                 1           141,828              2.6%           1.4%              64.8%
California                                              1           131,400              2.4%           0.6%              34.1%
New Hampshire                                           1            24,740              0.4%           0.2%              54.2%
                                                   ----------------------------------------------------------------------------
Subtotal                                                3           297,968              5.4%           2.2%              50.4%
                                                   ----------------------------------------------------------------------------
Total (All Properties)                                 41         5,503,318            100.0%         100.0%              91.1%
                                                   ============================================================================
</TABLE>

(1)  Total rental revenue  consists of base and percentage  rent plus recoveries
     from tenants for the year ended December 31, 1997.




                                       14
<PAGE>

     The following table sets forth certain  information as of December 31, 1997
relating to the Company's 41 centers. All of the Properties are owned fee simple
by the Company, except for the outlet center located in Boaz, Alabama, which the
Company holds  pursuant to a lease which has renewal  options  through 2027. The
Company has the right to purchase  the land and  building  during any term for a
total of $25,000 plus the present value of any future rental payments due during
the remaining  term. The Company's  monthly rental  payments  during the current
term are $350 through and including January 31, 1998; $500 from February 1, 1998
through and including  January 31, 1999;  $750 from February 1, 1999 through and
including  January 31, 2002; and $1,000.00  throughout the remainder of the term
and any renewal terms. The current term expires January 31, 2007.  Additionally,
the Company holds a ground lease at its Iowa, Louisiana center which has renewal
options through 2087.

<TABLE>
<CAPTION>
                                                             Date
                                                          Developed/               Gross      Percentage     Average   Percentage of
                                                         (Expanded or  Land       Leasable     of Total      Rental       GLA in
                                                          Renovated)   Area         Area        Rental     Revenue Per   Operation
Property                        Location                     (1)      (Acres)    (Sq. Ft.)    Revenue (2)  Sq. Ft. (3)    Leased
----------------------------------------------------------------------------------------------------------------------------------
<S>                   <C>                                   <C>         <C>        <C>            <C>          <C>         <C>  
Operating Properties:

Community Centers:

Mesa, AZ              Situated along U.S. Highways 60       1987
                      and 89                               (1995)       26.9       167,213        3.0%        12.99        88.1%
Tucson, AZ            Situated along Interstate 10          1984        12.5       127,575        1.4%         8.07        92.6%

Graceville, FL        Situated along U.S. Highway 77        1985        25.0        83,962        1.0%         8.51       100.0%

Lake Park, GA         Situated along Interstate 75          1989
                                                           (1992)       12.5       140,025        1.5%        12.20        71.9%
West Frankfort, IL    Situated along Interstate 57          1990        20.0        91,063        0.7%         9.64        73.2%

Story City, IA        Situated along Interstate 35          1990
                                                           (1996)       20.0       112,405        1.3%         8.68        92.3%
Carrollton, KY        Situated along Highway 22             1989        21.2        63,896        0.7%        12.54       100.0%

Georgetown, KY        Situated along Interstate 75          1991        16.7       176,615        3.0%        12.75        97.7%

Hanson, KY            Situated along U.S. Highway 41        1989        21.3        63,891        0.6%         7.27       100.0%

Arcadia, LA           Situated along Interstate I-20        1989
                                                           (1994)       28.7        89,528        1.3%        12.48       100.0%
Iowa, LA              Situated along Interstate 10          1989
                                                           (1994)      Lease       130,753        2.2%        12.85        96.2%
Tupelo, MS            Situated along Interstate 44          1987
                                                           (1996)       16.8       124,412        0.8%         3.24        93.7%

Lebanon, MO           Near Interstate 44 and State
                      Highways 5, 32 and 64                 1985        23.7        83,464        1.0%         9.18       100.0%

Nebraska City, NE     Intersection of U.S. Highway 75       1990
                      and State Highway 2                  (1996)       21.4        89,646        1.1%        11.58        93.3%
Las Vegas, NV         Situated along Las Vegas Blvd.
                                                            1992        25.7       229,958        3.9%        13.59        69.6%
Raleigh, NC           Wake Forest Rd.                       1966         6.0        54,375        1.1%        13.51       100.0%
Eastgate
Wilson, NC            U.S. Highway 264                      1992        18.5        91,266        1.2%          N/A       100.0%
Gateway Plaza
Cary, NC              U.S. Highway 64                       1986        21.1       142,378        3.1%        12.34        97.2%
MacGregor Village
Raleigh, NC           Falls of the Neuse Rd.                1980        19.5       165,309        3.4%        12.78        97.7%
North Ridge
Raleigh, NC-Tower     U.S. Highway 64                       1976        19.3       152,157        2.0%         7.44        97.4%

Tri-Cities, TN        Situated along Interstate 81 and
                      State Highway 125                     1990        23.3       132,908        1.4%         8.81        92.9%
Union City, TN        Situated along  U.S. Highway 51
                                                            1988        23.3        60,229        0.6%         9.29       100.0%
Corsicana, TX         Intersection of Interstate 45/287
                      and State Highway 32                  1989        20.0        63,605        0.6%         8.27       100.0%
Hempstead, TX         Situated along U.S. Highway 290
                                                            1989        14.8        63,605        0.6%        13.89        94.0%
La Marque, TX         Situated along Interstate 45          1990        19.2       176,071        3.2%        15.35        73.5%


                                       15
<PAGE>

Livingston, TX        Situated along U.S. Highway 59
                                                            1989        15.0        63,605        0.7%        10.70       100.0%
Mineral Wells, TX     Situated along U.S. Highway 180
                                                            1989        15.5        63,609        0.7%         8.42       100.0%
Sulphur Springs, TX   Situated along Interstate 30          1986        13.3        84,917        1.1%         8.97       100.0%
                                                                     ------------------------------------------------------------
                      Subtotal (Community Centers)                     521.2     3,088,440       43.2%        11.25        91.4%
Outlet Centers:
Boaz, AL              Situated along U.S. Highway 61        1982
                                                           (1994)      Lease       111,909        1.5%       $12.23        97.7%
Vacaville, CA         Situated along Interstate 84          1988        52.6       447,725       16.6%        22.12        96.6%
Kittery, ME           Situated along U.S. Highway 1         1987         5.3        24,620        1.0%        22.32       100.0%
Branson, MO           Situated along U.S. Highway 248       1995        24.4       287,522        5.1%        12.73        81.2%
Lake George, NY       Intersection of Rt. 9 and 49          1988         4.6        43,650        1.2%        15.10       100.0%
Smithfield, NC        At the junction of                    1988
                      Interstate 95 and U.S.               (1995)
                      Highway 70 and 70-A                  (1996)       51.6       355,756        8.0%        15.68        99.7%
Crossville, TN        Intersection of Interstate 40 and     1988
                      Genesis Road                         (1994)
                                                           (1997)       16.5       151,256        2.4%        13.56       100.0%
Nashville, TN         Across from Opryland                  1993
                                                           (1995)       33.1       285,808        8.6%        16.78        98.3%
Draper, UT            Situated along                        1986
                      Interstate 15                        (1995)       28.9       185,281        3.5%        12.40       100.0%
North Bend, WA        Situated along                        1990
                      Interstate 90                        (1994)       16.0       223,383        6.7%        18.86       100.0%
                                                                     ------------------------------------------------------------
                      Subtotal (Outlet Centers):                       233.0     2,116,910       54.6%        17.02        96.3%
                                                                     ------------------------------------------------------------
                      Subtotal (Operating Properties):                 754.2     5,205,350       97.8%        14.28        93.4%
                                                                     ============================================================
Properties Held for Sale:
Casa Grande, AZ       Situated along Interstate 10          1991        14.9       141,828        1.4%         8.72        64.8%
Lathrop, CA           Situated along Interstate 5           1993        14.3       131,400        0.6%        10.46     34.1%(4)
Conway, NH            Intersection of Rt. 16 & 153          1985         2.1        24,740        0.2%         6.20        54.2%
                                                                     ------------------------------------------------------------
                      Subtotal (Properties Held for Sale)               31.3       297,968        2.2%         8.92        50.4%
                                                                     ------------------------------------------------------------
                      Total  (All Properties)                          785.5     5,503,318      100.0%       $14.08        91.1%
                                                                     ===========================================================
</TABLE>

1)   Reflects the year in which the outlet center was developed or re-developed.

2)   Total Rental Revenue  consists of base and percentage  rent plus recoveries
     from tenants for the year ended December 31, 1997.

3)   Average  Rental  Revenue per square foot is defined as Total Rental Revenue
     divided by GLA in  operation,  exclusive of anchors,  at December 31, 1997.
     The  average   rental   revenue  paid  by  the  Company's   anchor  tenants
     (Books-A-Million, Carolina Pottery, Food Lion, K-Mart, VF Corporation, West
     Point Stevens and Winn Dixie),  including  base and  percentage  rents plus
     recoveries,  was $6.93,  $4.55,  $6.81,  $5.65,  $5.63, $5.28 and $6.65 per
     square foot, respectively, in 1997.

4)   The  Company  has  converted  this  property  to general  office use and is
     currently under contract for sale.



                                       16

<PAGE>

Properties Held for Sale

     As part of the Company's ongoing  strategic  evaluation of its portfolio of
assets,  management has been authorized to pursue the sale of certain properties
that  currently  are not fully  consistent  with or essential  to the  Company's
long-term  strategies.  Management plans to evaluate all properties on a regular
basis in accordance  with its strategy for growth and in the future may identify
other properties for disposition or may decide to defer the pending  disposition
of those assets now held for sale. In accordance with SFAS No. 121,  "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of",  assets  held for sale are  valued at the lower of  carrying  value or fair
value less selling costs. Accordingly,  in the fourth quarters of 1996 and 1995,
the Company recorded a non-cash $5.0 million and $8.5 million  adjustment to the
carrying value of the properties held for sale. The Company continues to operate
the properties and is actively  marketing these  properties.  As of December 31,
1997, two of the properties held for sale are under contract.

     After recording the $5.0 million and $8.5 million  valuation  adjustment in
1996 and 1995,  respectively,  the net carrying value of assets  currently being
marketed  for sale at  December  31,  1997 and 1996 are $12.5  million and $11.4
million,  respectively.  There is $12.2  million of debt  associated  with these
properties  held for sale at December  31,  1997.  In March,  1998,  the Company
repaid debt  associated  with one  property  held for sale in the amount of $5.7
million.

     The following summary financial information pertains to the properties held
for sale for the year ended December 31 (in millions):

                                       1997          1996          1995
                                       ----          ----          ----
     Revenues                         $  1.1       $  2.1         $  3.0
     Net loss after  operating  and
     interest expenses                $ (1.1)      $ (1.0)        $ (0.5)
                                   =========    ==========     =========

Planned Expansions

     For  the  year  ended   December   31,  1997  the  Company  had   delivered
approximately  32,470 square feet of expansion  space to tenants in  Crossville,
Tennessee.  The following table sets forth certain  information  relating to the
Company's proposed 1998 expansion activities:

<TABLE>
<CAPTION>
                                                                   Post-        Percentage of
                              Current         Expansion          Expantion        Expansion           Planned          Estimated
                            Center GLA          GLA                 GLA              GLA            Completion          Cost of 
       Location             (Sq. Ft.)         (Sq. Ft.)          (Sq. Ft.)        Committed*           Date            Expansion
------------------------------------------------------------------------------------------------------------------------------------
<S>                           <C>               <C>               <C>                <C>                   <C>        <C>       
Wilson, NC                    91,266            45,464            136,730            100%            April 1998       $2,450,000

Smithfield, NC               355,756            54,000            409,756            100%           Summer 1999       $8,000,000
</TABLE>

     * The percentage of expansion GLA committed  reflects the percentage of the
proposed  GLA for which  leases or lease  commitments  have been  obtained  from
tenants as of December 31, 1997.

     In undertaking developments and expansions,  the Company will incur certain
risks,  including the  expenditure of funds on, and the devotion of management's
time to,  projects  which may not come to fruition.  In addition,  completion of
planned  developments  and  expansions  will be subject to the  availability  of
adequate  debt or equity  financing.  Other risks  inherent in  development  and
expansion activities include possible  cost-overruns,  work stoppages and delays
beyond the  reasonable  control  of the  Company.  Accordingly,  there can be no
assurance if or when any or all of the Company's planned expansions or any other
development  or expansion  project will be completed or, if completed,  that the
costs of construction will not exceed, by a material amount, estimated costs.

     In addition,  the agreement  pursuant to which the Company  acquired the VF
Properties required,  subject to certain conditions,  that the Company complete,
during  the  three  years  following  the  acquisition,  the  expansion  of  ten
properties  by an aggregate of at least  320,000  square feet of gross  building
area  (approximately  288,000  square feet of GLA).  The agreement  provided for
periodic payments to VF Corporation, aggregating up to



                                       17

<PAGE>

approximately  $21.7  million if the  expansions  are not  completed on a timely
basis.  This  amount was reduced as the  expansions  of the VF  Properties  were
completed.  Three  expansions  totaling  approximately  97,000  square feet were
completed in 1994, two additional  expansions  approximating 100,000 square feet
were completed in 1995 and three additional  expansions  totaling  approximately
106,000 square feet in Story City,  Iowa,  Nebraska  City,  Nebraska and Tupelo,
Mississippi  were  completed  in 1996.  In  December  1996 the  Company and VFFO
entered into an amendment which set forth a framework to resolve the outstanding
issues  related  to  the  expansion  requirements.  The  amendment  deleted  the
requirement that the Company expand the Hempstead, Texas, Livingston,  Texas and
Lebanon,  Missouri  centers  and  substituted  therefor:  (i) the  now-completed
expansion  of the Tupelo,  Mississippi  center;  (ii) the  existing  arrangement
whereby the Company's  center and an adjacent center in Sulphur  Springs,  Texas
are operated as a single property;  and (iii) the completed requirement that the
Company  enter into  contracts to provide for the benefit of VFFO,  for at least
three years, three billboards each near the Draper, Utah; Crossville,  Tennessee
and Tupelo,  Mississippi  centers.  In  addition,  the Company  paid to VFFO the
$2,016,000  final  installment due under the agreement  referenced  above. As of
February 28, 1997, the Company had satisfied all remaining obligations under the
agreement.

Additional Information about Certain Centers

   
     As of  December  31,  1997,  the  Company's  outlet  center  at  Vacaville,
California,  had a book  value of 9% of the  total  assets  of the  Company  and
generated  gross  revenue in 1997 that  accounted for  approximately  18% of the
Company's  1997  aggregate  gross  revenue.  No other existing or planned center
accounts  for greater  than 10% of either the  Company's  1997  aggregate  gross
revenue or the Company's total assets at December 31, 1997.

     The Company  holds  title to the  Vacaville  center in fee simple,  but the
property is one of several that secures $54.6 million of Class A  Collateralized
Mortgage  Notes.  These Mortgage Notes bear interest at 7.51% and are secured by
the  Vacaville  center and 17 other outlet  centers.  These  Mortgage  Notes are
payable  in  monthly  principal  payments  ranging  from  $107,000  to  $173,000
determined using various parameters plus monthly interest.  Unpaid principal and
accrued  interest  will be due in June,  2002,  with a balloon  payment of $46.7
million.

     The  Vacaville,  California  outlet  center is  located  on 53 acres at the
intersection of Interstate 80 and Nut Tree Road,  approximately 60 miles east of
San Francisco and 30 miles west of Sacramento, the state capital. Phase I of the
center, which opened in 1988, contains approximately 206,000 square feet of GLA.
Phase II, which opened in 1992,  contains  approximately  120,000 square feet of
GLA. Phase III, which also opened in 1992, contains approximately 122,000 square
feet of GLA. The Company  currently  has no plans to further  expand or renovate
the  property.  The  realty  tax rate on the  property  is $10.68  per $1,000 of
assessed value,  and in 1997, the annual property taxes on the Vacaville  center
were $1.4 million.

     The city of Vacaville developmental plans continue to allow the building of
additional  retail  stores,  restaurants,  and area  services in the  properties
adjacent to the Company's  Center (Factory at Vacaville)  creating hub of retail
activity in this newly built area.  Interstate 80 motorists exit off the side of
the freeway that Factory Stores at Vacaville are located,  however, due to close
proximity,  the neighboring  complexes (which offer some name brand discounters)
appear  to be  monogamous  with  Factory  Stores  at  Vacaville.  This can cause
customer   confusion.   The  Company  has  countered  this  perception  with  an
advertising  campaign geared toward our shopper.  During the past ten years, the
Company has  maintained  its image of a designation  for its  Sacramento and San
Francisco shopper.
    

                                       18

<PAGE>

   
     The following  table  discloses the  occupancy  rate and average  effective
annual  rental  revenue per square  foot for each of the last five years  ending
December 31, 1997.

 Year ended December 31,     Occupancy Rate    Annual Rental Revenue per Sq. Ft.
 -----------------------     --------------    ---------------------------------

        1997                       98%                      $22.12

        1996                       89%                      $22.58

        1995                       88%                      $27.94

        1994                       92%                      $27.58

        1993                       93%                      $26.61

     The center's  major tenants  include:  The Gap,  NIKE,  VF Factory  Outlet,
Levi's,  Reebok,  9 West and Carter  Children's  Wear Outlet,  but none rent ten
percent or more of the center's total GLA.
    

     The following table shows the lease expirations for tenants in occupancy as
of December 31, 1997 for the Vacaville  outlet center (assuming that none of the
tenants exercise renewal options).

<TABLE>
<CAPTION>
                                              Pro Forma                     Average
                                             Annualized        % of         Annual
           Leases to      Leased GLA         Base Rental       Total       Base Rent
 Year      Expire(2)     (sq. ft.)(1)          Revenue        Revenue      Per Sq. Ft.
--------------------------------------------------------------------------------------
<S>            <C>          <C>               <C>               <C>          <C>   
 1998          30           114,669           1,870,603         26.8%        $16.31
 1999          20            67,513             908,756         13.0%         13.46
 2000          19            60,146           1,106,659         15.9%         18.40
 2001          27            86,103           1,383,223         19.8%         16.06
 2002           6            29,645             531,603          7.6%         17.93
 2003           7            63,079             933,178         13.4%         14.79
 2004           2             8,400             140,800          2.0%         16.76
 2005           0                 0                   0          0.0%          0.00
 2006           1             6,000             108,000          1.5%         18.00
 2007+          0                 0                   0          0.0%          0.00
          ============================================================================
Total          112          432,555          $6,982,822        100.0%        $16.14
          ============================================================================
</TABLE>

(1)  Total leased GLA is not equal to leasable GLA due to vacancies.

(2)  Expirations  assume no renewals or releasing for tenants in occupancy as of
     December 31, 1997.

   
     Management  believes  that all of its  properties,  including the Vacaville
center,  are adequately  insured.  For a description  of the Vacaville  center's
Federal tax basis,  rate,  method and life claimed with respect to the property,
see Schedule III to the Company's Consolidated Financial Statements.
    


                                       19
<PAGE>

Undeveloped Parcels

     The Company owns  approximately  182 acres of undeveloped  parcels  located
near  certain of the  Company's  shopping  centers.  The Company has a marketing
program  to lease,  develop  or sell the  parcels it owns  through  third  party
brokers.  During 1997,  27.6 acres were sold at $1.3 million  which  equaled the
cost of the  acreage.  Because  property  held for sale by a REIT is  subject to
significant  restrictions  imposed  by  the  Code,  the  Company  has  formed  a
non-qualified  REIT  subsidiary  under  Section  356 of the  Code.  By  using  a
non-qualified REIT subsidiary, the Company anticipates it will be not be subject
to the 100% tax imposed on the gain derived from the sale of certain  outparcels
of land owned by the Company.

Tenants

     General.  Management believes the Properties offer tenants a diverse tenant
mix which includes many well-known manufacturers/retailers.  The majority of the
Company's current tenants are large,  publicly-traded  companies.  The Company's
current core tenant mix at its  Properties  features such  well-known  brands as
Nike, The Gap, Liz Claiborne,  Lee, Wrangler,  Jantzen,  Jansport, Bass, Reading
China and More,  Vanity Fair,  Health-Tex,  Easy Spirit,  9 West,  Enzo,  Casual
Corner, L'eggs, Hanes, Bali, Champion, Levi's, Revlon, Mikasa, Sunbeam/Oster.

     Tenant Leases.  The majority of the leases with the Company's  tenants have
terms of between  five and ten years which expire  between 1998 and 2017.  While
many of these leases are  triple-net  leases which require  tenants to pay their
pro rata  share  of  utilities,  real  estate  taxes,  insurance  and  operating
expenses,  as of December 31,  1997,  21% of the  aggregate  GLA of its shopping
centers was leased to tenants under gross leases,  pursuant to which the Company
is obligated to pay all utilities and other operating expenses of the applicable
center.  VFFO is the Company's largest tenant.  See "Item 1 -- Business -- Major
Tenant" for a discussion of the Company's leases with VFFO.


                                       20

<PAGE>

Lease Expiration

     The following table shows tenant lease expirations for tenants in occupancy
as of December 31, 1997 for the next ten years at the Properties  (assuming that
none of the tenants exercises any renewal option):

<TABLE>
<CAPTION>
                                                                 Pro Forma                                    Average
                                         Leased                  Annualized                               Annual Base Rent
                    Leases to              GLA                  Base Rental                % of                 Per
      Year         Expire (1)           (sq. ft.)(2)              Revenue                  Total              Sq. Ft.
--------------------------------------------------------------------------------------------------------------------------
      <S>              <C>               <C>                     <C>                       <C>                <C>   
      1998             244               919,280                 $8,910,000                21.9%              $ 9.69
      1999             144               490,375                  5,489,879                13.4%               11.20
      2000             186               698,148                  7,852,768                19.3%               11.25
      2001             106               437,826                  4,842,505                11.9%               11.06
      2002              65               280,460                  2,738,874                 6.7%                9.77
      2003              71             1,334,110                  5,936,296                14.5%                4.45
      2004              11               196,256                  1,005,992                 2.5%                5.13
      2005              11               210,451                  1,350,395                 3.3%                6.42
      2006              13               200,684                  1,416,834                 3.5%                7.06
      2007+              7               243,722                  1,223,713                 3.0%                5.02
                  --------------------------------------------------------------------------------------------------------
     Total             858             5,011,312                $40,767,256               100.0%              $ 8.14
                  ========================================================================================================
</TABLE>

(1)  Expirations  assume no renewals or releasing for tenants in occupancy as of
     December 31, 1997.

(2)  Total leased GLA is not equal to leasable GLA due to vacancies.

Tenant Concentrations

     The following table provides certain information  regarding the ten largest
tenants  (based  upon total GLA  leased)  and other  tenants  for the year ended
December 31, 1997.

<TABLE>
<CAPTION>
                                                         Percentage
                                                          of Total       Number         Actual
                                          Total GLA         GLA            of         Base Rental         % of
                   Tenant                 Leased(1)        Leased        Stores         Revenue           Total
------------------------------------------------------------------------------------------------------------------
<S>                                       <C>               <C>            <C>         <C>                <C>  
VF Factory Outlet, Inc.                   1,225,655         24.5%          34          $5,809,614         15.1%
Carolina Pottery Retail Group, Inc.         278,458          5.6%           4           1,116,335          2.9%
Phillips-Van Heusen Corporation             253,182          5.1%          59           2,682,570          7.0%
The Dress Barn, Inc.                        139,604          2.8%          27           1,879,631          4.9%
Nine West Group, Inc.                       135,555          2.7%          30           1,353,207          3.5%
Bugle Boy Industries, Inc.                  129,120          2.6%          23             985,966          2.6%
US Factory Outlet                           100,957          2.0%           3             102,912          0.3%
The Paper Factory of Wisconsin, Inc.         94,088          1.9%          24           1,446,686          3.8%
Designs, Inc./Levi Strauss & Co.             85,111          1.7%           9           1,220,521          3.2%
WestPoint Stevens Stores, Inc.               82,840          1.7%           4             348,537          0.9%
                                        --------------------------------------------------------------------------
                                          2,524,570         50.4%         217          16,945,978           44%

Others                                    2,486,742         49.6%         641          21,589,050           56%
                                        --------------------------------------------------------------------------
Total                                     5,011,312        100.0%         858         $38,535,028        100.0%
                                        ==========================================================================
</TABLE>

(1)  Total leased GLA is not equal to leasable GLA due to vacancies.

                                       21

<PAGE>

Mortgage Debt

     The  following  table  sets  forth,  as  of  December  31,  1997,   certain
information  regarding the mortgages  encumbering  certain of the Properties (in
thousands).

                                 1997 Estimated
<TABLE>
<CAPTION>
                                                                    Annual       Balloon
Principal          Interest                                          Debt      Payment at
 Amount              Rate                         Type              Service     Maturity       Maturity          Secured By
------------------------------------------------------------------------------------------------------------------------------------
<S>                <C>             <C>                              <C>         <C>              <C>     <C>                     
 $54,583           7.51%           Collateralized Mortgage Notes    $1,324      $ 46,716         2002    Arcadia, LA; Carrollton,
                                                                                                         KY; Casa Grande, AZ;
                                                                                                         Conway, NH; Crossville,
                                                                                                         TN; Draper, UT; Hanson,
                                                                                                         KY; Iowa, LA; Kittery,
                                                                                                         ME; La Marque, TX; Lake
                                                                                                         George, NY; Las Vegas,
                                                                                                         NV; Mesa, AZ; North Bend,
                                                                                                         WA; Tucson, AZ; Union
                                                                                                         City, TN; Vacaville, CA;
                                                                                                         and West Frankfort, IL
                                                                                                         (collectively "FSA
                                                                                                         Finance Properties")

  20,000           7.87            Collateralized Mortgage Notes        --        20,000         2002    FSA Finance Properties

  17,000           8.39            Collateralized Mortgage Notes        --        17,000         2002    FSA Finance Properties

------------------------------------------------------------------------------------------------------------------------------------
  91,583   Total Fixed Rate Debt                                     1,324        83,716
------------------------------------------------------------------------------------------------------------------------------------
     736   Prime + 1/2 %           Line of Credit                       --           736                 Eastgate

   5,711   Prime + 2.25% (1)       Mortgage                             77         5,719         1998    Lathrop, CA

 134,545   LIBOR + 2.25% (2)       Revolving Credit Facility            --       134,545         1999    Georgetown, KY; Lake
                                                                                                         Park, GA; Nashville, TN;
                                                                                                         Smithfield, NC; Tri-
                                                                                                         Cities, TN; Story City,
                                                                                                         IA; Sulphur Springs, TX;
                                                                                                         Nebraska City, NE; Boaz,
                                                                                                         AL; Graceville, FL;
                                                                                                         Tupelo, MS; Lebanon,
                                                                                                         MO; Corsicana, TX;
                                                                                                         Hempstead, TX;
                                                                                                         Livingston, TX; and
                                                                                                         Mineral Wells, TX;
                                                                                                         MacGregor, North Ridge,
                                                                                                         Gateway, Tower
------------------------------------------------------------------------------------------------------------------------------------
 140,992   Total Variable Rate Debt                                     77       140,264
====================================================================================================================================
$232,575   Total Mortgage Debt                                      $1,401      $223,980
====================================================================================================================================
</TABLE>

(1)  The Company has repaid this mortgage debt as of March 25, 1998.

(2)  This  facility  was  reduced by $73.4  million on March 11, 1998 from a $75
     million securitization with Nomura Asset Capital.  Eleven of the properties
     which   secure  this   revolving   facility  now  secure  the  $75  million
     securitization.  The $75,000,000 Revolving Credit Facility was paid in full
     from proceeds  funded under a newly issued credit facility issued by Nomura
     Asset Capital  Corporation.  The Facility is secured by the same properties
     as the previous credit facility, plus an assignment of additional cash flow
     from the properties  secured by the collateral  mortgage notes,  matures in
     1999 with a 1 year extension and bears an interest rate of LIBOR + 2.25%.

Taxes

     Because the acquisitions of all of the Properties were taxable transactions
to the sellers of those  properties,  the Company has a  "stepped-up"  aggregate
cost  basis in these  real  estate  assets  for  Federal  income  tax  purposes.
Depreciation  is  calculated  using the straight  line method over the estimated
useful lives of the assets,  for which buildings and improvements  range from 15
to 31.5 years and equipment ranges from five to 10 years.

     The  Company's  aggregate  real estate tax  obligation  for the  Properties
during the fiscal year ended December 31, 1997, was approximately  $5.9 million,
or $1.07 per square foot of GLA. The real estate obligation and rates per square
foot  of  GLA  for  Vacaville,   the  Company's   largest  outlet  center,   was
approximately $1.4 million or $3.13 per square foot of GLA.


                                       22
<PAGE>

Executive Offices

     The Company  currently  leases its 31,800 square foot executive  offices in
Cary, North Carolina.

Item 3 - Legal Proceedings

     In August 1995, the Company executed written  agreements  ("Agreements") to
acquire both the outlet centers owned by The Public Employees  Retirement System
of Ohio ("OPERS") and the management and business  operations of the Charter Oak
Group Ltd., a subsidiary of Rothschild Realty, Inc., ("RRI"), subject to certain
terms and  conditions.  In  December  1995,  the Company  reported  that RRI had
terminated the Agreements and thus, the acquisitions did not take place.

     Subsequent  to the  termination  of the  Agreements,  RRI for itself and on
behalf  of  OPERS  made a  demand  for  payment  with  respect  to a $5  million
promissory  note (the  "Note")  issued by the  Company  in  connection  with its
proposed  acquisition.  The Note was payable only upon the occurrence of certain
conditions and a dispute rose as to whether those conditions had been met.

     After an  unsuccessful  attempt at mediation of the dispute,  RRI filed for
arbitration  of  the  matter  in New  York.  The  Company  thereafter  sought  a
preliminary injunction in North Carolina, seeking, among other things, a stay of
the New York  arbitration.  The North Carolina court entered an order  requiring
the parties to arbitrate in North Carolina.  Thereafter,  the Company OPERS' and
RRI  reached a  settlement  of the  dispute.  After an  unsuccessful  attempt at
mediation of the  dispute,  RRI filed for binding  arbitration  of the matter to
settle the dispute.  Following the arbitration  hearing held in late April 1997,
the Company  agreed to pay $2.9 million to RRI on behalf of related  entities of
OPERS in settlement of all outstanding  issues between the Company and OPERS/RRI
relating to the terminated merger. The settlement was payable and was fully paid
on December 31,1997. The Company previously recorded a charge of $1.7 million in
December 1995 in connection with the termination.  The remaining $1.2 million of
the $2.9  million,  plus an estimated  for the  Company's  legal fees,  has been
accrued  for as of December  1997 and is included in general and  administrative
expenses.  All amounts due to OPERS/RRI have been paid and the deed of trust has
been released. The Company considers the matter closed.

     In July 1996,  a  purported  class  action  lawsuit was filed in the United
States  District Court for the Eastern  District of North  Carolina  against the
Company, its former chairman and chief executive officer, J. Dixon Fleming, Jr.,
and a former  president of the Company,  David A. Hodson.  The complaint  sought
certification of a class consisting of all persons (with certain exclusions) who
purchased  common stock of the Company  between  December 16, 1993 and April 17,
1996,  inclusive (the "Class Period").  The complaint  alleged that,  during the
Class Period,  defendants  made certain  false or  misleading  statements to the
public  concerning  (1) earnings and funds from  operations;  (2) the  Company's
ability to maintain  dividends at prior levels;  (3) the alleged  maintenance of
dividends  through  borrowings  rather  than  funds  from  operations;  (4)  the
Company's ability to close a proposed  acquisition;  (5) the alleged purchase of
certain  properties  from  affiliates of the  individual  defendants at inflated
prices; and (6) alleged improper accounting practices.

     In October,  1996, a second purported class action lawsuit was filed in the
United States District Court for the Eastern  District of North Carolina against
the Company and Messrs.  Fleming and Hodson,  containing factual allegations and
legal claims similar to those asserted in the prior purported class action.  The
plaintiffs in both actions seek  unspecified  monetary  damages.  The cases were
consolidated and the Company filed motions to dismiss both lawsuits.

     On November 5, 1997,  the court  granted the motions to dismiss and entered
judgment for  defendants  related to the above.  The time for plaintiffs to file
appeals has expired without appeal.

     In addition,  the Company is a party to certain legal proceedings  relating
to its  ownership,  management  and  leasing of the  properties,  arising in the
ordinary course of business.


                                       23
<PAGE>

Item 4 - Submission of Matters to a Vote of Security Holders

     The Company held a Special  Meeting of Stockholders on December 15, 1997 at
its corporate office in Cary, North Carolina.

     The purpose of the meeting was to obtain the approval from  stockholders of
record as of October 31, 1997 pertaining to the following:

     o    Reincorporation of the Company from the State of Delaware to the State
          of Maryland

The reincorporation was approved as follows:

     For                                 6,196,916             50.7%
     Against                             1,153,019              9.4%
     Abstentions                            96,371              0.8%
     ----------------------------------------------------------------
     Total Voted                         7,446,306             60.9%
     ----------------------------------------------------------------
     Total Shares Outstanding           12,224,229            100.0%
     ================================================================

     No other business was conducted at this Special Meeting

     The reincorporation required an affirmative vote of the stockholders owning
a majority of the outstanding shares. The reincorporation took place on December
17, 1997. As a result of the  reincorporation,  the Company  reorganized  itself
into an umbrella partnership structure (an "UPREIT") through the contribution of
substantially  all of  its  assets  into  a  limited  partnership  known  as FAC
Properties, LP, which is controlled by the Maryland company.

     The  Company  felt those  events  were  strategic  for the  Company for the
following reasons:

     o    The  Company  will  realize a cost  savings  in annual  franchise  tax
          payments  of   approximately   $150,000  by  changing   its  state  of
          incorporation from Delaware to Maryland.

     o    By adopting an UPREIT structure,  the Company will realize annual cost
          savings of approximately  $188,000  beginning in 1998 related to state
          franchise tax payments on its assets located in certain states; and
   
     o    An UPREIT structure may enable the Company to acquire properties under
          more favorable economic terms.


                                       24

<PAGE>

                                     PART II

Item 5 - Market  for the  Registrant's  Common  Equity and  Related  Stockholder
         Matters

     The Common  Stock  began  trading  on the NYSE on June 3,  1993,  under the
symbol "FAC." As of March 23, 1998, there were approximately 609 stockholders of
record.

     The following  table sets forth the quarterly  high and low sales prices of
the Common Stock and dividends paid per share for 1997 and 1996:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
                                  1997                                1996
------------------------------------------------------------------------------------------
                     High         Low      Dividends      High         Low       Dividends
<S>                 <C>         <C>          <C>         <C>          <C>          <C>  
First Quarter       $6 3/4      $ 5 3/4      $0.00       $13 5/8      $9 7/8       $0.25
Second Quarter           7        5 1/4       0.00        10 1/8           9        0.25
Third Quarter       8 7/16       6 1/16       0.00         9 1/2       8 1/2        0.25
Fourth Quarter      8 7/16        6 3/4       0.00         8 7/8       6 5/8        0.00
                  ------------------------------------------------------------------------
</TABLE>

Distributions

     The  Company  intends  to  make  a  determination  regarding  its  dividend
distributions  annually  following  review of the  Company's  year end financial
results. The Company's policy is to declare dividends in amounts equal to 95% of
the Company's  taxable income which is the minimum dividend required to maintain
REIT status.  Based upon previous  losses,  the Company will have  approximately
$____ million of net operating  loss carry  forwards for 1998 which could result
in no dividend  payment  requirement  to  maintain  its REIT  status.  Under the
Company's line of credit with Nomura,  the Company may not make distributions if
it is in monetary default under the line of credit.  See "Item 7 -- Management's
Discussion  and Analysis of Financial  Condition  and Results of  Operations  --
Liquidity."

     The  Company  provides a Dividend  Reinvestment  Plan for  stockholders  of
record.  Information  on the Plan can be obtained  from the  Company's  transfer
agent and registrar, First Union National Bank at (800) 829-8432.

Item 6 - Selected Financial Data

     The  following   information   should  be  read  in  conjunction  with  the
consolidated  financial  statements and notes thereto included in Item 8 of this
report and  "Management's  Discussion  and Analysis of Results of Operations and
Financial Condition" included in Item 7 of this report.

     Industry  analysts  generally  consider  Funds from  Operations  ("FFO") an
appropriate  measure of  performance  for an equity  REIT.  FFO means net income
(computed in accordance with generally accepted accounting principles) excluding
gains or losses from debt  restructuring and sales of property plus depreciation
and  amortization  and adjustments for unusual items.  Management  believes that
FFO, as defined  herein,  is an appropriate  measure of the Company's  operating
performance because reductions for depreciation and amortization charges are not
meaningful in  evaluating  the operating  results of the  Properties  which have
historically been appreciating assets.

     Beginning in 1996 the Company  adopted a change in the definition of FFO as
promulgated  by the  National  Association  of  Real  Estate  Investment  Trusts
(NAREIT). Under the new definition, amortization of deferred financing costs and
depreciation  of non-real  estate  assets,  as defined,  are not included in the
calculation  of FFO.  All prior  period  FFO  results  have  been  retroactively
restated so that reported FFO in 1997 is comparable to prior periods.

     "EBITDA" is defined as revenues less operating costs, including general and
administrative  expenses,  before  interest,  depreciation  and amortization and
unusual items. As a REIT, the Company is generally not subject to Federal income
taxes.  Management  believes  that EBITDA  provides a  meaningful  indicator  of
operating  performance for the following reasons: (i) it is industry practice to
evaluate the performance of real estate properties based on net operating income
("NOI"),  which is generally  equivalent to EBITDA; and (ii) both NOI and EBITDA
are unaffected by the debt and equity structure of the property owner.


                                       25

<PAGE>

     FFO and EBITDA (i) do not represent cash flow from operations as defined by
generally accepted accounting principles, (ii) are not necessarily indicative of
cash available to fund all cash flow needs and (iii) should not be considered as
an alternative to net income for purposes of evaluating the Company's  operating
performance or as an alternative to cash flow as a measure of liquidity.

     Other data that management believes is important in understanding trends in
its  business  and  properties  are also  included  in the  following  table (in
thousands, except per share data).

     The  earnings  per  share  amounts  prior to 1997,  have been  restated  as
required to comply with  Statement of  Financial  Accounting  Standards  No. 128
"Earnings  Per  Share."  For further  discussion  of earnings  per share and the
impact  of  Statement  No.  128,  see  Note  2  to  the  consolidated  financial
statements.

<TABLE>
<CAPTION>
                                                                --------------------------------------------------------------------
                                                                  1997           1996           1995           1994         1993 (a)
                                                                --------------------------------------------------------------------
<S>                                                             <C>            <C>            <C>            <C>            <C>     
Operating Data:
Rental revenues                                                 $ 53,726       $ 47,170       $ 47,129       $ 42,077       $ 12,135
Property operating costs                                          15,671         13,975         13,648         10,454          3,371
                                                                --------------------------------------------------------------------
                                                                  38,055         33,195         33,481         31,623          8,764
Depreciation and amortization                                     15,652         13,802         11,900          8,511          1,997
General and administrative                                         6,397          6,199         15,279          5,567          1,615
Interest                                                          16,436         14,175         10,903          4,435             13
Adjustment to carrying value of assets                                --         (5,000)        (8,500)            --             --
Extraordinary (loss) on early extinguishment
  of  debt                                                          (986)          (103)            --           (884)            --
                                                                --------------------------------------------------------------------
Net  income (loss)                                              $ (1,416)      $ (6,084)      $(13,101)      $ 12,226       $  5,139
                                                                ====================================================================

   
 Loss before extraordinary item                                 $   (430)      $ (5,981)      $(13,101)      $ 13,110       $  5,139
 Preferred stock dividends                                            --           (368)            --             --             --
                                                                --------------------------------------------------------------------
 Loss before extraordinary item applicable to
   common stockholders                                              (430)        (6,349)       (13,101)        13,110          5,139
 Extraordinary loss on early extinguishment of
   debt                                                             (986)          (103)            --           (884)            --
 (Loss) income applicable to common
   shareholders                                                 $ (1,416)      $ (6,452)      $(13,101)      $ 12,226       $  5,139
                                                                ====================================================================
Per common share data:
   Income (loss) before extraordinary item                      $  (0.04)      $  (0.54)      $  (1.11)      $   1.11       $   0.86
   Extraordinary item                                              (0.08)         (0.01)            --          (0.07)            --
                                                                --------------------------------------------------------------------
   Net  income (loss)                                           $  (0.12)      $  (0.55)      $  (1.11)      $   1.04       $   0.86
                                                                ====================================================================
Weighted average common shares outstanding                        11,824         11,817         11,814         11,811          5,989
                                                                ====================================================================
    
</TABLE>



                                       26
<PAGE>

<TABLE>
<CAPTION>
                                                                    1997          1996          1995         1994         1993 (a)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>           <C>           <C>           <C>           <C>      
   
Other Data:
EBITDA:
Net (loss) income                                                $  (1,416)    $  (6,084)    $ (13,101)    $  12,226     $   5,139
   Adjustments:
        Interest                                                    16,436        14,175        10,903         4,435            13
        Depreciation and amortization                               15,652        13,802        11,900         8,511         1,997
        Compensation under stock plans                                 537           392            --            --            --
        Gain on sale of assets                                          --           (37)         (345)           --            --
        Non-recurring administrative costs                             250           927         6,500            --            --
        Merger termination costs                                     1,250            --            --            --            --
        Adjustment to fair value of assets                              --         5,000         8,500            --            --
        Extraordinary loss on early extinguishment
            of debt                                                    986           103            --           884            --
                                                               =====================================================================
                                                                 $  33,695     $  28,278     $  24,357     $  26,056     $   7,149
                                                               =====================================================================
    

  Funds from Operations:
   Net income (loss)                                             $  (1,416)    $  (6,084)    $ (13,101)    $  12,226     $   5,139
   Adjustments:
            Straight line rent                                        (619)          383          (626)         (922)         (355)
        Depreciation and amortization                               15,254        13,513        11,722         8,428         1,953
        Interest on exchangeable notes                                  --           553            --            --            --
        Compensation under restricted stock award                      537           392            --            --            --
        Gain on sale of real estate                                     --           (37)         (345)           --            --
        Unusual items:
            Non-recurring administrative costs                         250           927         6,500            --            --
            Merger termination costs                                 1,250            --            --            --            --
            Adjustment to carrying value of assets                      --         5,000         8,500            --            --
            Extraordinary loss on early
                extinguishment of debt                                 986           103            --           884            --
                                                               ---------------------------------------------------------------------
                                                                 $  16,242     $  14,750     $  12,650     $  20,616     $   6,737
                                                               =====================================================================
Weighted average shares outstanding-diluted (b)                     14,158        13,399        11,814        11,811         5,989
                                                               =====================================================================

   
Funds Available for Distribution/Reinvestment:
   Funds from Operations                                         $  16,242     $  14,750     $  12,650     $  20,616     $   6,737
                                                               =====================================================================
   Adjustments:
            Non-recurring administrative costs                        (250)         (927)       (6,500)           --            --
            Merger termination costs                                (1,250)           --            --            --            --
            Capitalized tenant allowances                           (1,418)         (316)       (1,380)       (1,340)         (156)
            Capitalized leasing costs                               (1,054)         (549)         (407)         (402)          (68)
             Recurring capital expenditures                           (845)         (312)         (796)       (1,314)         (233)
                                                               ---------------------------------------------------------------------
                                                                 $  11,425     $  12,646     $   3,567     $  17,560     $   6,280
                                                               =====================================================================
Dividends declared on annual earnings                            $    0.00     $  10,142     $  24,101     $  22,681     $   9,469
                                                               =====================================================================
Dividends declared on annual earnings per share                  $    0.00     $    0.75     $    2.04     $    1.92     $    1.58
                                                               =====================================================================
Cash Flows:
   Cash flows from operating activities                          $  12,962     $   7,649     $  22,078     $  20,674     $   4,167
   Cash flows from investing activities                            (62,185)      (17,288)      (50,854)      (84,719)     (173,023)
   Cash flows from financing activities                             47,061        15,018        29,134        59,750       174,447
                                                               ---------------------------------------------------------------------
   Net (decrease) increase in cash and cash
       equivalents                                               $  (2,162)    $   5,379     $     358     $  (4,295)    $   5,591
                                                               =====================================================================
    

Balance Sheet Data:
   Income-producing properties (before depreciation              $ 395,325     $ 354,029     $ 357,034     $ 321,088     $ 236,383
and amortization)
   Total assets                                                    403,626       358,612       355,095       326,270       245,457
   Debt on income properties                                       232,575       173,695       170,067       101,193        33,968
   Total liabilities                                               240,289       194,020       194,609       122,930        38,808
   Total stockholders' equity                                      163,337       164,592       160,486       203,340       206,649
Portfolio Property Data:
   Total GLA (at end of period)                                      5,503         4,865         4,626         4,234         3,502
   Weighted average GLA                                              5,341         4,674         4,336         3,768         2,474
   Number of properties (at end of period)                              41            36            36            35            32
   Occupancy (at end of year):
            Operating                                                 93.4%         91.4%         92.3%         92.9%         93.5%
            Development                                                0.0%         69.1%         52.1%           --            --
            Held for sale                                             50.4%         42.9%         66.3%           --            --
</TABLE>


                                       27

<PAGE>

(a)  Represents actual results of operations for the Company from March 31, 1993
     (inception) to December 31, 1993, and actual balance sheet data at December
     31, 1993.

(b)  The following  table sets forth the  computation  of the  denominator to be
     used in  calculating  the  weighted-average  shares  outstanding  based  on
     Statement of Financial Accounting Standard No. 128, "Earnings Per Share":

<TABLE>
<CAPTION>
Denominator:
<S>                                                              <C>            <C>           <C>           <C>             <C>  
      Denominator- weighted average shares                       11,824         11,817        11,814        11,811          5,989
      Effect of dilutive securities:
           Preferred stock                                        2,222          1,582             -             -              -
           Employee stock options                                    69              -             -             -              -
           Restricted stock                                          43              -             -             -              -
                                                           -------------------------------------------------------------------------
      Dilutive potential common shares                            2,334          1,582             -             -              -
                                                           -------------------------------------------------------------------------
      Denominator- adjusted weighted average shares and
    assumed  conversions                                         14,158         13,399        11,814        11,811          5,989
                                                           =========================================================================
</TABLE>


Item 7 - Management's Discussion and Analysis of Financial Condition
         and Results of Operation

     The following  discussion  should be read in conjunction  with the selected
financial data included in Item 6 of this report, and the consolidated financial
statements  and  notes  thereto  included  in  Item 8 of  this  report.  Certain
comparisons  between the periods have been made on a  percentage  basis and on a
weighted  average  square foot basis,  which adjusts for square footage added at
different times during the year.

     Certain  statements  under  this  caption,   "Management's  Discussion  and
Analysis  of  Financial   Condition  and  Results  of  Operations,"   constitute
"forward-looking  statements" under the Private Securities Litigation Reform Act
of 1995 (the "Reform Act"). See "Forward-Looking Statements" included under this
section.

General Overview

     The Company was  incorporated  on March 31, 1993 and  completed  an Initial
Public  Offering  ("IPO") on June 10, 1993.  Prior to completion of the IPO, the
Company owned four outlet centers in four states aggregating 701,000 square feet
of gross  leasable area ("GLA").  Upon  completion of the IPO, 21 outlet centers
(the "VF  Properties")  in  eleven  states  were  acquired  from VF  Corporation
totaling 1,725,000 square feet of GLA. On November 1, 1993, the Company acquired
a 167,000 square foot center located near Opryland in Nashville,  Tennessee.  On
December 23, 1993,  the Company  completed a secondary  offering of Common Stock
and used the  proceeds  to  purchase  six outlet  centers in six states from the
Willey Creek Group aggregating 908,000 square feet. As of December 31, 1993, the
Company owned 32 outlet centers in 21 states totaling  3,502,000  square feet of
GLA.

     During 1994, the Company began  development of a 288,000 square foot outlet
center in Branson,  Missouri,  acquired  three  additional  properties  totaling
449,000 square feet of GLA from the Willey Creek Group, and completed expansions
comprising 283,000 square feet of GLA in Iowa, Louisiana; Crossville, Tennessee;
North Bend,  Washington;  Arcadia,  Louisiana;  Boaz,  Alabama;  and  Nashville,
Tennessee.  By the end of 1994,  the Company  owned 35 outlet  centers  totaling
4,234,000  square feet of GLA,  which  represented a 21% increase over the prior
year end, and had one center under development.

     During 1995, the Company  delivered  109,000 square feet of expansion space
to tenants in Mesa,  Arizona and Draper,  Utah. In September,  1995, the Company
completed  an expansion of 28,000  square feet of GLA in  Nashville,  Tennessee.
Throughout  1995, the Company  continued  development of its 288,000 square foot
outlet  center in Branson,  Missouri,  with 207,000  square feet  available  for
delivery  to tenants by December  31,  1995.  The  Company  also began a 103,000
square foot expansion of its Smithfield,  North Carolina  factory outlet center,
with 48,000 square feet of the expansion  space opening in November,  1995;  and
had commenced two additional  expansions totaling 48,000 square feet in Nebraska
City,  Nebraska and Story City,  Iowa which were being  constructed  pursuant to
commitments  made to VF  Corporation  in connection  with the purchase of the VF
Properties in June, 1993. As of December 31, 1996, the Company had satisfied its
obligations to VF Corporation. The Company ended 1995 with 4,626,000 square feet
of GLA, up 9% from the prior year end.


                                       28

<PAGE>

   
     During 1996, the Company  completed the remaining 81,000 square feet of its
288,000 square foot outlet center in Branson, Missouri, and completed expansions
aggregating  158,000 square feet in Story City, Iowa;  Nebraska City,  Nebraska;
Smithfield, North Carolina; and Tupelo, Mississippi. The Company ended 1996 with
4,865,000 square feet of GLA, up 5.1% from the end of 1995.

Change of Domicile and UPREIT Conversion

     On December 17, 1997, following shareholder  approval,  the Company changed
its  domicile  from  the  State  of  Delaware  to the  State  of  Maryland.  The
reincorporation was accomplished through the merger of FAC Realty, Inc. into its
Maryland  subsidiary  FAC Realty Trust,  Inc.,  (the  "Company").  Following the
reincorporation,  on December 18, 1997,  the Company  reorganized as an umbrella
partnership  real  estate  investment  trust (an  "UPREIT").  The  Company  then
contributed  to FAC  Properties,  L.P.,  a  Delaware  limited  partnership  (the
"Operating Partnership") substantially all of its assets and liabilities, except
for legal title to 18 properties,  which remains in a wholly owned subsidiary of
the Company.  In exchange for the Company's assets, the Company received limited
partnership  interest  ("Units") in the Operating  Partnership  in an amount and
designation  that  corresponded  to the number and  designation  of  outstanding
shares of  capital  stock of the  Company at the time.  The  Company is the sole
general partner of the Operating Partnership. As additional limited partners are
admitted to the  Operating  Partnership  in  exchange  for the  contribution  of
properties, the Company's percentage ownership in the Operating Partnership will
decline.  As the Company  issues  additional  shares of capital  stock,  it will
contribute  the proceeds for that capital stock to the Operating  Partnership in
exchange  for a number of Units  equal to the number of shares  that the Company
issues.  The  Company  conducts  substantially  all of  its  business  and  owns
substantially  all of its  assets  (either  directly  or  through  subsidiaries)
through the Operating Partnership such that a Unit is economically equivalent to
a share of the Company's common stock.

The  purpose of  reincorporating  in  Maryland  and of becoming an UPREIT was as
follows:

o    The Company will realize a cost savings in annual franchise tax payments of
     approximately $150,000 by changing its state of incorporation from Delaware
     to Maryland
 
o    By  adopting an UPREIT  structure,  the Company  will  realize  annual cost
     savings  of  approximately  $188,000  beginning  in 1998  related  to state
     franchise tax payments on its assets located in certain states; and
 
o    An UPREIT may allow the Company to offer Units in the Operating Partnership
     in exchange for  ownership  interests  from  tax-motivated  sellers.  Under
     certain  circumstances,  the  exchange  of Units for a  seller's  ownership
     interest  will enable the  Operating  Partnership  to acquire  assets while
     allowing the seller to defer the tax liability  associated with the sale of
     such assets.  Effectively,  this allows the Company to use Units instead of
     sock to acquire  properties,  which  provide an advantage  over  non-UPREIT
     entities.

     The  Company  has  elected to be treated as a REIT for  Federal  income tax
purposes.  The Company  intends to continue to operate in the manner required to
maintain its REIT status.

Acquisitions and Significant Transactions
North Hills Portfolio

     In March,  1997,  the Company  purchased five  community  shopping  centers
located in the Raleigh,  North Carolina area for $32.4 million from an unrelated
third party.  The centers total  approximately  606,000  square feet and feature
anchor tenants such as  Winn-Dixie,  Food Lion,  Inc.,  K-Mart  Corporation  and
Eckerd  Drug.  The  acquisition  was funded  from the  Company's  line of credit
facility.  As a result  of the  acquisition,  the  Company  ended  1997  with 41
shopping  centers  containing an aggregate of  approximately  5.5 million square
feet of GLA.

Lazard Freres Transaction

     On February 24, 1998,  Prometheus  Southeast  Retail,  LLC ("PSR"),  a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC, entered
into a definitive agreement (the "Stock Purchase Agreement") with the Company to
make a $200 million strategic investment in the Company (the "Transaction"). PSR
has  committed to purchase  $200 million in newly  issued  common  shares of the
Company at a purchase  price of $9.50 per share.  The  investment can be made in
stages, at the Company's option, through March 30, 2000
    



                                       29
<PAGE>

   
allowing the Company to obtain capital as needed to fund its future  acquisition
and development  plans as well as retire debt.  Upon completion of funding,  PSR
will own an equity  interest in the Company of  approximately  60%, on a diluted
basis,  not including any further  issuance of Operating  Partnership  Units for
transactions  under contract or transactions into which the Company may enter in
the future.

     As  part  of the  Transaction,  three  representatives  of  Lazard  will be
nominated to the Company's Board of Directors, which will have a total number of
nine directors.

     On March 23, 1998, the Company issued  2,350,000 shares of its common stock
to PSR for a total  consideration  of $22.3 million (the "Initial  Purchase") as
part of the First  Closing.  In the event that the Second Closing does not occur
by September 30, 1998 or the Stock Purchase Agreement is terminated prior to the
Second  Closing  (other than as a result of PSR's  material  breach of the Stock
Purchase  Agreement),  PSR has an option under the Stock  Purchase  Agreement to
require that the Company  repurchase  the shares of Common Stock acquired in the
Initial  Purchase at a price equal to the purchase price thereof,  together with
any accrued  dividends (the "Put Option").  The Put Option may also be exercised
at any time  within two months  after the  earlier to occur of the date that the
Company fails to receive stockholder  approval of the Transaction,  the date the
Stock  Purchase  Agreement is terminated  prior to the Second Closing and August
31, 1998. The Company does not have the right to require PSR to exercise the Put
Option.  Therefore, in the event that stockholder approval of the Transaction is
not obtained and PSR does not  exercise  the Put Option  within two months,  the
shares of  Common  Stock  issued  to PSR in the  Initial  Purchase  will  remain
outstanding and the Put Option will expire.

     If the  stockholders  approve  the  Transaction,  PSR would have the right,
pursuant to a Contingent  Value Right  Agreement,  to receive on January 1, 2004
payment in cash or stock of an  aggregate  amount equal to the lesser of (a) (i)
21,052,632  shares  multiplied  by $19 per share  ($400  million)  less (ii) the
dividends  paid to PSR  through  January 1, 2004 and less (iii) the fair  market
value of the shares  purchased and (b)  4,500,000  multiplied by the fair market
value on such date.

     Whether or not the  Transaction  is fully  consummated,  the  Company  will
reimburse PSR for its expenses in  connection  with the  Transaction,  including
expenses  of  monitoring  the  Company and of  performing  its duties  under the
Transaction  Documents.  These expenses and Transaction expenses incurred by the
Company are estimated to aggregate  approximately  $3.3 million,  exclusive of a
claim by  Donaldson,  Lufkin &  Jenrette  Securities  Corporation  ("DLJ")  of a
"success  based"  advisory fee. The Company  believes that DLJ, which rendered a
fairness  opinion to the  Company,  but was not  requested  to perform any other
services in connection with the  Transaction,  is not entitled to any additional
fees or consideration.  DLJ, however,  has notified the Company that it believes
it is entitled to additional  "success  based"  advisory fees under the terms of
its  engagement  letter  with the  Company  dated May 23,  1997.  As of the date
hereof, there has been no resolution of the disagreement.

     Provided  that PSR is not in  material  default  under the  Stock  Purchase
Agreement,  has not breached any of its  representations  and  warranties in any
material  respect and has  satisfied  in all  material  respects  its  covenants
relating to the Initial  Purchase,  the Company  will pay PSR a break-up  fee of
$2,250,000 (the "Break-up  Fee") in the event that the Stock Purchase  Agreement
is terminated any time prior to the Second Closing. The Break-up Fee, therefore,
will be payable to PSR if the  stockholders do not approve the  Transaction.  In
addition,  in the event that a  competing  transaction  is  entered  into by the
Company on any date on or prior to the one-year anniversary of the date that the
Stock Purchase  Agreement is terminated,  the Company will pay PSR an additional
$3,000,000 (the "Topping Fee").

     Notwithstanding  the foregoing,  if a Topping Fee is payable to PSR and PSR
profits  on the  sale  of  the  shares  purchased  in the  Initial  Purchase  in
connection  with a  competing  transaction,  then PSR must pay the  Company  the
amount by which  such  profit,  the  Break-up  Fee and the  Topping  Fee  exceed
$7,750,000.

     Each of the Company's and PSR's  obligations  to effect the Second  Closing
and the  Subsequent  Closings  are  subject  to various  mutual  and  unilateral
conditions,  including,  without  limitation,  the  following:  (i)  stockholder
approval of the Transaction;  (ii) the continued qualification of the Company as
a REIT for  federal  income  tax  purposes;  (iii) the  receipt of an opinion of
counsel to the effect that the Company is a "domestically controlled" REIT; (iv)
the continuing  correctness of the  representations  and warranties in the Stock
Purchase  Agreement,   (v)  the  receipt  of  any  consents  necessary  for  the
Transaction,  and (vi) various other customary conditions.  In addition,  PSR is
not  obligated  to fund more  than  $100  million  of the  Transaction  unless a
significant portion of the Konover & Associates South transaction,  as described
below, is consummated.
    


                                       30

<PAGE>

   
Konover & Associates South Transaction

     On February 24, 1998, the Company entered into  definitive  agreements with
affiliates  of  Konover  &  Associates  South,  a  privately  held  real  estate
development firm based in Boca Raton,  Florida, to acquire 11 community shopping
centers totaling approximately 2.0 million square feet and valued at nearly $100
million. The purchase equates to approximately $24 million in equity, consisting
of the issuance of Units, at $9.50 per Unit, and/or cash, plus the assumption of
approximately $76 million in debt. At closing, $17 million of the equity will be
paid in the form of Units or cash. The remaining $7 million will be paid in cash
over a three-year  period with  interest at 7.75% per annum.  In  addition,  the
Company will issue 200,000  warrants to Mr. Simon Konover.  One hundred thousand
of the  warrants  have an  exercise  price of $9.50 per share, and the remaining
100,000  warrants have an exercise price of $12.50 per share.  The warrants vest
in 20% increments over a five-year  period and may be subject to forfeiture upon
the occurrence of certain events.

     As part of the  transaction,  the Company intends to operate under the name
"Konover  Property Trust".  The Company will remain listed on the New York Stock
Exchange and intends to change its ticker symbol from FAC to KPT, pending formal
approval by the shareholders in July, 1998. The Company will continue to operate
the  Konover  &  Associates  South  office  in Boca  Raton,  Florida  due to its
strategic location in the Southeast.

     Simon  Konover,  founder of both Konover &  Associates  South and Konover &
Associates,  Inc., a $500 million plus real estate company headquartered in West
Hartford,  Connecticut,  will become  Chairman of the Board of the Company  upon
completion of the  transaction.  He will not become an executive  officer of the
Company.

Rodwell/Kane Portfolio

     On October 7, 1997,  the Company  entered into  agreements to purchase nine
shopping  centers  located in North  Carolina and Virginia,  (the  "Rodwell/Kane
Properties")  totaling  1.0  million  square  feet,  and to  assume  third-party
management  of an  additional  1.2  million  square feet of  community  shopping
centers.  The centers to be purchased  are owned  primarily  by Roy O.  Rodwell,
Chairman and Co-Founder of Atlantic Real Estate Corporation ("ARC"), a privately
held real estate development company based in Durham, North Carolina and John M.
Kane,  Chairman  of Kane  Realty  Corporation,  a real  estate  development  and
brokerage company based in Raleigh,  North Carolina,  in a transaction valued at
$63.3 million.

     As of March  31,  1998,  the  acquisition  of  seven  of the  nine  centers
discussed  above had closed.  The acquisition of the eighth center closed on May
14,  1998.  The ninth and final  center  will be managed by the  Company  and is
expected to be acquired in the year 2000. Its acquisition prior to the year 2000
would trigger an onerous loan assumption fee.

     In exchange for their equity ownership  interests in the community centers,
Mr. Rodwell, Mr. Kane and related parties will receive approximately 1.2 million
Units in the Operating  Partnership and approximately  $3.0 million in cash. The
number of Units to be issued to the sellers was based on a $9.50 price per share
of the Company's Common Stock.  The issuance of approximately  269,000 Units and
payment of $0.8 million of cash will be deferred until the completion of certain
performance  requirements.  As part of the purchase price, the Company will also
assume  approximately  $48.8 million of fixed-rate  debt on the properties to be
acquired.

Joint Ventures

     On  September  22,  1997,  the Company  and ARC  jointly  created a limited
liability  company named Atlantic Realty LLC  ("Atlantic") to develop and manage
retail community and neighborhood  shopping centers in North Carolina.  Atlantic
currently has plans to develop  approximately one million square feet, including
outparcels,  over the next several years.  The Company and ARC will own Atlantic
equally,  with the Company serving as managing member overseeing its operations.
As of March 31,  1998,  the  Company  has  invested  $2.5  million in this joint
venture.  The  investment  in Atlantic  will be  accounted  for under the equity
method of  accounting as major  decisions  must be agreed to by both the Company
and ARC. As of March 31, 1998,  Atlantic had total assets of approximately  $8.1
million and debt of $5.6 million. The joint venture had no other operations.

     During  1997,  the Company  entered  into a joint  venture,  known as Mount
Pleasant  FAC  LLC,   with  AJS  Group,   to  develop  a   425,000-square   foot
retail/entertainment   shopping  center  in  Mount  Pleasant,   South  Carolina.
Construction  on the  center is  expected  to begin May  1998,  with  completion
targeted  for May 1999.  As of March 31,  1998,  the Company has  invested  $1.3
million in this joint venture. This 50% investment in the
    



                                       31

<PAGE>

   
joint  venture is accounted  for under the equity  method of accounting as major
decisions  must be agreed to by both the  Company  and the AJS Group.  The joint
venture had  approximately  $4.8 million of assets and $3.5 of debt at March 31,
1998. The joint venture had no other operations.

     During 1998, the Company  entered into a joint venture,  known as Wakefield
Commercial LLC,  primarily to develop two community  shopping  centers.  The two
retail   centers,   one   approximately   200,000  square  feet  and  the  other
approximately 300,000 square feet, will be located on 65 acres within a 500-acre
parcel of land zoned for  commercial  use. The Company will perform all leasing,
property  management  and marketing  functions for the two centers.  The Company
will hold a 50% interest in the venture, which is accounted for under the equity
method of  accounting as major  decisions  must be agreed to by both the Company
and its venture  partner.  As of March 31, 1998,  the Company had invested  $0.6
million in this joint  venture and had advanced the joint  venture $4.7 million.
The advances  carry  interest at 11% per annum.  The joint  venture had no other
operations.

     The  acquisition  and  development of the above  properties are subject to,
among other  things,  completion  of due  diligence  and various  contingencies,
including those inherent in development  projects,  such as zoning,  leasing and
financing.  There can be no assurance that all of the above transactions will be
consummated.

     The Company receives rental revenue through base rent, percentage rent, and
expense  recoveries from tenants and through other income including tenant lease
buyouts and  management  fee income.  Base rent  represents a minimum amount set
forth in the leases for which the tenants are contractually obligated, including
the amounts  tenants are  obligated to pay based on a percentage of the tenants'
gross  sales in lieu of base rent.  Percentage  rent is a function  of the sales
volumes of various  tenants in excess of a negotiated  sales "break point".  For
sales in excess of the break point,  tenants pay a specified percentage of these
sales as  percentage  rent in  addition  to their  base rent and other  charges.
Expense  recoveries  from  tenants  relate  to the  portion  of  the  property's
operating  costs for which the tenants are  obligated to reimburse  the Company,
and may  include,  real estate  taxes,  insurance,  and common area  maintenance
charges.  Pursuant to leases with the  Company's  two major anchor  tenants,  VF
Factory Outlet,  Inc.  ("VFFO") and Carolina  Pottery Retail Group,  Inc., these
anchor  tenants  are  obligated  to pay only  certain  increases  in common area
maintenance  expenses and their  pro-rata  share of  insurance  expense and real
estate taxes, and certain of the operating expenses. While many of the Company's
leases are triple net  leases,  whereby  the  tenants  are  obligated  for their
pro-rata  share of the real estate  taxes,  insurance,  common area  maintenance
charges  and  contribute  to  the  marketing  fund,  as of  December  31,  1997,
approximately  21% of the leased GLA of the Company's  factory outlet centers is
leased to tenants who are not obligated to reimburse the Company for real estate
taxes,  insurance,  utilities  and common  area  maintenance  expenses.  In such
instances,  the  Company  has  allocated  a portion  of the base rent to expense
recoveries.

     The Company  has  approximately  182 acres of  outparcels  located  near or
adjacent to certain  centers  which may be marketed for sale or as ground leases
from time to time. As outparcels are sold and cash received,  these revenues are
available for reinvestment.

Results of Operations

Year Ended December 31, 1997 compared to the Year Ended December 31, 1996.

     The Company reported a net loss of $1.4 million, or $0.12 per common share,
for the year ended December 31, 1997 compared to a net loss of $6.1 million,  or
$0.55 per common share,  for the  comparable  period in 1996.  The loss for 1997
resulted primarily from the following  factors:  (a) an increase in depreciation
and  amortization  of $1.9 million as described  below;  (b) increased  interest
expense of $2.2 million,  as a result of higher  borrowing  levels;  and (c) the
Company incurred an extraordinary  loss on the early  extinguishment  of debt of
$1.0 million in 1997 compared to $0.1 million in 1996. These amounts were offset
by increases in NOI of $4.9 million as  described  below.  In 1996,  the Company
recorded a $5 million  charge to  operations as a result of an adjustment to the
carrying value of a certain property as described below.

     FFO for the year ended December 31, 1997  increased $1.4 million,  or 9.5%,
to $16.2  million  from $14.8  million for the same period in 1996.  The factors
that had a positive  impact on 1997 FFO were an increase in NOI of $3.9  million
before the  adjustment  for  straight  line rent (net $1.0  million)  and a $0.5
million   decrease  in  general  and   administrative   expenses   exclusive  of
compensation under restricted stock awards and non-recurring  administrative and
merger  termination  costs, as described  below.  The factor that had a negative
impact on 1997
    



                                       32

<PAGE>

   
         FFO was $2.8 million in higher  interest  expense due to higher average
borrowing levels, net of interest on exchangeable notes of $0.6 million in 1996.
    

     Earnings before interest, taxes, depreciation and amortization (EBITDA) was
$33.7 million for the year ended  December 31, 1997, an increase of $5.4 million
or 19%, from $28.3 million for the same period in 1996.  The increase was due to
the increase in NOI of $4.9 million, including adjustment for straight line rent
and a decrease of $0.5 million in the general and  administrative  expenses from
1996 exclusive of compensation  under restricted stock awards and  non-recurring
administrative and merger termination costs, described below.

     Base rent  increased to $38.5 million for the year ended  December 31, 1997
from $34.1 million for the same period in 1996.  Base rent before the adjustment
for straight  line rent  increased  $3.4  million to $37.9  million for the year
ended  December 31, 1997 when  compared to 1996,  while the  Company's  weighted
average  square feet of GLA in  operation  increased  13%.  The increase in base
rents resulted from  increased GLA in operation and from increased  occupancy at
the  operating  and  development  centers and was offset by  declining  rents on
renewals at certain properties.  Base rental revenue in each of the years ending
December  31, 1997 and 1996  included a charge to the reserve for  uncollectible
tenant accounts of $0.5 million.

     Percentage  rent increased 33% to $0.8 million in 1997 from $0.6 million in
1996. The increase is due primarily to the percentage  rent  attributable to the
community centers acquired in March 1997.

     Recoveries  from  tenants,  representing  contractual  reimbursements  from
tenants of certain  common area  maintenance,  real estate  taxes and  insurance
costs, increased in the year ended December 31, 1997 to $12.7 million from $11.8
million in the same period in 1996.  On a weighted  average  square-foot  basis,
recoveries  from tenants  decreased 6% to $2.38 in 1997 from $2.52 in 1996.  The
average recovery of property  operating expenses for the year ended December 31,
1997  decreased  to 81% from 84% for the same  period in 1996.  With  respect to
approximately  21% of the  leased  GLA,  the  Company  is  obligated  to pay all
utilities and operating expenses of the applicable center.

     Total tenant retail sales at the Company's  centers  increased 4.9% for the
year ended  December 31, 1997 compared to the same period in 1996.  Tenant sales
on a comparative  store basis increased  approximately  1.2% in 1997 compared to
1996.

     Other income  increased  $1.0  million to $1.7 million in 1997  compared to
1996 primarily as a result of increased tenant lease buyouts of $0.7 million and
third party property management fee income of $0.3 million.

     Operating expenses increased $1.7 million, or 12%, to $15.7 million in 1997
from $14.0 million in 1996. The increase in operating  expenses was  principally
due to the  increase in the weighted  average  square feet in operation in 1997,
which rose 13% to 5.3 million  square feet in 1997 from 4.7 million  square feet
in 1996. On a weighted average  square-foot basis,  operating expenses decreased
1% to $2.96 in 1997 from $2.98 in 1996.

     General and  administrative  expenses for the year ended  December 31, 1997
included a charge of $1.3 million  related to the settlement of the  termination
of agreements  entered into in 1995 to acquire the factory  outlet centers owned
by Public  Employees  Retirement  System of Ohio (OPERS),  $0.3 million in other
non-recurring  charges and $0.5 million in compensation  under  restricted stock
awards.  General and  administrative  expenses in 1996  included $0.9 million in
non-recurring  administrative  expenses and $0.4 million in  compensation  under
restricted  stock awards.  Exclusive of these charges in 1997 and 1996,  general
and  administrative  expense  decreased $0.5 million,  or 10% to $4.4 million in
1997 from $4.9 million in 1996.

     Depreciation  increased  $1.7 million in 1997  primarily as a result of the
completion  in 1996 of the center in Branson,  Missouri,  the  expansions of the
Company's properties in Story City, Iowa; Nebraska City,  Nebraska;  Smithfield,
North Carolina and Tupelo, Mississippi, and the acquisition in March 1997 of the
five community  shopping  centers.  Amortization  of deferred  leasing and other
charges increased $0.1 million in 1997 primarily as a result of increased tenant
improvements.   On  a  weighted  average  square-foot  basis,  depreciation  and
amortization of income-producing  properties  decreased 1% to $2.86 in 1997 from
$2.89 in 1996.

     Interest  expense for the year ended  December  31,  1997,  net of interest
income of $0.6  million,  increased  by $2.2  million or 15%,  to $16.4  million
compared to $14.2 million, net of interest income of $0.6 million, in 1996. This
increase  resulted from higher  borrowing  levels in 1997 compared to 1996. On a
weighted average



                                       33

<PAGE>

basis,  debt outstanding and the average interest cost were  approximately  $211
million and 8.0%,  respectively,  in 1997  compared to $180.0  million and 8.2%,
respectively, in 1996. Amortization of deferred financing costs amounted to $1.6
million in 1997 and $1.4 million in 1996. The Company capitalized  interest cost
associated  with  its  development  projects  of $1.5  million  in 1997 and $2.0
million in 1996.  In  conjunction  with the early  extinguishment  of debt,  the
Company  expensed the related  unamortized loan costs of $1.0 million in 1997 as
compared to $0.1 million in 1996,  which has been classified as an extraordinary
item in the Consolidated Statements of Operations.

     As part of the Company's ongoing  strategic  evaluation of its portfolio of
assets,  the Company determined in 1995 to pursue the sale of certain properties
that  currently  are not fully  consistent  with or essential  to the  Company's
long-term strategies. Accordingly, in 1995 and 1996 the Company recorded an $8.5
and $5.0 million  adjustment  to the carrying  value of three assets  ultimately
held for disposition.  After recording the $13.5 million  valuation  adjustment,
the net  carrying  value of such assets at December  31, 1997 is $12.5  million.
There is also $12.3 million of debt secured by the properties  which is expected
to be retired primarily from the sale proceeds.  For the year ended December 31,
1997, these  properties  contributed  approximately  $1.1 million of revenue and
incurred a loss of $1.1 million after deducting  related interest expense on the
debt associated with the properties.  For the year ended December 31, 1996, such
properties contributed approximately $2.1 million of revenue and incurred a loss
of $1.0 million after deducting related interest  expense.  The reduction in the
performance is principally  due to the lower average  occupancy level in 1997 as
compared to 1996.

     As of December  31,  1997,  two of these  properties  were under  contract.
Management  periodically  evaluates  income  producing  properties for potential
impairment when  circumstances  indicate that the carrying amount of such assets
may not be recoverable.

Year ended December 31, 1996 compared to year ended December 31, 1995.

     The Company reported a net loss of $6.1 million, or $0.55 per common share,
for the year ended December 31, 1996 compared to a net loss of $13.1 million, or
$1.11 per common share,  for the  comparable  period in 1995.  The loss for 1996
resulted in part from three  factors.  First,  the Company took a charge against
earnings of $5.0  million to reduce the carrying  amount of a certain  property.
Second,   the  Company   accrued   severance   costs  and  other   non-recurring
administrative   costs  of  $0.9  million.   Third,   the  Company  incurred  an
extraordinary  loss  on the  early  extinguishment  of  debt  of  $0.1  million.
Excluding similar charges for 1995 and the charge of $4.5 million related to the
termination  of  agreements to acquire the factory  outlet  centers owned by the
OPERS in 1995,  net income for 1995 exceeded  that of 1996 by $2.0  million.  As
more fully described  below, the differential is primarily due to an increase in
depreciation and amortization of $1.9 million in 1996 over 1995.

   
     FFO for 1996 increased $2.1 million,  or 16.5%, to $14.8 million from $12.7
million for the same period in 1995.  Factors that had a positive impact on 1996
FFO were: (a) $1.1 million in improved  property level  performance as described
below and (b) $3.8 million in lower general and administrative  expenses also as
described  below.  Factors that had a negative impact on 1996 FFO were: (a) $2.7
million in higher interest expense due to a higher average  borrowing level; and
(b) $0.1 million in higher  depreciation  and  amortization  expense on non real
estate assets.
    

     Earnings before interest, taxes, depreciation and amortization (EBITDA) was
$28.3 million in 1996,  an increase of $3.9 million,  or 16%, from $24.4 million
for the same period in 1995.  The increase was due  primarily to the decrease in
the  general  and  administrative   expenses  from  1995  after  adjustment  for
non-recurring administrative costs for both years.

     Base rent decreased  slightly,  to $34.1 million in 1996 from $34.6 million
in 1995.  However,  base rent  before  the  adjustment  for  straight  line rent
increased  $0.5 million or 1.5% to $34.5  million in 1996 when compared to 1995,
while the Company's  weighted average square feet of GLA in operation  increased
8%.  The  increase  in base  rents from  increased  occupancy  at certain of the
Company's  properties was offset by declining rents on renewals at certain other
properties  and lower average  center  occupancy  levels in the centers held for
sale.  Base  rental  revenue  for 1996  includes  a charge  to the  reserve  for
uncollectible tenant accounts of $0.5 million compared to $0.6 million in 1995.

     Percentage rent remained  unchanged at $0.6 million in 1996 compared to the
same amount in 1995.


                                       34

<PAGE>

     Recoveries  from  tenants,  representing  contractual  reimbursements  from
tenants of certain  common area  maintenance,  real estate taxes,  and insurance
costs,  increased  in 1996 to $11.8  million  from $11.1  million in 1995.  On a
weighted average square foot basis,  recoveries from tenants  decreased to $2.52
in 1996 from $2.55 in 1995,  or 1%. The average  recovery of property  operating
expenses increased from 81% in 1995 to 84% in 1996. The increase in the recovery
percentage was the result of new  development  and expansions  which were leased
primarily  on a triple  net basis.  Approximately  21% of the  Company's  GLA is
leased  whereby the Company is  obligated  to pay all  utilities  and  operating
expenses of the applicable factory outlet center as compared to 18% in 1995.

     Although total tenant retail sales at Company centers increased 7.6% in the
year ended  December 31, 1996  compared to 1995,  tenant sales on a  comparative
store basis decreased  approximately  1.8% in 1996 compared to 1995, as compared
to a 1.3% increase for the industry as reported by the International  Council of
Shopping  Centers.  Lower tenant sales may have a continuing  adverse  effect on
tenant plans for new store openings or lease renewals.

     Other  income  was  approximately  $0.7  million in 1996  compared  to $0.9
million  in  1995.  The  decrease  was  primarily  due  slightly   higher  lease
termination  settlements  and a decrease  in gain on sale of real  estate  ($0.3
million in 1995).

     Operating expenses increased $0.4 million,  or 3%, to $14.0 million in 1996
from $13.6 million in 1995. The increase in operating  expenses was  principally
due to the  increase in the  weighted  average  square feet in operation in 1996
which rose 8% from 4.3 million square feet in 1995 to 4.7 million square feet in
1996. On a weighted  average  square-foot  basis,  operating  expenses  actually
decreased 5% from $3.15 in 1995 to $2.98 in 1996.  This was due principally to a
$0.21 per square foot  decrease in  marketing  costs,  which are recorded net of
tenant contributions to the marketing of the Company's centers.

     General  and  administrative   expenses  in  1996  included   non-recurring
administrative  costs of $0.9 million and a non-cash  charge of $0.4 million for
restricted stock issued principally for bonuses,  whereas 1995 included a charge
of $6.5 million related to the termination of agreements entered into in 1995 to
acquire  the  factory   outlet   centers   owned  by  OPERS  and  certain  other
non-recurring  charges.  Exclusive of these charges,  general and administrative
cost decreased  $3.9 million,  or 44%, to $4.9 million in 1996 from $8.8 million
in 1995.  The  decrease  was due  principally  to the  savings  of $3.7  million
associated  with  the  termination  of the  Company's  sponsorship  of a  NASCAR
motorsports  program and $0.2 million related to the termination of the lease on
the Company's airplane.

     Of the $0.9 million in non-recurring administrative costs incurred in 1996,
$0.8  million  related to  severance  costs  accrued as of December  31, 1996 in
conjunction with the resignation of the Company's chief executive officer.  Such
costs were accrued  pursuant to the terms of his  employment  agreement  entered
into  in  December  1995.  Concurrently,  the  Company  settled  a $0.6  million
valuation issue related to the Company's  purchase in 1993 of a 19-acre tract of
land,  acquired in a  non-monetary  transaction  from a partnership in which the
former officer was a general partner,  by agreeing to resell the land to him for
the original purchase price in an all-cash transaction. The consummation of this
transaction  is  secured  by the  unpaid  severance  amounts  due to the  former
officer.  Also in  settling  the terms of the  former  officer's  severance  and
non-competition  restrictions,  $0.25  million of his  severance  was applied to
certain advertising expenses incurred by the Company.

     Depreciation  increased $0.9 million in 1996,  primarily as a result of the
completion of the Nebraska outlet center in Branson, Missouri and the expansions
of the  Company's  properties  in Nebraska  City,  Nebraska,  Smithfield,  North
Carolina and Tupelo,  Mississippi.  Buildings  and  improvements  classified  as
income-producing   properties   increased  $36.9  million  in  1996  from  1995.
Amortization  of deferred  leasing and other charges  increased  $1.0 million in
1996 and  deferred  leasing and other  charges  classified  as  income-producing
properties  increased  $4.2  million  in 1996 from 1995.  On a weighted  average
square foot basis, depreciation and amortization of income-producing  properties
increased 7% to $2.89 in 1996 from $2.70 in 1995.

     Interest  expense for the year ended  December  31,  1996,  net of interest
income of $0.6  million,  increased by $3.3  million,  or 30%, to $14.2  million
compared to $10.9 million, net of interest income of $0.2 million, in 1995. This
increase resulted from higher borrowing levels in 1996 compared to 1995 and $0.6
million from the  infusion in April,  1996 of $20 million in capital from Gildea
Management Company, initially



                                       35

<PAGE>

in the form of  Exchangeable  Notes,  as more fully  described  in Note 7 of the
"Notes to  Consolidated  Financial  Statements".  On a weighted  average  basis,
excluding the Exchangeable Notes, debt outstanding and the average interest cost
were approximately  $180.0 million and 8.2%,  respectively,  in 1996 compared to
$147.1  million  and  8.3%,  respectively,  in 1995.  Amortization  of  deferred
financing  cost  amounted to $1.4 million in 1996 and $1.6 million in 1995.  The
Company  capitalized  interest cost associated with its development  projects of
$2.0 million in 1996 and $2.6 million in 1995.  Associated  with the refinancing
of the  Company's  existing  line of credit,  the Company  expensed  the related
unamortized  loan  costs  of  $0.1  million  which  has  been  classified  as an
extraordinary item in the Consolidated Statements of Operations.

     As part of the Company's ongoing  strategic  evaluation of its portfolio of
assets,  the Company determined in 1995 to pursue the sale of certain properties
that  currently  are not fully  consistent  with or essential  to the  Company's
long-term strategies.  Accordingly, in 1995 the Company recorded an $8.5 million
adjustment to the carrying  value of three of the  properties  held for sale. In
1996 the Company recorded an additional $5.0 million  adjustment to the carrying
value of one of the assets held for sale.  This non-cash  adjustment was charged
to operations and represents the difference between the fair value less costs to
sell and net  book  value of the  assets.  After  recording  the  $13.5  million
valuation adjustment,  the net carrying value of assets currently being marketed
for sale at December 31, 1996 is $11.4 million.  There was also $15.8 million of
debt  secured by the  properties  at  December  31, 1996 which is expected to be
retired from the sale  proceeds.  For the year ended  December  31, 1996,  these
properties contributed approximately $2.1 million of revenue and incurred a loss
of $1.0 million after deducting  related interest expense on the debt associated
with the  properties.  For the year ended  December  31,  1995 these  properties
contributed  approximately  $3.0  million of revenue and incurred a loss of $0.5
million  after  deducting  related  interest  expense.   The  reduction  in  the
performance is principally  due to the lower occupancy level in 1996 as compared
to 1995 existing at certain centers held for sale.

     The Company  began the process of  marketing  the  properties  and no sales
agreements had been completed at December 31, 1996. Management plans to evaluate
all properties on a regular basis in accordance with its strategy for growth and
in the future may identify  other  properties  for  disposition or may decide to
defer the pending disposition of those assets now held for sale.

Liquidity and Capital Resources

     The Company's  cash and cash  equivalents  balance at December 31, 1997 was
$4.9 million.  Restricted cash, as reported in the financial  statements,  as of
such date, was $3.9 million.  In connection with the Company's $95 million rated
debt  securitization,  the  Company is  required to escrow a portion of the loan
proceeds to fund certain  environmental and engineering work and to make certain
lease related  payments  that may be required in connection  with the renewal or
termination of certain leases by a tenant at most of the factory outlet centers.

     Net cash  provided by operating  activities  was $13.0 million for the year
ended December 31, 1997. Net cash used in investing activities was $62.2 million
for 1997. The primary use of these funds included:  $32.4 million to acquire the
five North Carolina  community shopping centers as previously  described,  $15.0
million  invested in  income-producing  properties as follows:  $1.6 million for
completion of a development  project in 1997, $3.9 million in  construction  and
development  of projects in  process,  $5.7  million  towards  normal  recurring
capital  expenditures;  and $3.8  million for  re-tenanting,  lease  renewal and
leasing costs. The Company loaned $8.5 million against a property to be acquired
from Konover & Associates  South and $2.3 million to a joint venture  partner as
an  advance  against  development  projects  to be  contributed  to  five  joint
ventures. During 1997, the Company also invested $4.3 million in a newly created
joint ventures.  Net cash provided by financing activities was $47.1 million for
the year ended December 31, 1997. The principal  source of such funds was $135.9
million of new borrowing,  as described  below,  net of $2.3 million in fees and
other costs related thereto.  Funds generated through financing  activities were
offset by payments of $86.5 million towards scheduled debt principal repayment.

     Capital Resources. The Company's management anticipates that cash generated
from  operating  performance  will  provide the  necessary  funds for  operating
expenses,   interest   expense  on  outstanding   indebtedness,   dividends  and
distributions  in accordance  with REIT federal income tax  requirements  and to
fund  re-tenanting  and lease  renewal  tenant  improvement  costs,  as well as,
capital  expenditures  to maintain  the  quality of its  existing  centers.  The
Company  also  believes  that it has  capital  and access to capital  resources,
including  additional  borrowings  and  issuances of debt or equity  securities,
sufficient to pursue its strategic plans.


                                       36

<PAGE>

     In February 1997, the Company  obtained a $150 million credit facility with
Nomura Asset Capital corporation.  The credit facility with Nomura is secured by
21 of the  Company's  centers  plus an  assignment  of excess cash flow from the
properties  currently  secured under the $95 million rated debt  securitization.
The credit  facility is for a term of 2 years with a 1 year  renewal  option and
bears interest at the rate of 1 month LIBOR (London Interbank Offered Rate) plus
2.25%.  The proceeds from the credit  facility  were used to fund  acquisitions,
expansions  of  existing  centers,   repay  indebtedness,   and  fund  operating
activities,  including the repurchase of the Company's  stock.  The indebtedness
repaid included a $75 million credit facility,  $7.4 million of Senior Notes and
a $2.0 million note payable  incurred in connection  with the acquisition of the
VF Properties.  The new credit facility contains financial covenants relating to
debt to total asset value and net operating income to debt service coverage.

   
     On March 11, 1998, the Company closed on a $75 million,  15-year  permanent
credit facility  secured by 11 properties  previously  securing the $150 million
revolving  credit  facility.  The loan is at an  effective  rate of 7.73% and is
amortized  on a 338-month  basis.  The  proceeds  were used to pay down  certain
borrowings  outstanding on the $150 million Nomura credit  facility  obtained by
the Company in 1997.

     On February 24, 1998,  Prometheus  Southeast  Retail,  LLC ("PSR"),  a real
estate investment  affiliate of Lazard  Freres Real Estate Investors,  LLC,
entered into a definitive  agreement (the "Stock Purchase  Agreement")  with the
Company  to  make a $200  million  strategic  investment  in  the  Company  (the
"Transaction").  PSR has  committed  to purchase  $200  million in newly  issued
common  shares  of the  Company  at a  purchase  price of $9.50 per  share.  The
investment  can be made in stages,  at the Company's  option,  through March 30,
2000  allowing  the  Company  to obtain  capital  as  needed to fund its  future
acquisition  and  development  plans as well as retire debt.  Upon completion of
funding, PSR will own an equity interest in the Company of approximately 60%, on
a diluted  basis,  not including any further  issuance of Operating  Partnership
Units for transactions under contract or transactions into which the Company may
enter in the future.

     As  part  of the  Transaction,  three  representatives  of  Lazard  will be
nominated to the Company's Board of Directors, which will have a total number of
nine directors.

     On March 23, 1998, the Company issued  2,350,000 shares of its common stock
to PSR for a total  consideration  of $22.3 million (the "Initial  Purchase") as
part of the First  Closing.  In the event that the Second Closing does not occur
by September 30, 1998 or the Stock Purchase Agreement is terminated prior to the
Second  Closing  (other than as a result of PSR's  material  breach of the Stock
Purchase  Agreement),  PSR has an option under the Stock  Purchase  Agreement to
require that the Company  repurchase  the shares of Common Stock acquired in the
Initial  Purchase at a price equal to the purchase price thereof,  together with
any accrued  dividends (the "Put Option").  The Put Option may also be exercised
at any time  within two months  after the  earlier to occur of the date that the
Company fails to receive stockholder  approval of the Transaction,  the date the
Stock  Purchase  Agreement is terminated  prior to the Second Closing and August
31, 1998. The Company does not have the right to require PSR to exercise the Put
Option.  Therefore, in the event that stockholder approval of the Transaction is
not obtained and PSR does not  exercise  the Put Option  within two months,  the
shares of  Common  Stock  issued  to PSR in the  Initial  Purchase  will  remain
outstanding and the Put Option will expire.

     If the  stockholders  approve  the  Transaction,  PSR would have the right,
pursuant to a Contingent  Value Right  Agreement,  to receive on January 1, 2004
payment in cash or stock of an  aggregate  amount equal to the lesser of (a) (i)
21,052,632  shares  multiplied  by $19 per shares ($400  million)  less (ii) the
dividends  paid to PSR  through  January 1, 2004 and less (iii) the fair  market
value of the shares  purchased and (b)  4,500,000  multiplied by the fair market
value on such date.

     Whether or not the  Transaction  is fully  consummated,  the  Company  will
reimburse PSR for its expenses in  connection  with the  Transaction,  including
expenses  of  monitoring  the  Company and of  performing  its duties  under the
Transaction  Documents.  These expenses and Transaction expenses incurred by the
Company are estimated to aggregate  approximately  $3.3 million,  exclusive of a
claim by  Donaldson,  Lufkin &  Jenrette  Securities  Corporation  ("DLJ")  of a
"success  based"  advisory fee. The Company  believes that DLJ, which rendered a
fairness  opinion to the  Company,  but was not  requested  to perform any other
services in connection with the  Transaction,  is not entitled to any additional
fees or consideration.  DLJ, however,  has notified the Company that it believes
it is entitled to additional  "success  based"  advisory fees under the terms of
its  engagement  letter  with the  Company  dated May 23,  1997.  As of the date
hereof, there has been no resolution of the disagreement.
    


                                       37

<PAGE>

   
     Provided  that PSR is not in  material  default  under the  Stock  Purchase
Agreement,  has not breached any of its  representations  and  warranties in any
material  respect and has  satisfied  in all  material  respects  its  covenants
relating to the Initial  Purchase,  the Company  will pay PSR a break-up  fee of
$2,250,000 (the "Break-up  Fee") in the event that the Stock Purchase  Agreement
is terminated any time prior to the Second Closing. The Break-up Fee, therefore,
will be payable to PSR if the  stockholders do not approve the  Transaction.  In
addition,  in the event that a  competing  transaction  is  entered  into by the
Company on any date on or prior to the one-year anniversary of the date that the
Stock Purchase  Agreement is terminated,  the Company will pay PSR an additional
$3,000,000 (the "Topping Fee").  Notwithstanding the foregoing, if a Topping Fee
is payable to PSR and PSR  profits  on the sale of the shares  purchased  in the
Initial Purchase in connection with a competing  transaction,  then PSR must pay
the Company the amount by which such  profit,  the  Break-up Fee and the Topping
Fee exceed $7,750,000.

     Each of the Company's and PSR's  obligations  to effect the Second  Closing
and the  Subsequent  Closings  are  subject  to various  mutual  and  unilateral
conditions,  including,  without  limitation,  the  following:  (i)  stockholder
approval of the Transaction;  (ii) the continued qualification of the Company as
a REIT for  federal  income  tax  purposes;  (iii) the  receipt of an opinion of
counsel to the effect that the Company is a "domestically controlled" REIT; (iv)
the continuing  correctness of the  representations  and warranties in the Stock
Purchase  Agreement,   (v)  the  receipt  of  any  consents  necessary  for  the
Transaction,  and (vi) various other customary conditions.  In addition,  PSR is
not  obligated  to fund more  than  $100  million  of the  Transaction  unless a
significant portion of the Konover & Associates South transaction,  as described
below, is consummated.
    

     Capital  Expenditures.  The Company's  capital  expenditures  have included
expansions of existing centers and acquisitions of new properties.

     Management's  view of the current state of the shopping center industry and
its future  direction is that  value-oriented  retail concepts are merging;  for
example,  outlet  centers  are  including  off-price  tenants  as well as outlet
tenants,  off-price centers have manufacturers' outlets,  community centers have
destination  tenants,  and other  community  centers  have  outlet or  off-price
tenants.  With this backdrop,  management  believes that a diversified  shopping
center  portfolio  will  provide  an  opportunity  for  growth.  As  part of the
Company's  diversification  strategy,  a portion of the  availability  under the
Nomura  credit  facility  was used to  purchase  five  community  centers in the
Raleigh,  NC area on March 27, 1997 for a total purchase price of $32.4 million.
The centers total approximately 606,000 square feet of GLA, are well-located and
feature well-known regional tenants.  Management will continue to pursue similar
opportunities  for the acquisition of community  shopping  centers in the United
States, and in particular,  the southeastern  region of the country as evidenced
by  Rodwell/Kane  and  the  announcement  of  the  Konover  &  Associates  South
transaction described below.

     In  1997,  the  Company  completed  construction  on a 32,000  square  foot
expansion at its Crossville, Tennessee Center. The Company began construction on
an expansion at its Wilson,  North Carolina Center consisting of a 44,000 square
foot Winn Dixie.  The cost of this  project was  estimated  at $2.45  million of
which $1.8 million has been expanded as of December 31, 1997.  During 1996,  the
Company  delivered a 288,000 square foot outlet center in Branson,  Missouri and
expansions of approximately  158,000 square feet at Story City,  Iowa,  Nebraska
City, Nebraska, Smithfield, North Carolina, and Tupelo, Mississippi. The cost of
these  projects was $42.5  million all of which has been expended as of December
31, 1997.

     On February 24, 1998, the Company entered into  definitive  agreements with
affiliates  of  Konover  &  Associates  South,  a  privately  held  real  estate
development firm based in Boca Raton,  Florida, to acquire 11 community shopping
centers totaling approximately 2.0 million square feet and valued at nearly $100
million. The purchase equates to approximately $24 million in equity, consisting
of the issuance of Units, at $9.50 per Unit, and/or cash, plus the assumption of
approximately $76 million in debt. At closing, $17 million of the equity will be
paid in the form of Units or cash. The remaining $7 million will be paid in cash
over a three-year period with interest at 7.75% per annum.

     As part of the  transaction,  the Company intends to operate under the name
"Konover  Property Trust".  The Company will remain listed on the New York Stock
Exchange and intends to change its ticker symbol from FAC to KPT, pending formal
approval by the shareholders in July, 1998. The Company will continue to operate
the  Konover  &  Associates  South  office  in Boca  Raton,  Florida  due to its
strategic location in the Southeast.


                                       38
<PAGE>

     Simon  Konover,  founder of both Konover &  Associates  South and Konover &
Associates,  Inc., a $500 million plus real estate company headquartered in West
Hartford,  Connecticut,  will become  Chairman of the Board of the Company  upon
completion of the  transaction.  He will not become an executive  officer of the
Company.

     On October 7, 1997,  the Company  entered into  agreements to purchase nine
shopping  centers  located in North  Carolina and Virginia,  (the  "Rodwell/Kane
Properties")  totaling  1.0  million  square  feet,  and to  assume  third-party
management  of an  additional  1.2  million  square feet of  community  shopping
centers.  The centers to be purchased  are owned  primarily  by Roy O.  Rodwell,
Chairman and Co-Founder of Atlantic Real Estate Corporation ("ARC"), a privately
held real estate development company based in Durham, North Carolina and John M.
Kane,  Chairman  of Kane  Realty  Corporation,  a real  estate  development  and
brokerage company based in Raleigh,  North Carolina,  in a transaction valued at
$63.3 million.

     As of March  31,  1998,  the  acquisition  of  seven  of the  nine  centers
discussed  above had closed.  The acquisition of the eighth center closed on May
14,  1998.  The ninth and final  center  will be managed by the  Company  and is
expected to be acquired in the year 2000. Its acquisition prior to the year 2000
would trigger an onerous loan assumption fee.

     In exchange for their equity ownership  interests in the community centers,
Mr. Rodwell, Mr. Kane and related parties will receive approximately 1.2 million
Units in the Operating  Partnership and approximately  $3.0 million in cash. The
number of Units to be issued to the sellers was based on a $9.50 price per share
of the Company's  Common  Stock.  Of the Units to be issued,  approximately  0.3
million  Units will  remain  unissued,  as well as the  holdback  of cash in the
amount  of  approximately   $0.8  million,   until  the  completion  of  certain
performance  requirements.  As part of the purchase price, the Company will also
assume  approximately  $48.8 million of fixed-rate  debt on the properties to be
acquired.

     During  1997,  the Company and  Atlantic  Real Estate  Corporation  ("ARC")
jointly  created  a  limited   liability   company  named  Atlantic  Realty  LLC
("Atlantic") to develop and manage retail  community and  neighborhood  shopping
centers in North  Carolina.  Atlantic  currently has plans to develop nearly one
million square feet,  including  outparcels,  over the next several  years.  The
Company  and ARC own  Atlantic  equally,  with the  Company  serving as managing
member overseeing its operations. As of March 31, 1998, the Company has invested
$2.5 million in this joint venture. The investment in Atlantic will be accounted
for under the equity method of accounting as major  decisions  must be agreed to
by both the Company and ARC. As of March 31, 1998,  Atlantic had total assets of
approximately  $8.1 million and debt of $5.6  million.  The joint venture had no
other operations.

     During 1997, the Company also entered into a joint venture,  known as Mount
Pleasant  FAC  LLC,   with  AJS  Group,   to  develop  a   425,000-square   foot
retail/entertainment   shopping  center  in  Mount  Pleasant,   South  Carolina.
Construction  on the  center is  expected  to begin May  1998,  with  completion
targeted  for May 1999.  As of March 31,  1998,  the Company has  invested  $1.3
million in this joint venture.  This 50% investment in the joint venture will be
accounted for under the equity method of accounting as major  decisions  must be
agreed  to by both  the  Company  and the  AJS  Group.  The  joint  venture  had
approximately  $4.8  million of assets and $3.5 of debt at March 31,  1998.  The
joint venture had no other operations.

     During 1998, the Company  entered into a joint venture,  known as Wakefield
Commercial LLC,  primarily to develop two community  shopping  centers.  The two
retail   centers,   one   approximately   200,000  square  feet  and  the  other
approximately 300,000 square feet, will be located on 65 acres within a 500-acre
parcel of land zoned for  commercial  use. The Company will perform all leasing,
property  management  and marketing  functions for the two centers.  The Company
holds a 50% in the venture,  which is accounted  for under the equity  method of
accounting  as major  decisions  must be agreed to by both the  Company  and its
venture partners. As of March 31, 1998, the Company had invested $0.6 million in
this joint venture and had advanced the joint venture $4.7 million. The advances
carry interest at 11% per annum. The joint venture had no other operations.

     The Company is currently in the  pre-development  and marketing stage for a
property  located Lake  Carmel,  New York.  If  appropriate  tenant  interest is
obtained and the appropriate agreements, permits and approvals are received, the
Company intends to commence construction in the Fall of 1998.


                                       39

<PAGE>

     The Company's  current  acquisition,  expansion and  development  plans are
subject  to  certain  risk and  uncertainties;  including,  but not  limited  to
economic   conditions  in  the  retail  industry,   future  real  estate  market
conditions;  the  availability  of financing;  and the risk  associated with the
Company's  property  development  activities,  such as the  potential  for  cost
overruns,  delays and the lack of  predictability  with respect to the financial
returns associated with these development activities.  There can be no assurance
that the planned  development  and  expansions  will occur  according to current
schedules or that,  once  commenced,  such  development  and expansions  will be
completed.

     Based on current  market  conditions,  the  Company  believes  it will have
access to the capital  resources  or has  adequate  financial  resources to fund
operating expenses,  potential  distributions to stockholders,  acquisitions and
planned development and construction activities.  At March 31, 1998, the Company
has available $87.8 under its $150 million Nomura credit facility  following the
retirement of $72.3 million of debt which existed at December 31, 1997.

     The Company is in the process of reviewing various  financing  alternatives
for its planned  development  of the "power" outlet mall located in Lake Carmel,
New  York,  including  a  potential  joint  venture  arrangement.   The  planned
development  of nearly one million  square feet of  community  and  neighborhood
shopping   centers  in  North   Carolina   with  ARC,  the   development   of  a
retail/entertainment  shopping center in Mt. Pleasant,  South Carolina,  and the
development of two community shopping centers in Wakefield,  North Carolina will
be  completed in joint  ventures  and will be financed in part by a  traditional
bank construction loan.

     The Company  previously  announced that dividends declared will be equal to
95% of the Company's  taxable income,  which is the minimum dividend required to
maintain its REIT status.  Determination  of any dividends will be made annually
following the review of the Company's year-end financial results.  The Company's
decision is driven by its goal to increase the total return to its  shareholders
through the use of internal cash flow to "self-fund" some of its growth, such as
expansions at existing centers and strategic acquisitions. The Company also will
strive to  reduce  its  borrowing  levels  and  interest  expense.  The Board of
Directors determined that the Company would not declare a dividend for 1997.

Impact of Year 2000 Issue

     The "Year  2000"  issue is a  general  term used to  describe  the  various
problems that may result from the improper  processing of dates and calculations
involving  years by many  computers  throughout  the  world as the Year  2000 is
approached and reached.  The Company has reviewed the impact of Year 2000 issues
and does  not  expect  any  remedial  actions  taken  with  respect  thereto  to
materially adversely affect its business, operations or financial condition.

FASB Statement No. 128

     In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 128,  "Earnings Per Share," which is effective for financial  statements for
periods  ending after  December 15, 1997.  FASB  Statement  No. 128 requires the
restatement  of prior period  earnings per share and requires the  disclosure of
additional  supplemental  information  detailing the calculation of earnings per
share.

     FASB  Statement  No. 128  replaced  the  calculation  of primary  and fully
diluted  earnings per share with basic and diluted  earnings  per share.  Unlike
primary  earnings  per share,  basic  earnings  per share  excludes any dilutive
effects of options,  warrants and convertible  securities.  Diluted earnings per
share is very similar to the  previously  reported  fully  diluted  earnings per
share.  It is computed  using the  weighted  average  number of shares of Common
Stock and the dilutive effect of options,  warrants and  convertible  securities
outstanding,  using the  "treasury  stock"  method.  Earnings  per share data is
required for all periods for which an income statement or summary of earnings is
presented,  including  summaries  outside the basic  financial  statements.  All
earnings per share amounts for all periods  presented have,  where  appropriate,
been restated to conform to the FASB Statement No. 128 requirements.

                                       40

<PAGE>

Recent Developments

Lazard Freres Transaction

   
     On February 24, 1998,  Prometheus  Southeast  Retail,  LLC ("PSR"),  a real
estate investment affiliate of Lazard Freres Real Estate Investors, LLC, entered
into a definitive agreement (the "Stock Purchase Agreement") with the Company to
make a $200 million strategic investment in the Company (the "Transaction"). PSR
has  committed to purchase  $200 million in newly  issued  common  shares of the
Company at a purchase  price of $9.50 per share.  The  investment can be made in
stages, at the Company's option,  through March 30, 2000 allowing the Company to
obtain capital as needed to fund its future acquisition and development plans as
well as retire debt. Upon completion of funding, PSR will own an equity interest
in the Company of  approximately  60%, on a diluted  basis,  not  including  any
further issuance of Operating  Partnership Units for transactions under contract
or transactions into which the Company may enter in the future.

     As  part  of the  Transaction,  three  representatives  of  Lazard  will be
nominated to the Company's Board of Directors, which will have a total number of
nine directors.

     On March 23, 1998, the Company issued  2,350,000 shares of its common stock
to PSR for a total  consideration  of $22.3 million (the "Initial  Purchase") as
part of the First  Closing.  In the event that the Second Closing does not occur
by September 30, 1998 or the Stock Purchase Agreement is terminated prior to the
Second  Closing  (other than as a result of PSR's  material  breach of the Stock
Purchase  Agreement),  PSR has an option under the Stock  Purchase  Agreement to
require that the Company  repurchase  the shares of Common Stock acquired in the
Initial  Purchase at a price equal to the purchase price thereof,  together with
any accrued  dividends (the "Put Option").  The Put Option may also be exercised
at any time  within two months  after the  earlier to occur of the date that the
Company fails to receive stockholder  approval of the Transaction,  the date the
Stock  Purchase  Agreement is terminated  prior to the Second Closing and August
31, 1998. The Company does not have the right to require PSR to exercise the Put
Option.  Therefore, in the event that stockholder approval of the Transaction is
not obtained and PSR does not  exercise  the Put Option  within two months,  the
shares of  Common  Stock  issued  to PSR in the  Initial  Purchase  will  remain
outstanding and the Put Option will expire.

     If the  stockholders  approve  the  Transaction,  PSR would have the right,
pursuant to a Contingent  Value Right  Agreement,  to receive on January 1, 2004
payment of an aggregate amount equal to the lesser of (a) (i) 21,052,632  shares
multiplied by $19 per share ($400  million) less (ii) the dividends  paid to PSR
through  January  1, 2004 and less  (iii) the fair  market  value of the  shares
purchased and (b) 4,500,000 multiplied by the fair market value on such date.

     Whether or not the  Transaction  is fully  consummated,  the  Company  will
reimburse PSR for its expenses in  connection  with the  Transaction,  including
expenses  of  monitoring  the  Company and of  performing  its duties  under the
Transaction  Documents.  These expenses and Transaction expenses incurred by the
Company are estimated to aggregate  approximately  $3.3 million,  exclusive of a
claim by  Donaldson,  Lufkin &  Jenrette  Securities  Corporation  ("DLJ")  of a
"success  based"  advisory fee. The Company  believes that DLJ, which rendered a
fairness  opinion to the  Company,  but was not  requested  to perform any other
services in connection with the  Transaction,  is not entitled to any additional
fees or consideration.  DLJ, however,  has notified the Company that it believes
it is entitled to additional  "success  based"  advisory fees under the terms of
its  engagement  letter  with the  Company  dated May 23,  1997.  As of the date
hereof, there has been no resolution of the disagreement.

     Provided  that PSR is not in  material  default  under the  Stock  Purchase
Agreement,  has not breached any of its  representations  and  warranties in any
material  respect and has  satisfied  in all  material  respects  its  covenants
relating to the Initial  Purchase,  the Company  will pay PSR a break-up  fee of
$2,250,000 (the "Break-up  Fee") in the event that the Stock Purchase  Agreement
is terminated any time prior to the Second Closing. The Break-up Fee, therefore,
will be payable to PSR if the  stockholders do not approve the  Transaction.  In
addition,  in the event that a  competing  transaction  is  entered  into by the
Company on any date on or prior to the one-year anniversary of the date that the
Stock Purchase  Agreement is terminated,  the Company will pay PSR an additional
$3,000,000 (the "Topping Fee").  Notwithstanding the foregoing, if a Topping Fee
is payable to PSR and PSR  profits  on the sale of the shares  purchased  in the
Initial Purchase in connection with a competing  transaction,  then PSR must pay
the Company the amount by which such  profit,  the  Break-up Fee and the Topping
Fee exceed $7,750,000.
    

                                       41

<PAGE>

   
     Each of the Company's and PSR's  obligations  to effect the Second  Closing
and the  Subsequent  Closings  are  subject  to various  mutual  and  unilateral
conditions,  including,  without  limitation,  the  following:  (i)  stockholder
approval of the Transaction;  (ii) the continued qualification of the Company as
a REIT for  federal  income  tax  purposes;  (iii) the  receipt of an opinion of
counsel to the effect that the Company is a "domestically controlled" REIT; (iv)
the continuing  correctness of the  representations  and warranties in the Stock
Purchase  Agreement,   (v)  the  receipt  of  any  consents  necessary  for  the
Transaction,  and (vi) various other customary conditions.  In addition,  PSR is
not  obligated  to fund more  than  $100  million  of the  Transaction  unless a
significant portion of the Konover & Associates South transaction,  as described
below, is consummated.

Konover & Associates South Transaction

     On February 24, 1998, the Company entered into  definitive  agreements with
affiliates  of  Konover  &  Associates  South,  a  privately  held  real  estate
development firm based in Boca Raton,  Florida, to acquire 11 community shopping
centers totaling approximately 2.0 million square feet and valued at nearly $100
million. The purchase equates to approximately $24 million in equity, consisting
of the issuance of Units, at $9.50 per Unit, and/or cash, plus the assumption of
approximately $76 million in debt. At closing, $17 million of the equity will be
paid in the form of Units or cash. The remaining $7 million will be paid in cash
over a three-year period with interest at 7.75% per annum.

     As part of the  transaction,  the Company intends to operate under the name
"Konover  Property Trust".  The Company will remain listed on the New York Stock
Exchange and intends to change its ticker symbol from FAC to KPT, pending formal
approval by the shareholders in July, 1998. The Company will continue to operate
the  Konover  &  Associates  South  office  in Boca  Raton,  Florida  due to its
strategic location in the Southeast.

     Simon  Konover,  founder of both Konover &  Associates  South and Konover &
Associates,  Inc., a $500 million plus real estate company headquartered in West
Hartford,  Connecticut,  will become  Chairman of the Board of the Company  upon
completion of the  transaction.  He will not become an executive  officer of the
Company.

Other

     On January 7, 1998,  the Company  completed the purchase of a 55,909 square
foot shopping center located in Danville, VA. This Food Lion anchored center was
purchased for $3.1 million.

     On March 11, 1998, the Company closed on a $75 million,  15-year  permanent
credit facility  secured by 11 properties  previously  securing its $150 million
revolving  credit  facility.  The loan is at an  effective  rate of 7.73% and is
amortized  on a 338-month  basis.  The  proceeds  were used to pay down  certain
outstandings on the $150 million Nomura credit facility.

     As of March 31, 1998, seven of the nine Kane/Rodwell Centers had closed. An
eighth  center is  expected  to close in second  quarter of 1998.  The ninth and
final  center  will be managed by the  Company and is expected to be acquired in
the year 2000. The loan assumption fee is currently  unreasonable,  however, the
loan is prepayable in the year 2000.
    


                                       42

<PAGE>

Economic Conditions

     Inflation  has  remained  relatively  low during the past three  years with
certain  segments of the economy  experiencing  disinflation,  such as,  apparel
pricing which has slowed the growth of tenant sales which adversely  impacts the
Company's  revenue due to lower percentage and overage rents on some properties.
Additionally, weakness in the overall retail environment as it relates to tenant
sales  volumes may have an impact on the  Company's  ability to renew  leases at
current rental rates or to release space to other tenants.  Although the decline
in sales does not effect base rental,  aside from renewals,  this weakness could
result in reduced revenue from percentage rent tenants, as well as, overage rent
paid to the Company.  Both revenue items are directly  impacted by sales volumes
and represented 5.4% of the Company's total revenue in 1997. Continuance of this
trend may affect the Company's  operating centers (the  "Properties")  occupancy
rate and the rental  rates  obtained  and  concessions,  if any,  granted on new
leases or re-leases of space, which may cause fluctuations in the cash flow from
the  operation  and  performance  of the  Properties.  In the  event  of  higher
inflation,  however,  a  majority  of the  tenants'  leases  contain  provisions
designed to protect the Company from the impact of  inflation.  Such  provisions
include  clauses  enabling the Company to receive  percentage  rentals  based on
tenants' gross sales, which generally increase as prices rise, and/or escalation
clauses,  which generally  increase rental rates during the terms of the leases.
In addition,  many of the leases are for terms of less than ten years, which may
enable the  Company to replace  existing  leases  with new leases at higher base
and/or  percentage  rentals  if rents  of the  existing  leases  are  below  the
then-existing market rate.

     The majority of the Company's leases, other than those for anchors, require
the  tenants  to pay a  proportionate  share of  operating  expenses,  including
marketing,  common area  maintenance,  real estate taxes and insurance,  thereby
reducing the  Company's  exposure to increases in costs and  operating  expenses
resulting from inflation.  The Company's  leases with two of its anchor tenants,
VF Factory Outlet and Carolina Pottery,  which were executed prior to June 1993,
require the tenants to pay certain  operating  expenses and  increases in common
area maintenance expenses,  which reduces the Company's exposure to increases in
costs and operating expenses resulting from inflation. At December 31, 1997, 21%
of the  aggregate  GLA of its factory  outlet  centers was leased to  non-anchor
tenants  under gross  leases,  pursuant to which the Company is obligated to pay
all utilities and other  operating  expenses of the  applicable  factory  outlet
center.  The Properties are subject to operating risks common to commercial real
estate in general, any and all of which may adversely affect occupancy or rental
rates.  The  Properties  are subject to increases in operating  expenses such as
cleaning;  electricity;  heating,  ventilation  and air  conditioning  ("HVAC");
insurance and  administrative  costs;  and other general costs  associated  with
security,  landscaping,  repairs and  maintenance.  While the Company's  tenants
generally are currently  obligated to pay a portion of these  escalating  costs,
there can be no assurance that tenants will agree to pay such costs upon renewal
or that new  tenants  will  agree  to pay  such  costs.  If  operating  expenses
increase,  the local  rental  market may limit the extent to which  rents may be
increased to meet increased expenses without decreasing occupancy rates.

     Additionally, inflation may have a negative impact on some of the Company's
other operating items.  Interest and general and administrative  expenses may be
adversely  affected by inflation as these  specified  costs could  increase at a
rate  higher  than  rents.  Approximately  61% of the  Company's  debt on income
properties and notes payable as of December 31, 1997 bore interest at rates that
adjust periodically based on market conditions. Following the closing of the $75
million  permanent debt facility  described  above,  and the receipt of proceeds
from sale of common shares to PSR, also described above, the Company's  exposure
to floating rate debt will be  significantly  reduced.  Also,  for tenant leases
with stated rent  increases,  inflation may have a negative effect as the stated
rent  increases in these leases could be lower than the increase in inflation at
any given time.

     Substantially  all of the Company's  existing  tenants have met their lease
obligations and the Company continues to attract and retain quality tenants. The
Company intends to reduce  operating and leasing risks by continually  improving
its tenant mix, rental rates and lease terms by attracting creditworthy national
brand-name manufacturers,  upscale,  high-fashion  manufacturers and new tenants
that offer a wide range of merchandise and amenities not previously offered.

Forward-Looking Statements

     Certain  statements  in this Form  10-K and in the  future  filings  by the
Company with the  Securities  and Exchange  Commission,  in the Company's  press
releases,  and in oral  statements made by or with the approval of an authorized
executive officer constitute "forward-looking  statements" under the Reform Act.
Such forward-

                                       43

<PAGE>

looking  statements  involve known and unknown  risks,  uncertainties  and other
factors, which may cause the actual results,  performance or achievements of the
Company to be  materially  different  from any future  results,  performance  or
achievements  expressed  or implied  by such  forward-looking  statements.  Such
factors include,  among others,  the following:  real estate market  conditions;
availability of financing; general economic conditions,  including conditions in
the retail  segments of the economy  such as,  inflation,  consumer  confidence,
unemployment rates and consumer tastes and preferences;  the amount of, and rate
of growth in, the  Company's  ability to reduce,  or limit the increase in, such
expenses,  and the impact of unusual items resulting from the Company's  ongoing
evaluation of its business strategies,  portfolio and organizational  structure;
difficulties  or delays in the completion of expansions of existing  projects or
development of new projects;  and, the effect of competition  from other factory
outlet  centers.  With  respect  to  the  Company's  expansion  and  development
activities  (including the potential  development of a site at Lake Carmel,  New
York),  such  forward  looking  statements  are subject to a number of risks and
uncertainties,  including the  availability of financing on favorable terms, the
consummation  of related  property  acquisitions,  receipt of zoning,  land use,
occupancy,  government  and  other  approvals,  and  the  timely  completion  of
construction and leasing activities.  With respect to the Company's  acquisition
activities),   such  forward  looking   statements  are  subject  to  risks  and
uncertainties,  including  accuracy of  representations  made in connection with
such  acquisitions,  continuation  of  occupancy  levels,  changes  in  economic
conditions (including interest rate levels) and real estate markets.

Item 8 - Financial Statements and Supplementary Data

         The response to this Item is submitted in a  separate  section  of this
report.

Item 9 - Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure

         None.


                                       44
<PAGE>

                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

Directors

<TABLE>
<CAPTION>
              Name            Age            Principal Occupation           Director Since
------------------------------------------------------------------------------------------
<S>                           <C>   <C>                                          <C> 
C. Cammack Morton             46    President and Chief Executive Officer        1996
                                    of the Company

Patrick M. Miniutti           50    Executive Vice President and Chief           1996
                                    Financial Officer of the Company

Robert O. Amick               65    President of The Amick Group                 1993


William D. Eberle             74    Chairman of Manchester                       1997
                                    Associates, LTD.

J. Richard Futrell, Jr.       67    Former Chairman and Chief Executive          1993
                                    Officer of Centura Banks, Inc.

John W. Gildea                54    Managing Director of Gildea Management       1996
                                    Company and Advisor for The Network
                                    Funds

Theodore E. Haigler, Jr.      73    Former President and Chief Executive         1993
                                    Officer of Burroughs-Wellcome Co.
</TABLE>

     For information on the business experience of Messrs.  Morton and Miniutti,
see "Executive Officers."

     Robert O. Amick is the President of The Amick Group, a financial consulting
firm that he founded in 1992.  Mr. Amick served as Vice President and Controller
of J.C.  Penney Co.,  Inc.  from 1982 to 1992 and was a director of J.C.  Penney
Business  Services,  Inc.  from 1985 to 1992.  Mr.  Amick also is a director  of
Protection Mutual Insurance Company and Park P.M. Company.

     William  D.  Eberle,  was a founder of Boise  Cascade  and is  Chairman  of
Manchester  Associates,  Ltd. a venture of capital and international  consulting
firm and Of Counsel to the law firm of Kaye,  Scholer,  Fireman,  Hay & Handler.
Mr. Eberle is also Chairman of the Board of America Service Group Inc., a health
care services company, Showscan Entertainment,  Inc., a movie-based software and
technology company, and Barry's Jewelry,  Inc., a retail jewelry chain, and is a
director of  Ampco-Pittsburgh  Corp.,  a steel  fabrication  equipment  company,
Fiberboard Corporation, a timber manufacturer,  Mitchell Energy and Development,
a  gas  and  oil  company,   and  Mid-States  PLC,  an  auto  parts  distributor
headquartered in Nashville, Tennessee.

     J. Richard Futrell, Jr. is the retired Chairman and Chief Executive Officer
of Centura  Banks,  Inc.,  a position  he held from 1989 to 1993.  He  currently
serves as a member of Centura's board of directors and its executive committee.

     John W. Gildea has been Managing Director of Gildea Management  Company and
affiliates  since  1990.  From 1986 to 1990,  he was Senior  Vice  President  of
Donaldson,  Lufkin & Jenrette Securities  Corporation.  Mr. Gildea also has been
President of Gildea  Investment Co, an investment  advisory firm, since 1983. He
is a director of America Service Group, Inc., UNC, Inc., and Barry's Jewelers.

                                       45

<PAGE>

     Theodore E. Haigler,  Jr. served as the President,  Chief Executive Officer
and  a  director  of  Burroughs-Wellcome  Co.  (now  Glaxo  Wellcome,  Inc.),  a
pharmaceutical  company, from 1986 until his retirement in 1989. Mr. Haigler was
a director of Tenax  Corporation and CCB Financial  Corporation,  a bank holding
company, from 1974 to 1995.

Executive Officers

     The  following  table sets forth  certain  information  with respect to the
current executive officers of the Company.

Name                       Age    Position
--------------------------------------------------------------------------------
C. Cammack Morton          46     President and Chief Executive Officer

Patrick M. Miniutti        50     Executive Vice President and Chief Financial
                                  Officer

William H. Neville         53     Executive Vice President and Chief Operating
                                  Officer

Christopher G. Gavrelis    44     Executive  Vice President - Management

Connell L. Radcliff        43     Senior Vice President - Development

Linda M. Swearingen        33     Senior Vice President - Finance/ Investor
                                  Relations

Sona A. Thorburn           32     Vice President and Chief Accounting Officer

     C. Cammack  Morton joined the Company in December  1995 as Chief  Operating
Officer and was elected  President  and a Director  in January  1996.  Effective
January 1, 1997, Mr. Morton became the Company's Chief Executive Officer.  Prior
to his affiliation with the Company,  Mr. Morton served as the Managing Director
of Rothschild  Realty,  Inc.  ("Rothschild")  and President and Chief  Executive
Officer of the Charter Oak Group,  Ltd. (the "Charter Oak Group"),  a subsidiary
of  Rothschild  engaged in the  development  and  management  of factory  outlet
centers. He joined Rothschild in 1987 as Vice President,  was promoted to Senior
Vice  President  in 1989 and to Managing  Director in 1991.  To resolve  certain
personal  financial  matters arising out of a limited partner  obligation to the
general  partner of a real estate  partnership,  Mr. Morton filed a petition for
relief  under  Chapter 11 of the United  States  Bankruptcy  Code in March 1994.
After settling with the general  partner,  the bankruptcy  case was dismissed in
June 1994.

     Patrick M. Miniutti joined the Company as Executive Vice  President,  Chief
Financial Officer and Director in August 1996. Prior to his affiliation with the
Company, Mr. Miniutti served for three years as Executive Vice President,  Chief
Financial Officer and Trustee of Crown American Realty Trust, a public REIT that
owns regional shopping malls. Prior thereto,  Mr. Miniutti held senior financial
positions  for a  combined  12 years with New Market  Companies,  Inc.,  Western
Development  Corporation  (predecessor  to The Mills  Corporation)  and Cadillac
Fairview  Corporation  Limited,  which  was  preceded  by ten  years  in  public
accounting,  principally  with national  firms.  Mr. Miniutti is a member of the
American  Institute of Certified  Public  Accountants and a former member of its
Real Estate Accounting Committee, which was responsible for promulgating most of
the real estate accounting rules in practice today.

     William  H.  Neville,  has served as  Executive  Vice  President  and Chief
Operating Officer since September 1997. Before joining the Company,  Mr. Neville
was Regional  President of Horizon Group Realty, a real estate  investment trust
specializing in outlet centers, from January 1996 to July 1997. Prior to joining
Horizon,  Mr.  Neville was  President of Charter Oak  Partners a  subsidiary  of
Rothschild,  the largest  privately  held developer of outlet  centers.  He also
served as Executive Vice  President and early in the Company's  history was Vice
President of leasing. Mr. Neville spent nearly ten years at The Rouse Company, a
mall developer, most

                                       46

<PAGE>

notably as the first Vice  President,  General  Manager of South Street Seaport.
During his shopping center career, he also served as a Vice President of leasing
at L. J. Hooker Corporation, a mall developer.

     Christopher G. Gavrelis  joined the Company in December 1995. Mr.  Gavrelis
was named Senior Vice  President in January 1996 and promoted to Executive  Vice
President  in January  1998.  Prior to his  affiliation  with the  Company,  Mr.
Gavrelis was Vice  President - Property  Management of the Charter Oak Group for
approximately  four years.  From 1989 to 1991, Mr.  Gavrelis  served as regional
property manager for McArthur/Glen Realty Corporation (now HGI Realty,  Inc.), a
company engaged in the development and operation of factory outlet centers. From
1986 to 1989, Mr. Gaverlis  worked for May Centers,  Inc. as General Manager and
later as  Development  Director for a super  regional mall located in Annapolis,
Maryland.  He started his career in 1978 with Developers General Corporation,  a
Baltimore,  Maryland firm engaged in commercial and residential real estate. Mr.
Gavrelis  is  responsible  for  the  Company's   management  and  administration
activities.

     Connell L.  Radcliff  has served as Senior Vice  President  of  Development
since its organization in April 1993. Mr. Radcliff joined North-South Management
Corporation  (a predecessor  company) as Vice President - Leasing in 1989.  From
1987 to 1989, Mr.  Radcliff was a partner with The Shopping Center Group, a real
estate brokerage firm specializing in national tenant  representation.  Prior to
his duties  there,  Mr.  Radcliff was with New Market  Development  (now Cousins
Market Centers) as regional  leasing  director.  Mr. Radcliff is responsible for
the Company's development activities.

     Linda M.  Swearingen  was  promoted  from Vice  President  to  Senior  Vice
President of  Finance/Investor  Relations in January 1998.  Prior to being named
Vice  President  in May 1996,  Ms.  Swearingen  was  Director of Leasing for the
Company,  a  position  she had held  since  July  1993.  From 1990 to 1993,  Ms.
Swearingen  served as Assistant Vice President - Commercial Real Estate for Bank
One Dayton.

     Sona A. Thorburn has served as Vice President and Chief Accounting  Officer
since joining the Company in 1997.  Prior to joining the Company,  Ms.  Thorburn
was a  manager  with the  accounting  firm of Ernst & Young  LLP,  where she was
employed for eight years. At Ernst & Young, Ms. Thorburn supervised audits for a
variety of clients, including the Company.

Compliance With Section 16 of the Securities Exchange Act of 1934

     Section  16(a)  of the  Exchange  Act  requires  the  Company's  directors,
executive  officers  and owners of more than 10% of the  Company's  Common Stock
("10%  beneficial  owners") to file with the Securities and Exchange  Commission
(the "SEC") and the New York Stock  Exchange  initial  reports of ownership  and
reports of changes in ownership of Common Stock and other equity  securities  of
the  Company.  Executive  officers,  directors  and 10%  beneficial  owners  are
required by SEC regulations to furnish the Company with copies of all forms they
file pursuant to Section 16(a). To the Company's knowledge,  based solely on the
information  furnished to the Company and written  representations that no other
reports were required,  during the fiscal year ended December 31, 1997, all such
filing  requirements  were complied  with,  except that the exchange of unvested
shares of  Restricted  Stock for  Repurchase  Options  described  at  "Executive
Compensation - Executive  Compensation  Committee Report - Restricted Stock" was
reported late by Messrs. Morton, Miniutti,  Neville,  Gavrelis, and Radcliff and
Ms. Thorburn.

Item 11. Executive Compensation

     The  following  table sets forth the  compensation  of the Chief  Executive
Officer and the four most highly  compensated  executive officers other than the
Chief Executive  Officer who were serving as executive  officers at December 31,
1997 (collectively, the Named Executive Officers).


                                       47
<PAGE>

                           Summary Compensation Table
<TABLE>
<CAPTION>
                                                                                                            
                                                       Annual                         Long-Term             
                                                    Compensation                 Compensation  Awards       
                                            ----------------------------------------------------------------

                                                                             Restricted         Securities          All Other
                                                 Salary          Bonus          Stock           Underlying        Compensation
Name and Principal Position         Year           ($)            ($)         Awards($)       Options(#)(10)          ($)
---------------------------         ----         ------           ---         ---------       --------------          ---

<S>                                 <C>         <C>             <C>          <C>                <C>                <C>
C. Cammack Morton                   1997          336,072           (4)        670,538(5)              (11)        33,467(12)
   President and Chief Executive    1996          287,692           (4)      1,019,250(5)       300,000(11)         3,570(13)
     Officer                        1995        11,458(1)            --                --                --            --

Patrick M. Miniutti                 1997          230,871           (4)        346,726(6)              (11)        19,000(12)
   Executive Vice President and     1996        70,769(2)           (4)        819,313(6)       200,000(11)        50,000(13)
     Chief Financial Officer                           --            --                --                --            --

William H. Neville                  1997        65,059(3)           (4)        205,800(7)            50,000            --
   Executive Vice President and     1996               --            --                --                --            --
     Chief Operating Officer        1995               --            --                --                --            --

Christopher G. Gavrelis             1997          160,962           (4)         94,163                 (11)        11,915(12)
   Executive Vice President -       1996          129,742           (4)        214,750(8)        35,000(11)         1,163(13)
     Management                     1995         5,208(1)            --                --                --            --

Connell L. Radcliff                 1997          185,555           (4)        101,138(9)                --        13,712(12)
   Senior Vice President -          1996          181,923           (4)         39,750(9)                --         3,750(13)
     Development                    1995          158,654        41,250               --             18,000         3,332(14)
</TABLE>

(1)  Messrs.  Morton and  Gavrelis  joined the  Company  in  December  1995 and,
     therefore, their salary for 1995 represents only a portion of the year.

(2)  Mr. Miniutti joined the Company in August 1996 and,  therefore,  his salary
     for 1996 represents only a portion of the year.

(3)  Mr.  Neville  joined the Company in  September,  1997 and,  therefore,  his
     salary for 1997 represents only a portion of the year.

(4)  Bonuses for all of the  officers of the Company for 1997 and 1996 were paid
     in the form of shares of restricted  Common Stock  ("Restricted  Stock") or
     options to purchase  Restricted  Stock based on the market  price of Common
     Stock  on the last day of the  applicable  calendar  year.  The  shares  of
     Restricted  Stock paid as bonuses vest all at once ("cliff  vesting") after
     three years. In consideration of the three-year vesting period,  Restricted
     Stock bonus amounts are set at 150% of an equivalent cash bonus  determined
     under the  Company's  MBO Plan.  See  "--Executive  Compensation  Committee
     Report."

(5)  Mr.  Morton  receives a portion of his base  annual  salary,  his  periodic
     increases  in base  annual  salary,  his  annual  bonus  and his  long-term
     incentive  compensation  in the  form of  Restricted  Stock or  options  to
     purchase Restricted Stock, as follows:

     (a)  30,000  shares,  with a value of $198,750  ($6.625  per  share),  were
          granted on March 1, 1997, subject to a one-year cliff vest, as part of
          Mr. Morton's base annual salary;

     (b)  6,000 shares, with a value of $39,750 ($6.625 per share), were granted
          on March 1, 1997,  subject to a three-year  cliff vest, as an increase
          in Mr. Morton's base annual salary;

     (c)  An option to purchase  48,500 shares,  with a value of $338,288 ($7.75
          per share) net of a 10% exercise price, was granted as of December 31,
          1997, subject to a three-year cliff vest, as Mr. Morton's 1997 bonus;

     (d)  18,000  shares,  with a value of $119,250  ($6.625  per  share),  were
          granted as of December 31, 1996,  subject to a three-year  cliff vest,
          as Mr. Morton's 1996 bonus;

     (e)  90,000  shares,  with a value of $900,000  ($10.00  per  share),  were
          granted in 1996 to Mr.  Morton as  long-term  incentive  compensation.
          These  shares were  replaced  with a grant of 150,000  shares,  with a
          value  of  $993,750  ($6.625  per  share),  on March  1,  1997.  These
          restricted shares vest in ten equal  installments  commencing March 1,
          1997.

     (f)  On November  11, 1997,  Mr.  Morton was awarded an  additional  21,000
          shares of  Restricted  Stock,  and each  unvested  share of Restricted
          Stock  then  owned  by Mr.  Morton  was  exchanged  for an  option  to
          repurchase a share of Restricted  Stock at an exercise price of 10% of
          the fair market  value of a share of Common  Stock on the date awarded
          (the Repurchase  Options).  The additional 21,000 shares of Restricted
          Stock were  awarded so that,  after  taking into  account the exercise
          price of the Repurchase Options, the value of such options would equal
          the value of Mr.  Morton's  unvested  Restricted  Shares  prior to the
          exchange. See -- Executive



                                       48
<PAGE>

          Compensation Committee Report, "Restricted Stock."

          During 1997 the Company  repurchased,  pursuant to  provisions  in its
          1996 Restricted  Stock Plan (the "Restricted  Plan"),  7,500 shares of
          Restricted Stock to cover the income tax liability on Restricted Stock
          that vested in 1997. At December 31, 1997, the aggregate number of Mr.
          Morton's shares of Restricted  Stock and shares issuable upon exercise
          of his  Repurchase  Options  was  266,000  with a value of  $1,860,788
          ($7.75 per share) net of the cost to  exercise.  Dividends or dividend
          equivalents are payable on such Restricted Stock and shares underlying
          such Repurchase  Options with the exception of the unvested portion of
          the 150,000 Repurchase Options granted as long-term compensation.

(6)  Mr.  Miniutti  receives a portion of his base annual  salary,  his periodic
     increases  in base  annual  salary,  his  annual  bonus  and his  long-term
     incentive  compensation  in the  form of  Restricted  Stock or  options  to
     repurchase restricted stock, as follows:

     (a)  15,000  shares,  with a value of  $99,375  ($6.625  per  share),  were
          granted on March 1, 1997, subject to a one-year cliff vest, as part of
          Mr. Miniutti's base annual salary;

     (b)  4,500 shares, with a value of $29,813 ($6.625 per share), were granted
          on March 1, 1997,  subject to a three-year  cliff vest, as an increase
          in Mr. Miniutti's base annual salary;

     (c)  An option to purchase  28,500 shares,  with a value of $198,788 ($7.75
          per share) net of a 10% exercise price, was granted as of December 31,
          1997,  subject to a  three-year  cliff vest,  as Mr.  Miniutti's  1997
          bonus;

     (d)  6,500 shares, with a value of $43,063 ($6.625 per share), were granted
          as of December 31, 1996,  subject to a three-year  cliff vest,  as Mr.
          Miniutti's 1996 bonus;

     (e)  90,000  shares,  with a value of $776,250  ($8.625  per  share),  were
          granted in 1996 to Mr. Miniutti as long-term  incentive  compensation.
          These  shares were  replaced  with a grant of 120,000  shares,  with a
          value  of  $795,000  ($6.625  per  share),  on March  1,  1997.  These
          restricted shares vest in ten equal  installments  commencing March 1,
          1997.

     (f)  On November 11, 1997,  Mr.  Miniutti was awarded an additional  15,000
          shares of  Restricted  Stock,  and each  unvested  share of Restricted
          Stock  then  owned by Mr.  Miniutti  was  exchanged  for a  Repurchase
          Option.  The additional 15,000 shares of Restricted Stock were awarded
          so  that,  after  taking  into  account  the  exercise  price  of  the
          Repurchase Options, the value of such options would equal the value of
          Mr. Morton's unvested Restricted Shares prior to the exchange.  See --
          Executive Compensation Committee Report, "Restricted Stock."

     During 1997 the Company repurchased, pursuant to its Restricted Plan, 6,000
     shares of Restricted  Stock to cover the income tax liability on Restricted
     Stock that vested in 1997. At December 31, 1997,  the  aggregate  number of
     Mr. Miniutti's shares of Restricted Stock and shares issuable upon exercise
     of his Repurchase Options was 183,500 with a value of $1,283,788 ($7.75 per
     share) net of the cost to exercise.  Dividends or dividend  equivalents are
     payable on such  Restricted  Stock and shares  underlying  such  Repurchase
     Options  with  the  exception  of  the  unvested  portion  of  the  120,000
     Repurchase Options granted as long-term compensation.

(7)  Mr.  Neville  receives  his  annual  bonus  and  his  long-term   incentive
     compensation  in the form of  restricted  stock or an  option  to  purchase
     restricted stock, as follows:

     (a)  An option to purchase 8,000 shares, with a value of $55,800 ($7.75 per
          share) net of a 10%  exercise  price,  was granted as of December  31,
          1997,   subject  to  a  three-year   cliff  vest,  as  Mr.   Neville's
          proportionate 1997 bonus;

     (b)  20,000  shares,  with a value of  $150,000  ($7.50  per  share),  were
          granted on  September 8, 1997 to Mr.  Neville as  long-term  incentive
          compensation. These restricted shares vest in three equal installments
          commencing March 1, 1998.

     (C)  On November  11, 1997,  Mr.  Neville was awarded an  additional  2,250
          shares of  Restricted  Stock,  and each  unvested  share of Restricted
          Stock then owned by Mr. Neville was exchanged for a Repurchase Option.
          The additional  2,250 shares of Restricted Stock were awarded so that,
          after  taking  into  account  the  exercise  price  of the  Repurchase
          Options,  the  value of such  options  would  equal  the  value of Mr.
          Neville's  unvested  Restricted  Shares prior to the exchange.  See --
          Executive Compensation Committee Report, "Restricted Stock."

     At December 31, 1997,  the aggregate  number of shares of Restricted  Stock
     issuable upon exercise of Mr. Neville's  Repurchase Options was 30,250 with
     a value of $211,550 ($7.75 per share) net of the cost to exercise. Dividend
     equivalents  are  payable on all of the  shares  underlying  Mr.  Neville's
     Repurchase Options.

(8)  Mr.  Gavrelis  receives  his  annual  bonus  and  his  long-term  incentive
     compensation  in the  form of  Restricted  Stock  or  options  to  purchase
     Restricted Stock, as follows:

     (a)  An option to purchase  13,500  shares,  with a value of $94,163 ($7.75
          per share) net of a 10% exercise price, was granted as of December 31,
          1997,  subject to a  three-year  cliff vest,  as Mr.  Gavrelis's  1997
          bonus;

                                       49

<PAGE>

     (b)  6,000 shares, with a value of $39,750 ($6.625 per share), were granted
          as of December 31, 1996,  subject to a three-year  cliff vest,  as Mr.
          Gavrelis's 1996 bonus;

     (c)  16,667  shares,  with a value of $175,000  ($10.50  per  share),  were
          granted on February 28, 1996 to Mr.  Gavrelis as  long-term  incentive
          compensation. These restricted shares vest in three equal installments
          commencing January 1, 1997.

     (d)  On November 11, 1997,  Mr.  Gavrelis was awarded an  additional  1,350
          shares of  Restricted  Stock,  and each  unvested  share of Restricted
          Stock then owned by Mr. Gavrelis was exchanged for Repurchase Options.
          The additional  1,350 shares of Restricted Stock were awarded so that,
          after  taking  into  account  the  exercise  price  of the  Repurchase
          Options,  the  value of such  options  would  equal  the  value of Mr.
          Gavrelis's  unvested  Restricted Shares prior to the exchange.  See --
          Executive Compensation Committee Report, "Restricted Stock."

     During  1997  the  Company  repurchased,  pursuant  to  provisions  in  its
     Restricted  Plan,  2,778 shares of Restricted Stock to cover the income tax
     liability on  Restricted  Stock that vested in 1997.  At December 31, 1997,
     the  aggregate  number of Mr.  Gavrelis's  shares of  Restricted  Stock and
     shares issuable upon exercise of Repurchase Options was 34,739 with a value
     of $249,086  ($7.75 per share) net of the cost to  exercise.  Dividends  or
     dividend  equivalents are payable on all of such  Restricted  Stock and the
     shares underlying Mr. Gavrelis's Repurchase Options.

(9)  Mr. Radcliff  received his annual bonus in the form of Restricted  Stock or
     an option to purchase Restricted Stock, as follows:

     (a)  An option to purchase  14,500 shares,  with a value of $101,138 ($7.75
          per share),  was granted as of December 31, 1997 net of a 10% exercise
          price,  subject to a three-year  cliff vest,  as Mr.  Radcliff's  1997
          bonus;

     (b)  6,000 shares, with a value of $39,750 ($6.625 per share), were granted
          as of December 31, 1996,  subject to a three-year  cliff vest,  as Mr.
          Radcliff's 1996 bonus.

     (C)  On November  11, 1997,  Mr.  Radcliff  was awarded an  additional  700
          shares of  Restricted  Stock,  and each  unvested  share of Restricted
          Stock then owned by Mr. Radcliff was exchanged for Repurchase Options.
          The  additional  700 shares of Restricted  Stock were awarded so that,
          after  taking  into  account  the  exercise  price  of the  Repurchase
          Options,  the  value of such  options  would  equal  the  value of Mr.
          Radcliff's  unvested  Restricted Shares prior to the exchange.  See --
          Executive  Compensation  Committee  Report,   "Restricted  Stock."

     At December 31, 1997,  the aggregate  number of shares of Restricted  Stock
     issuable upon exercise of Mr. Radcliff's Repurchase Options was 21,200 with
     a value of $148,038 ($7.75 per share) net of the cost to exercise. Dividend
     equivalents  are  payable on all of the shares  underlying  Mr.  Radcliff's
     Repurchase Options.

(10) Excludes options to purchase shares of Restricted Stock, which options have
     an exercise  price equal to 10% of a share's  fair market value on the date
     of grant.  Such options are reported  under the  "Restricted  Stock Awards"
     column of the Summary Compensation Table.

(11) Stock options granted in 1996 were canceled in 1997 and new options for the
     same number of shares were issued in 1997.  See  "--Executive  Compensation
     Committee   Report--Report   on  Repricing   of  Options"  for   additional
     information.

(12) In  1997  Messrs.   Morton,   Miniutti,   Gavrelis  and  Radcliff  received
     distributions from the cancellation of a Split Dollar Insurance Plan in the
     amounts of $29,746, $15,000, $10,000 and $10,000,  respectively, as well as
     matching  contributions to the Company's 401(k) Retirement and Savings Plan
     of $3,721, $4,000, $1,915 and $3,712, respectively.

(13) In  1996  Messrs.   Morton,   Gavrelis  and  Radcliff   received   matching
     contributions  to the  Company's  401(k)  Retirement  and  Savings  Plan of
     $3,570, $1,163 and $3,750, respectively. In addition, in 1996, Mr. Miniutti
     received an allowance for relocation expenses of $50,000.

(14) In 1995 Mr.  Radcliff  received  matching  contributions  to the  Company's
     401(k) Retirement and Savings Plan of $3,332.


                                       50

<PAGE>

     The  following  table  provides  information  regarding  the stock  options
granted during 1997 to the Named Executive Officers:

                      Option Grants in Last Fiscal Year(1)

<TABLE>
<CAPTION>
                                                          Individual Grants
-------------------------------------------------------------------------------------------------------------------------------
                                Number of                                                              Potential Realizable
                               Securities        Percent of Total                                         Value at Assumed
                               Underlying        Options Granted                                       Annual Rates of Stock
                                 Options           to Employees       Exercise                         Price Appreciation for
                                 Granted          in Fiscal Year       Price         Expiration          Option Term ($)(2)
                                                                                                         ------------------
          Name                     (#)                 (%)              ($)             Date            5%($)            10%($)

<S>                            <C>                     <C>             <C>             <C>           <C>              <C>      
C. Cammack Morton              300,000(3)              46.5            $5.625          4/1/07        1,061,260        2,689,44,

Patrick M. Miniutti            200,000(4)              31.0            $5.625          4/1/07          707,506        1,792,960

William H. Neville              50,000(5)               7.8            $7.50           9/7/07          235,835          597,653

Christopher G. Gavrelis         35,000(4)               5.4            $5.625          4/1/07          123,814          313,768
</TABLE>

(1)  Excludes Repurchase Options,  which options have an exercise price equal to
     10% of a share's fair market  value on the date of grant.  Such options are
     reported  under  the  "Restricted  Stock  Awards"  column  of  the  Summary
     Compensation Table.

(2)  In accordance with SEC rules, these columns show gains that might exist for
     the respective  options,  assuming the market price of the Company's Common
     Stock  appreciates  from the date of grant  over a period  of ten  years at
     annualized rates of five and ten percent,  respectively.  The actual value,
     if any, on stock option exercises will depend on the future  performance of
     the  Company?s  Common  Stock,  as well  as the  option  holders  continued
     employment through the four-year vesting period.  There can be no assurance
     that the value, if any,  ultimately realized by the executive will be at or
     near the values shown above.

(3)  100,000 option shares vested upon grant with the remainder at 25% per year.
     These stock options  represent the  replacement  of option shares issued in
     1996 and canceled in 1997. See "-- Executive  Compensation Committee Report
     -- Report on Repricing of Options" for additional information.

(4)  20% vested  upon  grant with the  remainder  at 25% per year.  These  stock
     options  represent  the  replacement  of option  shares  issued in 1996 and
     canceled in 1997. See ""-- Executive Compensation Committee  Report--Report
     on Repricing of Options" for additional information.

     The following table sets forth certain information concerning the number of
shares of Common Stock  underlying  options held by each of the Named  Executive
Officers and the value of such options at December 31, 1997:

                        Fiscal Year-End Option Values(1)

                                   Number of              Value of Unexercised
                             Securities Underlying            In-the-money
                              Unexercised Options              Options at
                                   at Fiscal                Fiscal Year-End
                                  Year-End (#)                    ($)

                                  Exercisable/                Exercisable/
Name                           Unexercisable (2)           Unexercisable (3)
----                           -----------------           -----------------

C. Cammack Morton               100,000/200,000             212,500/425,000

Patrick Miniutti                 40,000/160,000              85,000/340,000

William H. Neville                10,000/40,000                2,500/10,000

Christopher G. Gavrelis            7,000/28,000              14,875/59,500

Connell L. Radcliff              43,400/19,850                   --/--


                                       51

<PAGE>

(1)  Excludes Repurchase Options,  which options have an exercise price equal to
     10% of a share's fair market  value on the date of grant.  Such options are
     reported  under  the  "Restricted  Stock  Awards"  column  of  the  Summary
     Compensation Table.

(2)  Future  exercisability  is subject to vesting  and the  optionee  remaining
     employed by the Company.

(3)  Value is calculated by subtracting  the exercise price from the fair market
     value of the  securities  underlying  the  option  at fiscal  year-end  and
     multiplying  the results by the number of  in-the-money  options held. Fair
     market  value was based on  closing  market  price of the  Common  Stock at
     December 31, 1997 ($7.75).

Employment Agreements

     Annual  Compensation  and Basic Terms. The Company is a party to employment
agreements with Messrs. Morton,  Miniutti,  Gavrelis and Neville. The agreements
with Messrs.  Morton,  Miniutti and Neville currently  continue through February
29, 2001. The term is automatically  extended for an additional year on March 1,
1999 and each year thereafter, subject to the right of either party to terminate
as of the end of the  then-existing  three-year term by giving written notice at
least 30 days before the March 1 extension date. The agreement with Mr. Gavrelis
continues  through  March  1,  1999.  If  the  employment  of any  executive  is
terminated due to the change of control of the Company,  an additional two years
will be added to the unexpired  term of the respective  agreements.  Pursuant to
their  respective  agreements,  each  executive is required to devote his entire
business time to the Company and is prohibited  from  competing with the Company
for a period of one year following  termination  of  employment.  The employment
agreements  provide  for base annual cash  salaries  as  follows:  Mr.  Morton -
$330,000;  Mr. Miniutti - $225,000;  Mr. Neville - $225,000;  and Mr. Gavrelis -
$170,000.  In addition,  Messrs. Morton and Miniutti receive Restricted Stock as
part of their base annual  compensation,  based on an  equivalent  cash value of
approximately  $200,000 and  $100,000,  respectively.  The number of  restricted
shares  issued  annually  is  adjusted  on March 1st of each  year  based on the
previous year-end market price of the stock. Such Restricted Stock is subject to
a one-year  cliff  vest.  The base  annual  salaries  are  subject  to  periodic
increases based upon the  performance of the Company and the executive.  Messrs.
Morton and  Miniutti  each agreed to take the raises in their base  salaries for
1997 in the form of  Restricted  Stock,  which is subject to a three-year  cliff
vest,  in the  amounts  of 6,000  shares  and  4,500  shares,  respectively.  In
addition,  they have agreed to take all future  raises in the form of Restricted
Stock subject to similar vesting provisions.  If the employment of any executive
is terminated  without  cause (as defined in the  respective  agreements),  such
executive  will be entitled to the greater of (i) the base salary payable to the
executive for the remainder of the then existing  employment  term or one year's
base salary,  (ii) in the case of Messrs.  Morton,  Miniutti  and  Neville,  the
product of the number of years  representing the unexpired term of the agreement
and an amount equal to the average bonus paid to such  executive  over the three
years immediately prior to termination,  and in the case of Mr. Gavrelis,  a pro
rata portion of any  incentive  compensation  or bonus  payable for the years of
termination and (iii) certain other accrued benefits.

     Long-Term  Compensation.  As of  March  1,  1997,  in  recognition  of  the
increases in their  responsibilities  and after consultation with an independent
executive  compensation  consultant,  the  Independent  Directors  replaced  the
previous  long-term  incentive plan awards of 90,000 shares of Restricted  Stock
for  Messrs.  Morton and  Miniutti  with  grants of 150,000  shares and  120,000
shares,  respectively.  These grants were issued  pursuant to the Company's 1996
Restricted  Stock  Plan.  These  restricted  shares  vest  in ten  equal  annual
installments  commencing on March 1, 1997,  provided each executive continues to
be employed by the Company.  If the Company (i) does not extend the  executive's
employment  agreement beyond its initial three-year term; or (ii) terminates the
executive without cause (as defined in their respective  employment  agreements)
all unvested shares of restricted stock will become fully vested. The executives
will be entitled to receive dividends on only the vested shares. Mr. Neville was
awarded  20,000  shares of Restricted  Stock,  which vests in three equal annual
installments  commencing March 1, 1998,  provided he continues to be employed by
the Company.  Mr. Gavrelis was awarded 16,667 shares of Restricted Stock,  which
vest in three equal annual  installments  commencing December 14, 1996, provided
that he continues to be employed by the Company.

     In  addition,  the  employment  agreements  for Messrs.  Morton,  Miniutti,
Neville  and  Gavrelis  provide  for the grant of options to  purchase  300,000,
200,000, 50,000 and 35,000 shares of Common Stock, respectively. For information
regarding such options,  see the table  captioned  "Option Grants in Last Fiscal
Year" above and "-- Executive Compensation Committee Report--Report on Repricing
of Options" below.


                                       52

<PAGE>

Change in Control Arrangements

     Under the  employment  agreements,  termination  without cause includes any
termination  resulting from a change in control of the Company.  The term change
in control  generally is defined under the employment  agreements to include the
first to occur of the following: (i) any person or group owns or controls 50% or
more of the  outstanding  Common Stock,  (ii) any person or group who owned less
than 5% of the outstanding Common Stock on the date of the agreement owns 20% or
more of the  outstanding  Common Stock or (iii) the  stockholders of the Company
approve a business  combination that will result in a change in ownership of 20%
or more of the  outstanding  Common  Stock.  Upon the  occurrence of a change in
control of the Company, all non-vested  Restricted Stock will become immediately
vested.

     In addition,  upon the occurrence of a change in control of the Company (as
defined in the Stock  Incentive  Plan),  all  non-vested  stock options  granted
thereunder become  immediately vested and exercisable in full. Change in control
generally is defined under the Stock Incentive Plan to occur at such time as any
person or group beneficially owns at least 25% of the outstanding Common Stock.

     Each of the five executive officers who have employment agreements with the
Company have entered into waivers  providing that the Lazard  Investment and the
Konover  Transaction  will not trigger  any  obligation  under their  employment
agreements except to the extent that such transactions  automatically extend the
term of their employment agreements.

Executive Compensation Committee Report

     Executive  Officer  Compensation  Policies.  The  goals  of  the  Executive
Compensation Committee (the "Committee") with respect to the compensation of the
Company's executive officers are to (i) provide a competitive total compensation
package  that  enables the Company to attract and retain  qualified  executives,
(ii)  align the  compensation  of such  executives  with the  Company's  overall
business  strategies and (iii) provide each executive officer with a significant
equity  stake  in the  Company,  which  serves  to align  compensation  with the
interests of  stockholders.  To this end,  the  Committee  determines  executive
compensation  consistent  with a philosophy of compensating  executive  officers
based on their  responsibilities  and the  Company's  performance  in  attaining
financial and non-financial objectives.

           The  primary  components  of  the  Company's  executive  compensation
program are: (i) base salaries,  (ii)  performance-based  annual bonuses,  (iii)
stock  options  and (iv)  restricted  stock.  The more senior the  position  the
greater  the  compensation  that  varies  with  performance  and the greater the
portion that is in the form of options or restricted stock.

     Base Salaries. Base salaries for the Company?s Named Executive Officers, as
well as changes in such salaries,  are based upon  recommendations  of the Chief
Executive  Officer,  taking into account such  factors as  competitive  industry
salaries;  a  subjective   assessment  of  the  nature  of  the  position;   the
contribution  and  experience  of the officer;  and the length of the  officer's
service.  Under the Chief  Executive  Officer's  direction,  the Chief Operating
Officer  reviews  all  salary  recommendations  with the  Committee,  which then
approves  or  disapproves  such  recommendations.  The Chief  Executive  Officer
reviews any salary  recommendations  for the Chief  Operating  Officer  with the
Committee.   The  Committee  has  engaged  a  national  executive   compensation
consultant for the purpose of obtaining  comparative  information  and advice on
each of the components of executive  compensation.  The Committee  believes that
the majority of the Company's  executive officers are at or near the average for
base salaries and total compensation as compared to that of the Company's peers.
The Committee would like to increase base salaries to the 75th percentile  level
in the future. See Employment Agreements - Annual Compensation and Basic Terms.

     Bonuses.  Annual  bonuses are  determined  under a Management By Objectives
(MBO) plan based on Company and individual  performance.  The weighting  between
Company  performance  and  individual  performance is determined on the basis of
position  and  responsibilities.  Performance  targets are  determined  for both
Company  performance  and  individual  performance.  Achieving the targets would
ordinarily result in bonuses ranging from 5% to 60% of base salary, with maximum
bonuses  ranging  from 10% to 70% of base  salary for  performance  achievements
greater  than the  targets.  All  officers of the Company  receive 100% of their
bonus  in the  form  of  restricted  stock  with a  three-year  cliff  vest.  In
consideration  therefor, each officer receives shares equal to 150% of the value
of the  appropriate  cash bonus;  the number of shares is  determined  using the
total bonus amount divided by the stock price at the day of issuance.


                                       53

<PAGE>

     Stock Options.  The Company  established  an Employee Stock  Incentive Plan
("The Stock  Incentive Plan) in 1993 for the purpose of attracting and retaining
the Company's  executive  officers and other  employees.  A maximum of 1,100,000
shares of Common  Stock are  currently  reserved  for  issuance  under the Stock
Incentive Plan (see "Proposal  Five" below relating to the proposed  increase to
2,800,000  shares).  The Stock  Incentive Plan allows for the grant of incentive
and nonqualified  options (within the meaning of the Internal Revenue Code) that
are exercisable at a price equal to the closing price of the Common Stock on the
New York Stock  Exchange on the trading day  immediately  preceding  the date of
grant. All of the Company's  executive  officers are eligible to receive options
to purchase  shares of Common Stock granted under the Stock  Incentive Plan. The
Committee  believes that stock option grants are a valuable  motivating tool and
provide a long-term  incentive to  management.  The Committee also believes that
issuing  stock  options to executives  benefits the  Company's  stockholders  by
encouraging  executives to own the  Company's  stock,  thus  aligning  executive
compensation with stockholder interests. Options for 645,000 shares were granted
during 1997. (See Option Grants in Last Fiscal Year" above.)

     Restricted  Stock.  The Company  established  a restricted  stock plan (the
"Restricted  Plan")  in 1996,  reserving  350,000  shares  of  Common  Stock for
issuance  thereunder,  to give  the  Committee  more  flexibility  in  designing
equity-based   compensation   arrangements  to  attract,   motivate  and  retain
executives and other key employees.  Such equity-based  compensation is designed
to align more closely the  financial  interests of  management  with that of the
stockholders.  In 1998 and  1997,  the  Company  reserved  in the  aggregate  an
additional  1,150,000  shares of Common Stock for issuance  under the Restricted
Plan. The Restricted Plan, which is administered by the Committee,  provides for
the grant of  restricted  stock  awards to any new or  existing  employee of the
Company,   including  executive  officers.  Awards  under  the  Restricted  Plan
typically will be subject to various vesting  schedules  ranging from one to ten
years from the date of grant.  The  Restricted  Plan  permits the  Committee  to
customize the vesting schedule by deferring the commencement  date,  lengthening
the vesting period and/or conditioning vesting upon the achievement of specified
performance goals. During 1997, the Company granted 248,752 shares of Restricted
Stock, net of replacement shares, to officers and other key employees.

     In 1997, the Company amended the Restricted Plan so that officers would not
have to sell their  shares of  Restricted  Stock to meet  their tax  obligations
incurred upon the vesting of such shares. The amendment provides that Restricted
Stock may be awarded to certain  officers  in the form of an option to  purchase
Restricted  Stock at 10% of the market  price of the Common Stock on the date of
grant of the option.  Under the Restricted Plan all of the officers'  previously
unvested  shares of Restricted  Stock as of November 11, 1997 were replaced with
options to purchase such shares.  The options vest on the same  schedules as the
shares of  Restricted  Stock  that they  replaced.  Under the  Restricted  Plan,
holders of options to  purchase  Restricted  Stock will also be entitled to cash
payments  equal to the value of the  dividends  that would have been paid on the
shares  underlying such options.  The executives may exercise the options at any
time after  vesting and within 15 years of the date of grant.  All future grants
to  officers  under  the  Restricted  Plan  will be in the form of an  option to
purchase Restricted Stock.

     Chief Executive Officer's  Compensation.  C. Cammack Morton's  compensation
for 1997 as the Company's  President and Chief Executive Officer consisted of an
annual base cash salary of $330,000,  which is subject to periodic  increases in
the form of  Restricted  Stock,  subject  to  three-year  cliff  vesting,  to be
determined by the Committee in its discretion  based upon (i) a qualitative  and
quantitative  review of the performance of the Company (including  consideration
of  factors  such  as  funds  from  operations)  and Mr.  Morton  and  (ii)  the
compensation of executives with similar  responsibilities  employed by companies
similar in size and generally  considered  to be comparable to the Company.  Mr.
Morton has agreed to take such  raises.  In  addition,  Mr.  Morton was  granted
36,000  shares  of  Restricted  Stock in 1997 as part of his base  compensation,
which had a market value at date of grant of  $238,500.  Such shares are subject
to one-year (30,000 shares) and three-year  (6,000 shares) cliff vesting.  Also,
consistent  with the intent of the bonus plan  discussed  above,  the  Committee
granted a bonus to Mr.  Morton  for 1997 in the form of an  option  to  purchase
48,500 shares of Restricted  Stock subject to a three-year cliff vest, which had
a market value at date of grant of $338,288,  net of a 10% exercise  price.  The
bonus was based on the Company's exceeding the target increase in FFO for 1997.

     Section  162(m) of the Internal  Revenue Code.  The Company does not expect
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), to
affect the  deductibility for federal income tax purposes of the compensation of
the Company's  executive officers in 1997. In the future, the Company intends to
review  periodically  the  applicability  of  Section  162(m)  to the  Company's
compensation programs, including

                                       54

<PAGE>

its potential  impact on stock options and Restricted Stock awarded to executive
officers,  and, if considered  appropriate,  to develop a policy with respect to
the Company's compliance with Section 162(m).

     Report on  Reproaching  of Options.  The Executive  Compensation  Committee
determined  that the granting of new stock options to certain senior  executives
would  promote its goals of aligning  executive  and  stockholder  interests and
retaining qualified  executives.  However,  due in part to the issuance of stock
options to former  officers,  the  Company  did not have  sufficient  unreserved
options under the Stock  Incentive Plan to grant new stock  options.  Therefore,
the Company requested that certain officers allow their previously granted stock
options,  of which in the aggregate  37% had vested,  to be canceled in exchange
for new options. The executive officers accepted the Company's re-issuance offer
although their  proportion of vested versus unvested stock options  decreased by
28% on average.

<TABLE>
<CAPTION>
                                                                                                                  
                                           Number of                                                              Length of Original
                                          Securities        Market Price of   Exercise Price at                      Option Term    
                                          Underlying        Stock at Time of       Time of                        Remaining at Date 
                                       Options Reprised      Reproaching or    Reproaching or      New Exercise   of Reproaching or 
Name                        Date        or Amended (#)        Amendment ($)     Amendment ($)       Price ($)         Amendment     
----                        ----        --------------        -------------     -------------       ---------         ---------     
<S>                         <C>              <C>                  <C>              <C>                <C>             <C>      
C. Cammack Morton           4/97             300,000              5.625            10.25              5.625           8.8 years

Patrick M. Miniutti         4/97             200,000              5.625             8.625             5.625           9.4 years

Christopher G. Gavrelis     4/97              35,000              5.625            10.25              5.625           8.8 years

Michaela M. Twomey          4/97              35,000              5.625             8.875             5.625           9.4 years

Susan M. Crusoe             4/97              25,000              5.625            10.25              5.625           8.8 years
</TABLE>

     The Executive Compensation Committee consists of John W. Gildea,  Chairman,
William D. Eberle,  J. Richard  Futrell,  Jr., Robert O. Amick,  and Theodore E.
Haigler, Jr.

     The foregoing report should not be deemed  incorporated by reference by any
general  statement  incorporating  by reference  this Annual Report on Form 10-K
into any filing  under the  Securities  Act of 1933,  as  amended,  or under the
Securities  Exchange  Act of 1934,  as  amended,  except to the extent  that the
Company  specifically  incorporates  this information by reference and shall not
otherwise be deemed filed under such acts.

Compensation Committee Interlocks and insider Participation

     During 1997,  the  following  individuals  (none of whom was or had been an
officer  or  employee  of  the  Company)  served  on  the  Company's   Executive
Compensation  Committee:  Messrs. Gildea, Eberle, Futrell, Amick and Haigler. No
member of the Executive  Compensation Committee was or is an officer or employee
of the Company. 51

Item 12. Security Ownership of Certain Beneficial Owners and Management

     The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of March 23, 1998 by: (a) each Named
Executive  Officer;  (b) each  director;  (c)  current  executive  officers  and
directors  as a group;  and (d) each  person or group  known by the  Company  to
beneficially own more than five percent of the Common Stock. Except as otherwise
described in the notes below, the following  beneficial  owners have sole voting
power and sole  investment  power with respect to all shares of Common Stock set
forth opposite their name.


                                       55
<PAGE>

                                                 Amount and Nature
                                                   of Beneficial     Percent
                                                     Ownership     of Class (1)

C. Cammack Morton .............................       214,715         1.5%

Patrick M. Miniutti ...........................       118,400           *

William H. Neville ............................        17,417           *

Christopher G. Gavrelis .......................        19,671           *

Connell L. Radcliff ...........................       128,541           *

Robert O. Amick ...............................         5,544           *

William D. Eberle .............................         6,095           *

J. Richard Futrell, Jr ........................         5,044           *

John W. Gildea ................................       886,777(2)      5.9%

Theodore E. Haigler, Jr .......................         5,354           *

All current executive officers and directors as
a group (12) ..................................     1,421,229         9.1%

Jeffrey B. Citron .............................       807,222(3)      5.4%

Prometheus Southeast Retail LLC(4) ............     2,350,000        16.5%

(1)  An asterisk (*) indicates less than one percent. The total number of shares
     outstanding used in calculating this percentage assumes that (i) no options
     to  purchase  shares of Common  Stock are  exercised;  (ii) no  warrants to
     purchase  shares  of  common  stock  are  exercised  and (iii) no shares of
     Preferred Stock are converted to shares of Common Stock;  provided that the
     following shares of Common Stock are deemed  outstanding:  (x) those Isabel
     within 60 days upon exercise of options or warrants held by the  persons(s)
     shown in this table and (y) those Isabel upon conversion of Preferred Stock
     held by the person(s) shown in this table.

(2)  Includes (i) 4,000 shares held by Mr. Glide's spouse as custodian for their
     children as to which Mr.  Gildea has sole voting power only and as to which
     he disclaims  beneficial  ownership,  (ii)  111,111  shares of Common Stock
     presently  Isabel upon conversion of Preferred Stock as to which Mr. Gildea
     has sole voting and dispositive  power,  and (iii) 766,666 shares of Common
     Stock  presently  issuable upon  conversion of Preferred Stock and warrants
     owned by Network Fund III, Ltd. (Network), with respect to which Mr. Gildea
     has shared  dispositive power only. Mr. Gildea is a director of Network and
     a Managing Director of Gildea Management  Company,  which has an investment
     advisory agreement with Network.

(3)  Includes  547,222 shares issuable upon conversion of outstanding  preferred
     stock and 260,000 shares issuable upon conversion of outstanding  warrants.
     Jeffery B. Citrin possesses only investment control with respect to 272,222
     of such shares.  Mr. Citrin's address is 950 Third Avenue,  17th Floor, New
     York,  New York 10022.  Information  based on  Schedule  13D dated July 22,
     1996.

(4)  As discussed at "Proposal  Two,"  Investor  purchased  2,350,000  shares on
     March  23,  1998  pursuant  to  the  Stock  Purchase   Agreement.   If  the
     Stockholders  approve Proposal Two,  Investor will be obligated to purchase
     an additional  18,602,632 shares of Common Stock. Assuming no other changes
     in the number of  outstanding  shares of Common Stock,  the Investor  would
     then own  62.6% of the  outstanding  shares  of  Common  Stock.  Investor's
     address is 30 Rockefeller Plaza, 63rd Floor, New York, New York 10020.

Item 13.  Certain Relationships and Related Transactions

     During 1993, the Company acquired a 19 acre tract of land in a non-monetary
transaction  from a  partnership  whose  partners  include two former  executive
officers of the Company. The recorded value of the land was $748,000.  In return
for the land, the Company  assumed  certain  outstanding  debt and the remaining
purchase  price was settled by reducing  amounts owed to the Company by a tenant
whose majority  owners were also partners in the  partnership.  A review of this
transaction resulted in J. Dixon Fleming, Jr., the Company's

                                       56

<PAGE>

former Chairman and Chief Executive  officer,  agreeing to permit the Company to
satisfy a $0.6 million asset  valuation  issue by offsetting  amounts  otherwise
owed to Mr.  Fleming  pursuant  to his  employment  agreement  (see  "Item 11 --
Executive  Compensation  --Severance  Agreements") or by the acceptance from Mr.
Fleming of some other cash or value equivalent. The Company has recently entered
into an agreement with Mr. Fleming to sell to him the 19 acre land tract for the
sum of $750,000 which would satisfy the asset valuation  issue. The consummation
of this  transaction  is  secured  by the unpaid  severance  amounts  due to Mr.
Fleming.   Also  in  settling  the  terms  of  Mr.   Fleming's   severance   and
non-competition  restrictions,  $0.25  million of his  severance  was applied to
certain advertising expenses incurred by the Company.  During the fourth quarter
of 1997,  the  Company  sold to Mr.  Fleming,  the 19 acre  tract for the sum of
$750,000, which substantially satisfied the asset valuation issues.

                                     PART IV

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

(a)(1) The following  consolidated financial statements are filed as part of the
       report:

                                                                            Page
                                                                            ----

        Reports of independent auditors                                      F-2

        Consolidated balance sheets as of December 31, 1997 and 1996         F-4

        Consolidated statements of operations for the years ended
        December 31, 1997, 1996 and 1995                                     F-5

        Consolidated statements of stockholders' equity for years
        ended December 31, 1997, 1996 and 1995                               F-6

        Consolidated statements of cash flows for the years
        ended December 31, 1997, 1996 and 1995                               F-7

        Notes to consolidated financial statements                           F-8


(a)(2) Included  with  this  report  is  the  following  consolidated  financial
       statement schedule:

        Schedule III - Real Estate and Accumulated Depreciation             F-23

        All other  schedules  for which  provision  is made in the  applicable
        accounting  regulations  of the SEC are not required under the related
        instructions or are inapplicable and, therefore, have been omitted.

(a)(3) Included with this report are the following exhibits:

                              FAC 10K Exhibit List

Exhibit #                                  Title
--------------------------------------------------------------------------------

 3.1   Amended and Restated Articles of Incorporation (1)

 3.2   Amended and Restated Bylaws of the Company

 3.3   Amended and Restated  Agreement of Limited  Partnership  of the Operating
       Partnership

 4.1   Specimen Common Stock Certificate

 4.2   Warrant Agreement between the Company and Blackacre (2)


                                       57

<PAGE>

4.3    Warrant Agreement between the Company and Blackacre (2)

4.4    Warrant  Agreement  between the Company and National Union Fire Insurance
       Company of Pittsburgh (2)

4.5    Warrant Agreement between the Company and Network Fund III, Ltd. (2)

4.6    Indenture  by and  between  FSA  Finance,  Inc.,  as  issuer,  Bank  One,
       Columbus,  National  Association,  as trustee,  and Fleet  Management and
       Recovery Corporation, as master servicer (3)

4.7    Master Servicing  Agreement by and between FSA Finance,  Inc., as issuer,
       Bank One,  Columbus,  National  Association,  as trustee  (FN1) and Fleet
       Management and Recovery Corporation, as master servicer (3)

4.8    Specimen copies of the various types of Class A, B, C and R Notes (3)

4.9    Mortgage Note given by FSA  Properties,  Inc., as maker,  in favor of the
       Travelers Insurance Company, as payee (3)

4.10   Deed of Trust, Mortgage,  Security Agreement,  Fixture Filing,  Financing
       Statement  and  Assignment  of  Leases  and  Rents  by  and  between  FSA
       Properties,  Inc., as mortgagor,  and the Travelers  Insurance Company as
       mortgagee (3)

4.11   Gap  Note  given  by FSA  Properties,  Inc.,  as  maker,  in favor of The
       Travelers Insurance Company, as payee (3)

4.12   Mortgage Loan Purchase  Agreement by and between The Travelers  Insurance
       Company, as seller, and FSA Finance, Inc., as purchaser (3)

4.13   Loan  Agreement  between FAC  Mortgage  LLC as Borrower  and Nomura Asset
       Capital Corporation as Lender

4.14   Agreement to Furnish Certain Instruments Defining the Rights of Long-Term
       Debt Holders

10.1   Employment Agreement between the Company and C. Cammack Morton

10.2   Employment Agreement between the Company and Patrick M. Miniutti

10.3   Employment Agreement between the Company and William H. Neville

10.4   Employment Agreement between the Company and Sona A. Thorburn

10.5   Employment Agreement between the Company and Christopher G. Gavrelis

10.6   Factory Stores of America,  Inc. Amended and Restated 1993 Employee Stock
       Option Plan (4)

10.7   1995 Outside Directors' Stock Award Plan

10.8   Factory Stores of America, Inc. 1996 Restricted Stock Plan (4)

10.9   Restricted Stock Agreement between the Company and C. Cammack Morton

10.10  Restricted Stock Agreement between the Company and Patrick M. Miniutti

10.11  Restricted  Stock  Agreement  between  the  Company  and  Christopher  G.
       Gavrelis

10.12  Incentive  Stock  Option  Agreement  between the  Company and C.  Cammack
       Morton

10.13  Incentive  Stock  Option  Agreement  between  the  Company and Patrick M.
       Miniutti

                                       58

<PAGE>

10.14  Nonqualified  Stock Option  Agreement  between the Company and Patrick M.
       Miniutti

10.15  Line of Credit  Agreement  between  FAC  Realty,  Inc.  and Nomura  Asset
       Capital Corporation, dated February 19, 1997

10.16  First Amendment to the Master and Exchange Option Agreement,  dated as of
       March  16,  1998 by and among  the  Company,  FAC  Realty,  L.P.  and the
       Contributors listed therein (6)

--------------------------------
(FN1)  Bank One, Columbus,  resigned as trustee effective December 10, 1997, and
       the issuer  has  appointed  First  Union  Bank as the  successor  trustee
       effective December 10, 1997.

10.17  Assignment of Interest in Master Agreement and Exchange Option Agreement,
       and Consent of Limited Partners dated December 22, 1997 (6)

10.18  Exchange  Option  Agreement  dated as of October  1,  1997,  by and among
       Carolina FAC, Limited Partnership, FAC Realty, Inc. and the Owners of the
       Properties and Interests listed therein (6)

10.19  Master  Agreement,  dated as of October 1, 1997, by and among FAC Realty,
       Inc., Carolina FAC, Limited Partnership, and the other signatories listed
       therein (6)

10.20  Amended and  Restated  Stock  Purchase  Agreement,  dated as of March 23,
       1998, between the Company and the Investor (6)

10.21  Stockholders  Agreement,  dated February 24, 1998,  among the Company and
       the Investor (6)

10.22  Registration  Rights  Agreement,  dated  February  24,  1998  between the
       Company and the Investor (6)

10.23  Contingent  Value Right  Agreement,  dated  February 24, 1998,  among the
       Company and the Investor (6)

21.1   Subsidiaries of the Registrant

23.1   Consent of Ernst & Young, LLP

23.2   Consent of Arthur Andersen, LLP

27.1   Financial Data Schedule (electronic filing only)

27.2   Restated 1996 Financial Data Schedules (electronic filing only)

23.3   Restated Fourth Quarter 1997 Financial Data Schedule  (electronic  filing
       only)
--------------------------------

(1)    Incorporated  herein  by  reference  to  Exhibit  3.1  to  the  Company's
       Registration Statement on Form S-4 (File No. 333-39491)

(2)    Incorporated  herein by reference to the Company's  annual report on Form
       10-K for the year ended December 31, 1995

(3)    Incorporated  herein by reference to the Company's Current Report on Form
       8-K dated May 23, 1995

(4)    Incorporated  herein by reference to the Company's  annual report on Form
       10-K for the year ended December 31, 1996

(5)    Incorporated  herein by reference to the Company's Current Report on Form
       8-K dated February 19, 1997

(6)    Incorporated  herein by reference to the Company's Current Report on Form
       8-K dated March 23, 1998



                                       59

<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.

                                                    FAC Realty Trust, Inc.
   


Date: June 30, 1998                           By /S/ Patrick M. Miniutti
                                                 -------------------------------
                                              Patrick M. Miniutti
                                              Director, Exec. Vice President and
                                              Chief Financial Officer

    




                                       60

<PAGE>

                             FAC REALTY TRUST, INC.
                    Audited Consolidated Financial Statements
                  Years ended December 31, 1997, 1996 and 1995


               Index to Audited Consolidated Financial Statements



Reports of Independent Auditors..............................................2-3

Consolidated Balance Sheets as of December 31, 1997 and 1996...................4

Consolidated Statements of Operations for the years ended December 31, 1997,
   1996 and 1995...............................................................5

Consolidated Statements of Stockholders' Equity for the years ended
   December 31, 1997, 1996 and1995.............................................6

Consolidated Statements of Cash Flows for the years ended
   December 31, 1997, 1996 and 1995............................................7

Notes to Consolidated Financial Statements.....................................8

Schedule III - Real Estate and Accumulated Depreciation.......................35




<PAGE>

Report of Independent Public Accountants

To FAC Realty Trust, Inc.:

We have audited the accompanying consolidated balance sheet of FAC Realty Trust,
Inc.  (a  Maryland  corporation)  as of  December  31,  1997,  and  the  related
consolidated  statements of operations,  stockholders' equity and cash flows for
the  year  then  ended.   These  consolidated   financial   statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards  require that we plan and perform the audit to obtain reasonable
assurance  about  whether  the  consolidated  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 audit  provides a  reasonable  basis for our
opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of FAC Realty Trust,
Inc. as of December 31,  1997,  and the results of its  operations  and its cash
flows for the year then ended in conformity with generally  accepted  accounting
principles.

Our audit of FAC  Realty  Trust,  Inc.  was made for the  purpose  of forming an
opinion  on the  basic  financial  statements  taken  as a whole.  Schedule  III
included  with  consolidated  financial  statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic  financial  statements.  This  schedule  as of, and for the year ended
December 31, 1997, has been subjected to the auditing  procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly stated in
all material  respects in relation to the basic financial  statements taken as a
whole.


                                                             ARTHUR ANDERSEN LLP


Raleigh, North Carolina,
February 11, 1998 (except for the matters discussed in
Note 15, as to which date is March 31, 1998).



<PAGE>

Report of Independent Auditors

Board of Directors and Stockholders
FAC Realty Trust, Inc.


We have audited the accompanying consolidated balance sheet of FAC Realty Trust,
Inc.  as of  December  31,  1996  and the  related  consolidated  statements  of
operations,  stockholders'  equity,  and cash flows for each of the two years in
the period ended December 31, 1996. These consolidated  financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated 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  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
consolidated  financial  statement  presentation.  We  believe  that our  audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the consolidated  financial  position of FAC
Realty  Trust,  Inc. at December  31, 1996 and the  consolidated  results of its
operations  and its cash  flows  for each of the two years in the  period  ended
December 31, 1996, in conformity with generally accepted accounting principles.


                                                               ERNST & YOUNG LLP


Raleigh, North Carolina,
January 31,  1997,  except for the first  paragraph
of Note 11 and the last two sentences of the first
as to which the date is March 27, 1997.



<PAGE>

                              FAC REALTY TRUST, INC
                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                   1997          1996
                                                                                ------------------------
                                                                                      (in thousands)
<S>                                                                              <C>          <C>      
                                     Assets
Income producing properties:
   Land                                                                          $  81,233    $  77,011
   Buildings and improvements                                                      292,726      259,383
   Deferred leasing and other charges                                               21,366       17,635
                                                                                ------------------------
                                                                                   395,325      354,029
   Accumulated depreciation and amortization                                       (50,134)     (36,027)
                                                                                ------------------------
                                                                                   345,191      318,002
   Properties under development                                                      6,456        2,538
   Properties held for sale                                                         12,490       11,438
   Investment in joint ventures                                                      4,283           --
 Other assets:
   Cash and cash equivalents                                                         4,872        7,034
   Restricted cash                                                                   3,858        3,860
   Tenant and other receivables                                                      7,167        5,864
   Deferred charges and other assets                                                 8,851        9,876
   Notes receivable                                                                 10,458           --
                                                                                ------------------------
                                                                                 $ 403,626    $ 358,612
                                                                                ========================

                      Liabilities and Stockholders' Equity
Liabilities:
   Debt on income properties                                                     $ 232,575    $ 173,695
   Unsecured senior notes                                                               --        7,420
   Other unsecured notes                                                               197        2,542
   Capital lease obligations                                                         1,131          826
   Accounts payable and other liabilities                                            6,796        9,537
                                                                                ------------------------
                                                                                   240,699      194,020
                                                                                ------------------------
Commitments and contingencies

Stockholders' equity:
   Convertible preferred stock, Series A, 5,000,000 shares authorized, and          19,162       19,162
     800,000 issued and outstanding in 1997 and 1996
   Stock purchase warrants                                                               9            9
   Common stock, $0.01 par value, 45,000,000 shares authorized and                     119          121
     11,904,182 and 12,100,267 issued and outstanding in 1997 and 1996,
     respectively
   Additional paid-in capital                                                      145,332      147,346
   Accumulated deficit                                                              (1,416)          --
   Deferred compensation - Restricted Stock Plan                                      (279)      (2,046)
                                                                                ------------------------
                                                                                   162,927      164,592
                                                                                ------------------------
                                                                                 $ 403,626    $ 358,612
                                                                                ========================
</TABLE>

See accompanying notes.

                                       4

<PAGE>

                             FAC REALTY TRUST, INC.
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                              Year ended December 31,
                                                           1997        1996         1995
                                                       -------------------------------------
                                                       (in thousands, except per share data)
<S>                                                      <C>         <C>         <C>     
Rental operations:
   Revenues:
      Base rents                                         $ 38,535    $ 34,099    $ 34,584
      Percentage rents                                        755         633         616
      Property operating cost recoveries                   12,726      11,757      11,065
      Other income                                          1,710         681         864
                                                         --------------------------------
                                                           53,726      47,170      47,129
                                                         --------------------------------
   Property operating costs:
      Common area maintenance                               6,609       5,864       5,549
      Utilities                                             1,173       1,074         939
      Real estate taxes                                     5,863       5,098       4,733
      Insurance                                               616         684         589
      Marketing                                             1,294       1,001       1,838
      Other                                                   116         254          --
                                                         --------------------------------
                                                           15,671      13,975      13,648
   Depreciation and amortization                           15,652      13,802      11,900
                                                         --------------------------------
                                                           31,323      27,777      25,548
                                                         --------------------------------
                                                           22,403      19,393      21,581
                                                         --------------------------------
Other expenses:
   General and administrative                               6,397       6,199      15,279
   Interest                                                16,436      14,175      10,903
                                                         --------------------------------
                                                           22,833      20,374      26,182
                                                         --------------------------------
                                                             (430)       (981)     (4,601)
                                                         --------------------------------
Property adjustments:
   Adjustment to carrying value of assets                      --      (5,000)     (8,500)
                                                         --------------------------------
                                                                       (5,981)     (8,500)
                                                         --------------------------------

Loss before extraordinary item                               (430)     (5,981)    (13,101)
   Extraordinary loss on early extinguishment of debt        (986)       (103)         --
                                                         --------------------------------
Net loss                                                 $ (1,416)   $ (6,084)   $(13,101)
                                                         --------------------------------

Loss before extraordinary item                           $   (430)   $ (5,981)   $(13,101)
   Preferred stock dividends                                   --        (368)         --
                                                         --------------------------------
Loss before extraordinary item applicable to common      $   (430)   $ (6,349)   $(13,101)
stockholders
Extraordinary loss on early extinguishment of debt           (986)       (103)         --
                                                         --------------------------------
Net loss applicable to common shareholders               $ (1,416)   $ (6,452)   $(13,101)
                                                         --------------------------------

Basic and diluted  loss per common share:
   Loss before extraordinary item applicable to common
   stockholders                                          $  (0.04)   $  (0.54)   $  (1.11)
   Extraordinary item                                       (0.08)      (0.01)         --
                                                         --------------------------------
Net loss applicable to common stockholders               $  (0.12)   $  (0.55)   $  (1.11)
                                                         ================================

Weighted average number of  common shares outstanding      11,824      11,817      11,814
                                                         ================================
</TABLE>

See accompanying notes.


                                       5

<PAGE>

                             FAC REALTY TRUST, INC.
                 Consolidated Statements of Stockholders' Equity
                  Years ended December 31, 1997, 1996 and 1995
                     (in thousands except for share amounts)

<TABLE>
<CAPTION>
                                                                                                              Deferred
                                                    Convertible   Stock            Additional               Compensation
                                                     Preferred  Purchase   Common    Paid in    Accumulated  Restricted
                                                       Stock    Warrants   Stock     Capital      Deficit    Stock Plan     Total
                                                    --------------------------------------------------------------------------------
<S>                                                  <C>         <C>      <C>       <C>          <C>          <C>         <C>      
Balance at December 31, 1994                         $     --    $   --   $   118   $ 203,222    $      --    $     --    $ 203,340
   Issuance of 924 shares of directors stock               --        --        --          18           --          --           18
   Net loss                                                --        --        --          --      (13,101)         --      (13,101)
   Common dividends declared ($2.52  per share)            --        --        --     (42,872)      13,101          --      (29,771)
                                                    --------------------------------------------------------------------------------
Balance at December 31, 1995                               --        --       118     160,368           --          --      160,486
   Issuance of 800,000 shares of convertible           19,162        --        --          --           --          --       19,162
   preferred stock
   Issuance of 3,152 shares of directors stock             --        --        --          29           --          --           29
   Issuance of 372,592 shares of restricted stock          --        --         4       3,334           --      (3,338)          --
   Issuance of 200,000 stock purchase warrants             --         9        --          --           --          --            9
   Compensation under stock plans                          --        --        --          --           --         392          392
   Cancellation of 90,000 shares of restricted stock       --        --        (1)       (899)          --         900           --
   Net loss                                                --        --        --          --       (6,084)         --       (6,084)
   Preferred dividends declared ($0.46 per share)          --        --        --        (368)          --          --         (368)
   Common dividends declared ($0.75 per share)             --        --        --     (15,118)       6,084          --       (9,034)
                                                    --------------------------------------------------------------------------------
Balance at December 31, 1996                           19,162         9       121     147,346           --      (2,046)     164,592
                                                    --------------------------------------------------------------------------------
   Issuance of 7,300 shares of directors stock             --        --        --          45           --          --           45
   Issuance of 384,852 shares of restricted stock          --        --         3       2,600           --      (2,603)          --
   Compensation under stock plans                          --        --        --          --           --         493          493
   Cancellation of 180,000 shares of restricted            --        --        (2)     (1,641)          --       1,643           --
   stock
   Exchange of 390,884 shares of restricted stock
   for options to repurchase                               --        --        (3)     (2,641)          --       2,234         (410)
   restricted stock
   Repurchase of 17,353 shares common stock                --        --        --        (377)          --          --         (377)
   Net loss                                                --        --        --          --       (1,416)         --       (1,416)
                                                    --------------------------------------------------------------------------------
Balance at December 31, 1997                         $ 19,162    $    9   $   119   $ 145,332    $  (1,416)   $   (279)   $ 162,927
                                                    ================================================================================
</TABLE>

See accompanying notes.




                                       6

<PAGE>

                              FAC REALTY TRUST, INC
                      Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>
                                                                      Year ended December 31,
                                                                   1997        1996         1995
                                                               ------------------------------------
                                                                          (in thousands)
<S>                                                            <C>          <C>          <C>       
Cash flows from operating activities:
   Net loss                                                    $  (1,416)   $  (6,084)   $ (13,101)
    Adjustments to reconcile net loss to net cash provided
      by operating activities:
       Adjustment to carrying value of assets                         --        5,000        8,500
       Depreciation and amortization                              15,652       13,802       11,900
       Extraordinary loss on early extinguishment of debt            986          103           --
       Amortization of deferred financing costs                    1,562        1,422        1,552
       Compensation under restricted stock plan                      493          392           --
       Net changes in:
         Tenant and other receivables                             (1,303)        (619)         828
         Deferred charges and other assets                           139          122        3,968
         Accounts payable and other liabilities                   (3,151)      (6,489)       8,431
                                                               -----------------------------------
          Net cash provided by operating activities               12,962        7,649       22,078
                                                               -----------------------------------

Cash flows from investing activities:
    Investment in income-producing properties                    (15,025)     (18,234)     (46,048)
    Acquisition of  income-producing properties                  (32,421)          --           --
    Investment in joint ventures                                  (4,283)          --           --
    Increase in notes receivable                                 (10,458)          --           --
    Change in restricted cash                                          2          946       (4,806)
                                                               -----------------------------------
          Net cash used in  investing activities                 (62,185)     (17,288)     (50,854)
                                                               -----------------------------------

Cash flows from financing activities:
    Proceeds from debt on income properties                      135,856        5,061      139,672
    Proceeds from exchangeable notes                                  --       20,000           --
    Proceeds from other debt                                          --        9,580          582
    Deferred financing charges                                    (1,947)      (2,289)      (4,361)
    Debt repayments                                              (86,516)      (1,936)     (71,294)
    Payable related to acquisition of properties                      --           --      (11,737)
    Repurchase of common stock                                      (360)          --           --
    Distributions to stockholders                                     --      (15,427)     (23,746)
    Other                                                             28           29           18
                                                               -----------------------------------
          Net cash provided by financing activities               47,061       15,018       29,134
                                                               -----------------------------------

Net (decrease) increase in cash and cash equivalents              (2,162)       5,379          358
Cash and cash equivalents at beginning of year                     7,034        1,655        1,297
                                                               -----------------------------------
Cash and cash equivalents at end of year                       $   4,872    $   7,034    $   1,655
                                                               ===================================

Supplemental disclosures of cash flow information
    Cash paid during the year for interest (net of interest
    capitalized of $1,525 in 1997, $1,974 in 1996 and $2,567
    in 1995)                                                   $  14,505    $  15,347    $   9,848
                                                               ===================================
    Dividend declared not paid                                 $      --    $      --    $   6,025
                                                               ===================================
</TABLE>

See accompanying notes.


                                       7

<PAGE>

                             FAC REALTY TRUST, INC.
                   Notes to Consolidated Financial Statements
                                December 31, 1997

1. Organization and Basis of Presentation

Organization

FAC Realty Trust,  Inc. (the  "Company"),  formerly  Factory  Stores of America,
Inc.,  and  FAC  Realty,   Inc.,  was  incorporated  on  March  31,  1993  as  a
self-administrated  and self-managed  real estate  investment trust (REIT).  The
Company is principally  engaged in the acquisition,  development,  ownership and
operation of community and outlet shopping centers.  The Company's  revenues are
primarily  derived  from real estate  leases with  national,  regional and local
retailing companies.

On December 17, 1997, the following  shareholder  approval,  the Company changed
its  domicile  from  the  State  of  Delaware  to the  State  of  Maryland.  The
reincorporation was accomplished through the merger of FAC Realty, inc. into its
Maryland  subsidiary,  FAC Realty  Trust,  Inc. (the  "Company").  Following the
reincorporation  on December 18, 1997,  the Company  reorganized  as an umbrella
partnership  real estate  investment  trust (an  "UPREIT)").  The  Company  then
contributed  to FAC  Properties,  L.P.,  a Delaware,  limited  partnership  (the
"Operating Partnership") substantially all of its assets and liabilities, except
for legal title to 18 properties,  which remains in a wholly owned subsidiary of
the Company.  In exchange for the Company's assets, the Company received limited
partnership  interest  ("Units") in the Operating  Partnership  in an amount and
designation  that  corresponded  to the number and  designation  of  outstanding
shares of  capital  stock of the  Company at the time.  The  Company is the sole
general partner of the Operating Partnership. As additional limited partners are
admitted to the  Operating  Partnership  in  exchange  for the  contribution  of
properties, the Company's percentage ownership in the Operating Partnership will
decline.  As the Company  issues  additional  shares of capital  stock,  it will
contribute  the proceeds for that capital stock to the Operating  Partnership in
exchange  for a number of Units  equal to the number of shares  that the Company
issues.  The  Company  conducts  substantially  all of  its  business  and  owns
substantially  all of its  assets  (either  directly  or  through  subsidiaries)
through the Operating Partnership such that a Unit is economically equivalent to
a share of the Company's common stock.

An UPREIT may allow the Company to offer Units in the Operating  Partnership  in
exchange for  ownership  interests  from  tax-motivated  sellers.  Under certain
circumstances,  the  exchange of Units for a seller's  ownership  interest  will
enable the Operating  Partnership to acquire assets while allowing the seller to
defer the tax liability  associated  with the sale of such assets.  Effectively,
this  allows the  Company to use Units  instead of stock to acquire  properties,
which provides an advantage over non-UPREIT entities.

As of December 31, 1997, the properties  owned by the Company consist of: (1) 28
community  shopping  centers in 15 states  aggregating  approximately  3,090,000
square  feet;  (2) 10  outlet  centers  in 9  states  aggregating  approximately
2,120,000 square feet; (3) two outlet centers aggregating  approximately 150,000
square feet and one former  factory  outlet  center which has been  converted to
commercial office use with  approximately  150,000 square feet that are held for
sale; and (4) approximately 182 acres of outparcel land located near or adjacent
to certain of the Company's centers and are being marketed for lease or sale.

As the  owner of real  estate,  the  Company  is  subject  to risks  arising  in
connection  with  the  underlying  real  estate,  including  defaults  under  or
non-renewal of tenant  leases,  competition,  inability to rent unleased  space,
failure to generate  sufficient  income to meet operating  expenses,  as well as
debt  service,  capital  expenditures  and  tenant  improvements,  environmental
matters,  financing availability and changes in real estate and zoning laws. The
success of the Company also depends upon certain key  personnel,  the  Company's
ability to maintain its  qualification as a REIT,  compliance with the terms and
conditions of the debt on its income properties and other debt instruments,  and
trends  in  the  national  and  local  economy,   including   income  tax  laws,
governmental regulations and legislation and population trends.

                                       8

<PAGE>

                             FAC REALTY TRUST, INC.
             Notes to Consolidated Financial Statements (continued)

1. Organization and Basis of Presentation (continued)

Basis of Presentation

The accompanying  consolidated  financial statements include the accounts of the
Company and its wholly owned  subsidiaries.  Minority interests in entities that
are not wholly owned are not significant.  All significant intercompany balances
have been eliminated in consolidation.

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

2. Significant Accounting Policies

Income-Producing Properties

Income-producing  properties are recorded at cost less accumulated depreciation.
Included in such costs are  acquisition,  development,  construction  and tenant
improvement  expenditures,   interest  incurred  during  construction,   certain
capitalized  improvements  and  replacements  and  certain  allocated  overhead.
Allocated  overhead is computed  primarily on the basis of time spent by certain
departments in various operations and represents direct costs of the development
department  which  meet the  definition  of  "indirect  costs" in  Statement  of
Financial  Accounting Standards (SFAS) No. 67, "Accounting for Costs and Initial
Rental Operations of Real Estate Projects."

Leasing  charges,  including  tenant  construction  allowances  and direct costs
incurred by the Company to obtain a lease,  are deferred and amortized  over the
related leases or terms appropriate to the expenditure.

Depreciation is provided  utilizing the straight-line  method over the estimated
useful life of 31.5 years for building and improvements,  5 to 15 years for land
improvements.

Certain  improvements  and  replacements  are  capitalized  when they extend the
useful life,  increase  capacity,  or improve the  efficiency of the asset.  All
other repair and maintenance items are expensed as incurred.

Substantially all of the income-producing properties have been pledged to secure
the Company's debt.

The Company  periodically  reviews its income producing properties for potential
impairment when  circumstances  indicate that the carrying amount of such assets
may not be recoverable.

Properties  under  development  include  costs  related to new  development  and
expansions in process  totaling  approximately  $6.5 million and $2.5 million at
December 31, 1997 and 1996, respectively.  The pre-construction stage of project
development  involves  certain  costs to secure  land and zoning and to complete
other initial tasks which are essential to the development of the project. These
costs   are   transferred   to   developments   under   construction   when  the
pre-construction  tasks are completed.  The Company  charges  operations for the
costs of unsuccessful development projects.
   

In March 1995, the Financial  Accounting  Standards  Board issued  Statement No.
121,  "Accounting for the Impairment of Long-Lived  Assets and Long-Lived Assets
to be  Disposed  Of," which  requires  impairment  losses to be recorded on each
long-lived  asset used in operations  when  indicators of impairment are present
and the undiscounted cashflows estimated to be generated by each of those assets
are less than the asset's carrying amount.  The impairment loss recognized shall
be measured as the amount by which the carrying  amount of the asset exceeds the
fair value of the asset. The Company adopted the Statement in 1995.
    
Properties Held for Sale

As part of the  Company's  ongoing  strategic  evaluation  of its  portfolio  of
assets,  management has been authorized to pursue the sale of certain properties
that  currently  are not fully  consistent  with or essential  to the  Company's
long-term  strategies.  Management plans to evaluate all properties on a regular
basis in accordance  with its strategy for growth and in the future may identify
other properties for disposition or may decide to defer


                                       9

<PAGE>

                             FAC REALTY TRUST, INC.
             Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

the pending  disposition  of those assets now held for sale. In accordance  with
SFAS No. 121,  assets held for sale are valued at the lower of carrying value or
fair  value less  selling  costs.  Accordingly,  in 1996 and 1995,  the  Company
recorded a non-cash  $5.0  million and $8.5 million  adjustment  to the carrying
value of the  properties  held for sale.  The Company  continues  to operate the
properties and has begun the process of marketing these properties.
As of December 31, 1997, two of the properties held for sale are under contract.

After recording the $5.0 million and $8.5 million  valuation  adjustment in 1996
and  1995,  respectively,  the net  carrying  value of  assets  currently  being
marketed  for sale at  December  31,  1997 and 1996 are $12.5  million and $11.4
million, respectively. There is also $12.2 million of debt associated with these
properties held for sale.

The following summary financial  information pertains to the properties held for
sale for the year ended December 31 (in thousands):

                                1997         1996           1995
                                ----         ----           ----
Revenues                      $  1,100      $  2,100       $   3,000
Net loss  after  operating
and interest expenses         $ (1,100)     $ (1,000)      $    (500)
                            ============= =============== ============

Interest Costs

Interest costs are  capitalized  related to  income-producing  properties  under
construction,  to the extent  such  assets  qualify  for  capitalization.  Total
interest  capitalized  was $1.5  million,  $2.0 million and $2.6 million for the
years ended December 31, 1997,  1996 and 1995,  respectively.  Interest  expense
includes  amortization  of deferred  financing  costs (see Note 4) and is net of
miscellaneous interest income on cash and escrow deposit balances.

Cash and Cash Equivalents

The Company considers highly liquid  investments with a maturity of three months
or less when purchased to be cash equivalents.

Restricted Cash

In connection with the sale of the $95 million  securitized  debt offering,  the
lender  required a holdback of a portion of the loan  proceeds  to fund  certain
environmental  and engineering  work and to make certain lease related  payments
that may be required in connection  with the renewal or  termination  of certain
leases by a tenant at most of the factory outlet centers.  Such holdback amounts
were approximately $3.9 million at December 31, 1997 and 1996.

Revenue Recognition
   

The  Company,  as a  lessor,  has  retained  substantially  all of the risks and
benefits of ownership and accounts for its leases as operating  leases.  Minimum
rental income is recognized on a straight-line  basis over the term of the lease
and  unpaid  rents  are  included  in  tenant  and  other   receivables  in  the
accompanying  balance sheets.  Certain lease agreements contain provisions which
provide for rents based on a percentage of sales that are recognized  ratably on
an estimated basis throughout the year. In addition,  certain leases provide for
additional  rents  based on a  percentage  of  sales  volume  above a  specified
breakpoint which are recognized as percentage  rents.  Also, most leases provide
for  the  reimbursement  of real estate taxes, insurance, advertising, utilities
and certain common area maintenance (CAM) costs which are recognized as property
operating  cost  recoveries.  The   percentage   rents  and  property  operating
cost  recoveries  are  reflected  on  the  accrual  basis. In  lease  agreements
where  the  tenant  is  not  required to  reimburse  the Company for real estate
taxes,  insurance  and CAM costs,  the Company  has  allocated a portion of base
rents to property operating cost recoveries.
    



                                       10

<PAGE>

                             FAC REALTY TRUST, INC.
             Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)
   
Amounts allocated to property operating cost recoveries from base rent were $3.7
million,  $3.3 million and $3 million in 1997, 1996 and 1995, respectively.  For
tenants  who are not  obligated  to pay  directly or  reimburse  the Company for
utility  costs  related to their store,  the Company has  allocated a portion of
their base rents to offset the  utility  expense in the amounts of $1.3 million,
$1.2 million and $1.3 million in 1997, 1996 and 1995, respectively.
    

The Company's principal financial instrument subject to potential  concentration
of credit risk is tenant accounts  receivable which are unsecured.  Although the
tenants are primarily in the retail industry,  the properties are geographically
diverse.  The Company's exposure to credit loss in the event that payment is not
received  for revenue  recognized  equals the  outstanding  accounts  receivable
balance. The Company provides an allowance for estimated uncollectible amounts.

Environmental Matters

Substantially all of the Properties have been subjected to Phase I environmental
audits.   Such  audits  have  not  revealed  nor  is  management  aware  of  any
environmental  liability that management  believes would have a material adverse
impact  on the  Company's  financial  position  or  results  of  operations.  In
accordance with a certain  mortgage  agreement,  the lender required to place in
escrow $281,000 to be used to perform  possible  remediation work on a property,
which  management  believes  will not be  required  based on the  results of the
environmental audits.

Earnings/(Loss) Per Common Share

The Company has adopted the  provisions  of SFAS No. 128,  "Earnings Per Share".
Under SFAS No. 128,  basic  earnings  per share  ("EPS") and diluted EPS replace
primary EPS and fully  diluted  EPS.  Basic EPS is  calculated  by dividing  the
income available to common stockholders by the weighted-average number of shares
outstanding.  Diluted EPS reflects the  potential  dilution  that could occur if
options or warrants to purchase common shares were exercised and preferred stock
was converted into common shares ("potential common shares").  All prior periods
presented  have been restated.  For the years ended December 31, 1997,  1996 and
1995, basic and diluted EPS are computed based on a  weighted-average  number of
shares  outstanding of  11,824,000,  11,817,000  and  11,814,000,  respectively.
Potential  common shares have been excluded from diluted EPS for 1997,  1996 and
1995 because the effect would be antidilutive.

Income Taxes

The Company is taxed as a REIT under  Sections  856 through 860 of the  Internal
Revenue Code of 1986, as amended,  commencing  with the tax year ending December
31, 1993. As a REIT, the Company generally is not subject to federal income tax.
To maintain qualification as a REIT, the Company must distribute at least 95% of
its REIT taxable income to its stockholders and meet certain other requirements.
If the Company fails to qualify as a REIT in any taxable year,  the Company will
be subject to federal  income  tax on its  taxable  income at regular  corporate
rates.  The Company may also be subject to certain  state and local taxes on its
income and  property and federal  income and excise  taxes on its  undistributed
taxable income.

Dividends

During 1996 and 1995,  distributions  were paid of $0.75 per share and $2.52 per
share,  respectively.  The ordinary income, return of capital and long-term gain
portions of such distributions for each year are indicated in the table below:

                                       1996             1995
                                ---------------- ---------------
Ordinary income                        24.7%             0.0%
Return of capital                      74.9             98.8
Long-term gains                         0.4              1.2
                                ================ ===============
                                      100.0%           100.0%
                                ================ ===============

There were no dividends paid or accrued for the year ended December 31, 1997.


                                       11

<PAGE>

                             FAC REALTY TRUST, INC.
             Notes to Consolidated Financial Statements (continued)

2. Significant Accounting Policies (continued)

Reclassifications

Certain 1996 and 1995  financial  statement  amounts have been  reclassified  to
conform with 1997 classifications.  These reclassifications had no effect on net
loss or stockholders' equity as previously reported.

3. Investment in Joint Ventures

The Company and  Atlantic  Real Estate  Corporation  ("ARC")  jointly  created a
limited  liability company named Atlantic Realty LLC ("Atlantic") to develop and
manage retail  community and  neighborhood  shopping  centers in North Carolina.
Atlantic  currently  has  plans to  develop  nearly  one  million  square  feet,
including  outparcels  over the next  several  years.  The  Company  and ARC own
Atlantic  equally,  with the Company serving as managing  member  overseeing its
operations.  The  investment  in Atlantic will be accounted for under the equity
method of accounting.  As of December 31, 1997,  Atlantic had purchased land and
building for development  totaling  approximately  $3.5 million and did not have
any other  operations.  Atlantic had total assets of approximately  $3.7 million
and debt of approximately $2.3 million at December 31, 1997.

The Company has entered  into a joint  venture  with an  unrelated  third party,
known  as  Mount   Pleasant  FAC,   LLC,  to  develop  a  425,000   square  foot
retail/entertainment   shopping  center  in  Mount  Pleasant,   South  Carolina.
Construction  on the center is  expected  to begin May,  1998,  with  completion
targeted for May,  1999. As of December 31, 1997,  the Company has invested $2.8
million in this joint venture.  This 50% investment in the joint venture will be
accounted  for under the equity  method of  accounting.  The joint  venture  had
approximately  $2.8 million of assets and $0.6 of debt at December 31, 1997. The
joint venture had no other operations.

4. Deferred Charges and Other Assets

Deferred charges and other assets, net of accumulated amortization of $4,267 and
$2,892 at  December  31,  1997 and 1996 as of  December  31, are  summarized  as
follows (in thousands):

                                               1997                 1996
                                         ------------------------------------
   Deferred financing costs, net               $5,531              $ 5,915
   Prepaid expenses                               248                  518
   Other assets, net                            3,072                3,443
                                         ====================================
                                               $8,851              $ 9,876
                                         ====================================

Deferred Financing Costs

Deferred financing costs, including fees and costs incurred to obtain financing,
are being  amortized on a straight  line basis over the terms of the  respective
agreements. Unamortized deferred financing costs are charged to expense when the
associated debt is retired before the maturity date.

Other Assets

During 1993, as part of the VF acquisition (see Note 12), the Company acquired a
favorable lease  agreement for land and buildings which has been  capitalized as
an intangible  asset.  This asset is being  amortized over the remaining life of
the lease. The carrying value of the intangible  asset,  approximating  $2.8 and
$3.1  million at December  31, 1997 and 1996,  respectively,  is reviewed if the
facts  and  circumstances  suggest  that it may be  impaired.  If such a  review
indicates  that the  carrying  amount of the asset may not be  recoverable,  the
Company will reduce the carrying value by the amount of the impairment.



                                       12

<PAGE>

                             FAC REALTY TRUST, INC.
             Notes to Consolidated Financial Statements (continued)

5. Notes Receivable

In December  1997,  the Company  advanced  $8.5  million to Konover & Associates
South ("Konover") (see Note 15) which was used to prepay certain Konover debt on
a shopping center at a discount.  The note receivable is secured by the shopping
center and will be repaid upon the purchase of the shopping center from Konover.
Additionally,  in  October,  1997,  the  Company  advanced  $2.3  million to the
partners in ARC who control  certain  land  parcels  which the Company  plans to
co-develop  in joint  ventures  with ARC (see Note 3).  The note  receivable  is
secured by the  partners'  interest in  properties to be acquired by the Company
(see Note 11) and will be converted to equity in the joint ventures formed.

6.   Debt on Income Properties

Debt  on  income  properties  consists  of  the  following  at  December  31 (in
thousands):

<TABLE>
<CAPTION>
                                                                                           1997         1996
                                                                                       ------------------------
<S>                                                                                     <C>        <C>     
$150,000 credit facility with Nomura Asset Capital Corporation, interest at a rate of
   LIBOR  plus 2.25% (7.9% at December 31, 1997) (a)                                    $134,545   $     --

Class A Mortgage Notes - payable in 85 monthly principal payments ranging from
   approximately $104 to $173 determined using various parameters plus weighted
   average monthly interest payments at 7.51%.  Unpaid principal and accrued interest
   due June, 2002 (b)                                                                     54,583         55,907

Class B Mortgage Notes - monthly interest payments at 7.87% with entire balance due
   June, 2002 (b)                                                                         20,000         20,000

Class C Mortgage Notes - monthly interest payments at 8.4% with entire balance due
   June, 2002 (b)                                                                         17,000         17,000

Note payable to a financial institution with 45 monthly principal and interest
   payments of  approximately  $59 with interest of prime rate (8.5% at December
   31,  1997) plus 2 1/4% with  entire  balance  repaid from  proceeds  from PSR
   funding (see
   Note 15)                                                                                5,711          5,788

$2,500 credit facility with a financial institution, interest at prime rate plus 1/2%        736            --

$75,000 credit facility with a financial institution repaid in February 1997 (c)              -          75,000
                                                                                       ----------------------------
                                                                                       $ 232,575     $ 173,695
                                                                                       ============================
</TABLE>

(a)  The Company  obtained a $150  million  credit  facility  with Nomura  Asset
     Capital  Corporation  ("Nomura") in February 1997. The credit facility with
     Nomura is secured by 21 of the  Company's  centers  plus an  assignment  of
     excess  cash flow from the  properties  held by FSA  Properties,  Inc.  The
     Nomura  credit  facility  is for a term  of 2 years  with a 1 year  renewal
     option.   The  proceeds  from  the  credit   facility  were  used  to  fund
     acquisitions,  expansions of existing centers, repay indebtedness, and fund
     operating  activities,  including  the  purchase of the common  stock.  The
     indebtedness repaid included $75 million of debt on income properties, $7.5
     million of unsecured senior notes and $2.0 million of other unsecured notes
     outstanding  at December 31,  1996.  As a result of this  transaction,  the
     Company  expensed  the  unamortized  deferred  financing  costs of $986,000
     related to its previous  credit  facility as an  extraordinary  item in the
     accompanying  consolidated  statements  of  operations  for the year  ended
     December 31, 1997. The new credit  facility  contains  financial  covenants
     relating  to debt to total  asset  value and net  operating  income to debt
     service coverage.  All financial convenants were satisfactorily met for the
     year ended December 31, 1997. The balance was repaid in part  subsequent to
     December 31, 1997 and 11 centers were  released as collateral to secure the
     new permanent facility (see Note 15).

(b)  In 1995, the Company's wholly owned subsidiary,  FSA Finance, Inc. closed a
     $95 million rated debt  securitization  (the "Mortgage  Notes").  The total
     offering of $95 million  consisted of $58 million of Class A Mortgage Notes
     rated  "AA";  $20  million of Class B  Mortgage  Notes  rated "A";  and $17
     million of Class C Mortgage  Notes  rated  "BBB".  The  Mortgage  Notes are
     secured by a  cross-collateralized  mortgage which covers 18 factory outlet
     centers owned by FSA Properties, Inc.



                                       13
<PAGE>

                             FAC REALTY TRUST, INC.
             Notes to Consolidated Financial Statements (continued)

6. Debt on Income Properties (continued)

(b)  Mortgage Notes are subject to Optional  Redemption (as defined) in whole or
     in part on any  payment  date  beginning  on June  1,  1998.  Any  Optional
     Redemption  occurring  on or prior to  December  1, 2001 is  subject to the
     payment of a yield maintenance premium.

(c)  In April,  1996, the Company  closed on a $75 million credit  facility from
     Bank One, Dayton, The facility was used to refinance the Company's existing
     credit  line and repay $5  million in  short-term  promissory  notes.  As a
     result,  the Company expensed the unamortized  deferred  financing costs of
     $103,000  as  an  extraordinary  item  in  the  accompanying   consolidated
     statements of operations for the year ended December 31, 1996.

Combined  aggregate  principal  maturities  of notes  payable are as follows (in
thousands):

         1998                                   $    8,007
         1999                                      136,226
         2000                                        1,810
         2001                                        1,952
         2002                                       84,580
                                              =================
                                                $  232,575
                                              =================

The Company  estimates  that the fair value of notes  payable  approximates  the
carrying  value based upon its effective  current  borrowing  rate for debt with
similar terms and remaining maturities. Disclosure about fair value of financial
instruments is based upon information available to management as of December 31,
1997.  Although  management is not aware of any factors that would significantly
affect the fair value of amounts,  such  amounts  have not been  comprehensively
revalued for purposes of these financial statements since that date.

7.    Convertible Preferred Stock and Unsecured Senior Notes

On April 2, 1996,  the  Company  executed a Note  Purchase  Agreement  and other
related documents (collectively the "Agreements") with Gildea Management Company
("Gildea") and Blackacre Bridge Capital,  L.L.C.  ("Blackacre"),  whereby Gildea
and Blackacre  agreed to purchase in a private  placement up to $25.0 million of
the Company's  Exchangeable Notes (the "Exchangeable Notes") and $5.0 million of
its  Senior  Notes,  both of which  were  unsecured.  On  April 3 and 29,  1996,
Exchangeable Notes with an aggregate principal amount of $10.0 million each were
sold pursuant to the Agreements.

Holders of the Exchangeable Notes, subject to certain conditions,  were required
to exchange  them for shares of the  Company's  Series A  Convertible  Preferred
Stock (the "Series A Preferred")  at the rate of one share of Series A Preferred
for each  $25 in  principal  amount  of  Exchangeable  Notes,  upon  stockholder
approval of necessary  amendments to the Company's  Certificate of Incorporation
and authorization of the Series A Preferred. Each share of Series A Preferred is
convertible  into shares of the  Company's  Common Stock at a  conversion  price
equal to the lower of $9 per share or the 30-day  average price of the Company's
Common Stock following an  announcement  by the Company of the initial  funding,
subject to certain limitations. Dividends on the Series A Preferred will be paid
quarterly on each Common Stock  dividend  payment date in an amount equal to the
dividends  that  would have been paid on the Common  Stock  then  issuable  upon
conversion of the Series A Preferred.

                                       14

<PAGE>

                             FAC REALTY TRUST, INC.
             Notes to Consolidated Financial Statements (continued)

7. Convertible Preferred Stock and Unsecured Senior Notes (continued)

On August 1, 1996, the Company issued holders of the Exchangeable  Notes 800,000
shares of the Company's  Series A Preferred  Stock in exchange for notes with an
aggregate  principal amount of $20 million (net of issue cost of $838,000).  The
800,000 shares of the Series A Preferred Stock are convertible, at the option of
the  holders,  into an aggregate of  2,222,222  shares of the  Company's  Common
Stock.  No  dividends  were  accrued or paid on the Series A Preferred  Stock in
1997.

On April 29,  1996,  $5 million of the Senior  Notes were placed at 97% of their
face amount.  On November 12, 1996, $2.5 million of the Senior Notes were placed
at 100% of their face amount. In March 1997, the Company repaid the Senior Notes
at their face amounts from the proceeds of the Nomura credit facility.

In  connection  with the issuance of the  Exchangeable  Notes and the initial $5
million  of  Senior  Notes,  on April 3,  1996 the  Company  issued  the  holder
detachable  warrants for the  purchase of 200,000  shares of Common Stock of the
Company.  Each warrant entitles the holder,  subject to certain  conditions,  to
purchase on or before  April 3, 2003 one share of Common Stock of the Company at
a  price  equal  to  $9.50  per  share,  subject  to  adjustment  under  certain
conditions.  The  warrants  were valued at an  aggregate  value of $6,000 at the
issuance date. The $2.5 million of Senior Notes have detachable warrants for the
purchase of 100,000  shares of Common Stock of the Company that were issued with
terms and  conditions  similar to the existing  Senior  Notes,  except that each
warrant  entitles  the holder to purchase  one share of Common  Stock at a price
equal to $8.375 per share.  These warrants were valued at an aggregate  value of
$3,000 at the issuance date.

8. Stock Option and Compensation Plans

Employee Stock Incentive Plan

The Company has  established a stock option plan which provides for the issuance
of 1,100,000 shares through the grant of qualified and  nonqualified  options to
officers and employees at exercise prices not less than market value on the date
of grant. Generally,  options vest proportionately over a period of four to five
years from the date of grant and are  exercisable  for 10 years from the date of
grant.

A summary of changes in outstanding options is as follows:

<TABLE>
<CAPTION>
                                               1997                     1996                    1995
                                      -------------------------------------------------------------------------
                                                     Avg.                      Avg.                      Avg.
                                        Shares      Price         Shares      Price          Shares     Price
                                      -------------------------------------------------------------------------
<S>                                    <C>          <C>            <C>        <C>            <C>       <C>   
Balance, beginning of year             1,047,500    $15.01         432,500    $22.72         330,500   $23.00
      Options granted, at market         645,000    $ 5.78         615,000    $23.00         102,000   $21.50
      Canceled                          (949,250)   $13.43              --        --              --       --
      Exercised                               --        --              --        --              --       --
                                      -------------------------------------------------------------------------
Balance, end of year                     743,250    $ 9.29       1,047,500    $15.01         432,500   $22.65
                                      =========================================================================

Exercisable, end of year                 281,800    $13.14         512,820    $13.14         317,080   $22.72
                                      =========================================================================

Weighted Average Fair Value of
Options Granted During the Year                     $ 4.80                    $ 5.34                   $11.32
                                      =========================================================================
</TABLE>




                                       15

<PAGE>

                             FAC REALTY TRUST, INC.
             Notes to Consolidated Financial Statements (continued)

8.   Stock Option and Compensation Plans (continued)

The following table summarizes  information  about stock options  outstanding at
December 31, 1997:

<TABLE>
<CAPTION>
                                 Options Outstanding                   Options Exercisable
                      ----------------------------------------------------------------------
                                             Weighted Average
                                          Remaining Contractual
  Exercise Prices        Shares               Life in Years                  Shares
--------------------------------------------------------------------------------------------
<S>                      <C>                       <C>                        <C>    
   $  23.00              123,250                   5.5                        114,200
   $  21.50               18,000                   7.1                          7,200
   $   7.50               50,000                   9.3                         10,000
   $   5.63              552,000                   9.8                        150,400
                         -------                                              -------
                         743,250                                              281,800
                         =======                                              =======
</TABLE>

The fair value of each option granted in 1997, 1996, and 1995 is estimated using
the Black-Scholes option pricing model with the following assumptions:

                                            1997           1996           1995
                                          -------------------------------------
        Dividend yield                       0.00%          0.00%          0.00%
        Expected volatility                 10.40%         10.40%         10.40%
        Risk-free interest rate              6.80%          6.99%          7.74%
        Expected life in years                  5             10             10
        
        Restricted Stock Plan

The Company's shareholders' approved a restricted stock plan in 1996 whereby the
Company can award up to 500,000 shares of common stock to employees.  Generally,
awards  under  the  plan  vest at the end of the  restriction  period,  which is
typically  three  years.  The awards are recorded at market value on the date of
grant as  unearned  compensation  expense  and  amortized  over the  restriction
periods.  Generally,  recipients are eligible to receive dividends on restricted
stock issued.  Restricted stock and annual expense information is as follows (in
thousands, except share amounts):

                                                               1997        1996
                                                            --------------------
Number of restricted shares awarded                          444,852      42,592
Award date - average fair value per share                   $   6.62    $  10.73
Number of restricted shares exchanged for options to
    repurchase restricted stock                              390,884          --
Restricted shares repurchased
                                                              17,353          --
Restricted shares outstanding at December 31, 1997            79,207      42,592

Annual expense, net                                         $    493    $    392

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

On  November  11,  1997,  the  Company  adopted a plan  whereby  members  of the
Company's executive management exchanged a total of 390,884 shares of restricted
stock  previously  awarded  to them for the  right to  repurchase  such  shares.
Holders of these  repurchase  rights have no voting rights,  but are entitled to
receive a dividend  equivalent,  an amount equal to any cash  dividends  paid to
common  stockholders.  Recipients of the  repurchase  rights may exercise  their
rights  at any time  beginning  the date the  restricted  stock  subject  to the
repurchase  right  becomes  vested and ending 15 years from the date of vesting.
The  exercise  price is 10% of the fair  market  value of the  restricted  stock
subject  to  the  repurchase  right  determined  on the  date  of  grant  of the
repurchase  right.  There is no  effect  on the  amount  of  compensation  to be
recorded as a result of the exchange as the  effective  value of the  restricted
stock granted is the same as the value of the discounted  repurchase  right.  At
December 31, 1997, no repurchase rights were exercisable.

During 1997, the Company's Independent Directors, upon the recommendation of the
Executive Compensation Committee, which in turn received recommendations from an
executive  compensation  consulting firm, approved a long-term incentive program
for two senior executive officers.  Pursuant to such program,  270,000 shares of
restricted stock with a value of $1,788,750 were awarded to the senior executive
officers  replacing  180,000 shares  previously  awarded in 1996 with a value of
$1,643,000. In 1996, 90,000 shares of restricted stock previously granted to the
former chairman and chief executive officer of the Company,  valued at $900,000,
were cancelled upon his resignation.


                                       16
<PAGE>


                             FAC REALTY TRUST, INC.
             Notes to Consolidated Financial Statements (continued)

8.   Stock Option and Compensation Plans (continued)

Employee Stock Purchase Plan

During  1997,  the Company  adopted an Employee  Stock  Purchase  Plan (ESPP) to
provide all full-time  employees an opportunity to purchase shares of its common
stock through payroll deductions over a six-month  subscription  period. A total
of 25,000 shares are available for award under this plan.  The purchase price is
equal to 85% of the fair  market  value on  either  the first or last day of the
subscription  period, which ever is lower. The initial subscription period began
July 1, 1997 and ended on December 31, 1997 on which date 6,530 shares of common
stock were issued to employees at a price of $5.21 per common share.

Pro Forma Information

During 1996, the Company adopted Statement of Financial Accounting Standards No.
123,  "Accounting  for Stock-Based  Compensation"  (SFAS No. 123). In accordance
with the  provisions  of SFAS No.  123,  the  Company  has  elected to apply APB
Opinion No. 25 and related  Interpretations  in accounting for its stock option,
restricted  stock,  and employee stock purchase plan. Had the Company elected to
recognize  compensation cost for these plans based on the fair value at the date
of grant,  as  prescribed  by SFAS No. 123,  net income and net income per share
would have been  reduced by the pro forma  amounts  indicated in the table below
(in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                       1997                        1996                        1995
                            -----------------------------------------------------------------------------------
                              Reported      Proforma      Reported      Proforma      Reported      Proforma
                            -----------------------------------------------------------------------------------
<S>                         <C>            <C>           <C>           <C>            <C>           <C>       
Net loss available to
   common stockholders      $ (1,416)      $  (2,481)    $  (6,349)    $ (7,481)      $(13,101)     $ (13,860)
Net loss per share          $  (0.12)      $   (0.21)    $   (0.55)    $  (0.63)      $  (1.11)     $   (1.17)
</TABLE>

Other Plans

The Company  offers the FAC Realty Trust,  Inc.  401(k) and Profit  Sharing Plan
(the "Plan"),  a tax qualified defined  contribution plan to its employees.  The
Plan covers  substantially  all  employees  of the Company who have  attained 21
years of age and completed at least one year of service.  Eligible employees may
elect to contribute 1% to 15% of their compensation to the Plan. The Company may
elect to match a certain percentage of each employees  contribution and may also
elect to make a profit  sharing  contribution.  For the years ended December 31,
1997,  1996 and 1995,  the Company  contributed  $102,579,  $64,084 and $59,710,
respectively,  as a  matching  contribution  and  there  was no  profit  sharing
contribution made by the Company.

9.   Leases

The Company leases certain signage and equipment under capital lease  agreements
which expire  beginning in 1998 through 2007.  Amortization  of assets  acquired
through capital leases is included with depreciation and amortization expense in
the accompanying statements of operations.

The Company  leased an airplane  under an operating  lease  beginning in January
1994  through  December  1995.  Total  lease  payments  under  this  lease  were
approximately  $659,000 for the year ended December 31, 1995. As of December 31,
1995, the lease was canceled at a cost of approximately $180,000.



                                       17
<PAGE>


                             FAC REALTY TRUST, INC.
             Notes to Consolidated Financial Statements (continued)

9.   Leases (continued)

Aggregate  future  minimum lease  payments  under  capital and operating  leases
having  remaining  terms in excess of one year as of December 31,  1997,  are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                                Capital          Operating
                                                                Leases            Leases
                                                               -----------------------------
<S>                                                            <C>            <C>      
  1998                                                         $     404      $     356
  1999                                                               304            276
  2000                                                               280            206
  2001                                                               248            154
  2002                                                               167            100
  Thereafter                                                          48             72
                                                               -----------------------------
                                                                   1,451      $   1,164
                                                                              ==============
  Less amounts representing interest ranging from 8% to 13%          320
                                                               ===============
  Present value of minimum lease payments                      $   1,131
                                                               ===============
</TABLE>

10.  Tenant Lease Agreements

The Company is the lessor of retail stores under  operating  leases with initial
terms that expire from 1998 to 2017. Many leases are renewable for five years at
the lessee's option.

Expected  future  minimum rents to be received from tenants,  excluding  renewal
options and contingent rentals, under operating leases in effect at December 31,
1997, are as follows (in thousands):

         1998                                       $  35,659
         1999                                          30,998
         2000                                          24,748
         2001                                          18,281
         2002                                          14,048
         Thereafter                                    28,806
                                                    ---------
                                                    $ 152,540
                                                    =========

For the years ended  December  31,  1997,  1996 and 1995 rental  revenue  from a
single major tenant, VF Corporation,  comprised  approximately 11%, 14% and 14%,
respectively, of total rental revenue.

11.  Acquisitions

On March 27, 1997, the Company  purchased five community  centers located in the
Raleigh,  North Carolina area for $32.3 million. Pro forma results of operations
for the years ended  December 31, 1997 and 1996 are set forth below which assume
the acquisition of the five properties aggregating 606,000 square feet of retail
and  office  space had been  completed  as of  January  1,  1996.  The pro forma
condensed statements of operations are not necessarily indicative of what actual
results of operations  of the Company would have been assuming such  transaction
had been  completed  as of  January 1,  1996,  nor does it purport to  represent
results of  operations  of future  periods (in  thousands,  except for per share
data).


                                       18
<PAGE>


                             FAC REALTY TRUST, INC.
             Notes to Consolidated Financial Statements (continued)

11.    Acquisitions (continued)

                                          Pro forma year ended December 31,
                                             1997                  1996
                                         -----------------------------------
                                          (Unaudited)           (Unaudited)
                                         -----------------------------------
Revenues                                   $ 55,019              $ 52,302
Property Operating Costs                     16,042                15,279
   Depreciation                              15,854                14,610
   General and administrative                 6,422                 6,338
   Interest                                  17,062                16,678
   Property sales and adjustments                --                 4,963
                                           ========              ========
Loss before extraordinary item             $   (361)             $ (5,566)
                                           ========              ========
Loss per share                             $  (0.03)             $  (0.47)
                                           ========              ========
                                                           
     On October 7, 1997, the Company  entered into an agreement to purchase nine
shopping  centers  located in North Carolina and Virginia,  totaling 1.0 million
square feet,  and to assume third party  management of an additional 1.2 million
square feet of  community  shopping  centers.  The centers to be  purchased  are
valued at $63.3 million. The purchase of the shopping centers was subject to the
final approval of respective  partnerships holding the properties which has been
received, as well as holders of mortgage notes on the shopping centers which has
been received on all properties  except for one. The remaining  shopping  center
will be managed by the Company until either approval is received or the mortgage
is retired.

     In exchange for their equity ownership  interests in the community centers,
the sellers will receive approximately 1.2 million share-equivalent  partnership
units in the Operating  Partnership and approximately  $2.9 million in cash. The
number of Units to be issued to the sellers was based on a $9.50 price per share
of the Company's  Common  Stock.  Of the Units to be issued,  approximately  0.5
million  will  remain  unissued  until the  completion  of  certain  performance
requirements  and the acquisition of the remaining  shopping center noted above.
As part of the purchase price, the Company will also assume  approximately $49.4
million of primarily fixed rate debt on the properties to be acquired.

As of October 1997, the Company has been managing the properties and, in return,
receives a  management  fee,  as defined.  In 1997,  the  Company  recorded  net
management fees of approximately $300,000 (see Note 15).

12. Commitments and Contingencies

Under the terms of its 1993 purchase agreement to acquire the VF Properties from
VF Corporation,  the Company  committed to expand certain of these properties by
an  aggregate of at least  320,000  square feet in the 36 months  following  the
acquisition.  Through December 31, 1996, the Company  completed eight expansions
totaling  approximately  303,000  square feet. On December 10, 1996, the Company
and VF Factory Outlet, Inc. ("VFFO"), an operating subsidiary of VF Corporation,
entered into an Amendment and Waiver Agreement  ("Amendment  Agreement") whereby
the  requirement to complete the final two  expansions  was waived.  The Company
remained  obligated to pay a tenant  allowance  for two centers and will provide
for VFFO's benefit nine additional billboards at three center locations selected
by VFFO for at least three years ending July,  2000.  Pursuant to the  Amendment
Agreement,  the obligation,  under the terms of the original commitment,  to pay
$9.5  million  to VF  Corporation  in the event all of the  expansions  were not
completed  as planned,  has been  extinguished.  In 1997,  the Company paid VFFO
$2,016,000 for tenant allowances (see Note 4).



                                       19
<PAGE>


                             FAC REALTY TRUST, INC.
             Notes to Consolidated Financial Statements (continued)

12. Commitments and Contingencies (continued)

The  Company is  currently  in the  pre-development  and  marketing  stage for a
property located in Lake Carmel, New York. If the appropriate tenant interest is
obtained  and the  appropriate  agreements,  permits  and  approvals  have  been
received, the Company intends to commence construction in the Fall of 1998.

On July 19 and October 30, 1996, two purported  class action lawsuits were filed
in the United States  District Court for the Eastern  District of North Carolina
against the Company,  its former chairman and chief executive officer,  J. Dixon
Fleming,  Jr.,  and a former  president  of the  Company  David A.  Hodson.  The
complaints  sought  certification  of a class  consisting  of all persons  (with
certain  exclusions) who purchased  common stock of the Company between December
16, 1993 and April 17, 1996,  inclusive  (the "Class  Period").  The  complaints
alleged  that,  during  the  Class  Period,  defendants  made  certain  false or
misleading  statements  to the public  concerning  (1)  earnings  and funds from
operations; (2) the Company's ability to maintain dividends at prior levels; (3)
the alleged  maintenance of dividends through  borrowings rather than funds from
operations;  (4) the Company's ability to close a proposed acquisition;  (5) the
alleged  purchase  of  certain  properties  from  affiliates  of the  individual
defendants at inflated prices;  and (6) alleged improper  accounting  practices.
The cases were  consolidated  and the  Company  filed  motions  to dismiss  both
lawsuits.

In November, 1997, the court granted the motions to dismiss and entered judgment
for  defendants.  The time for  plaintiffs  to file appeals has expired  without
appeal.

The Company is a party to certain legal  proceedings  relating to its ownership,
management  and leasing of the  properties,  arising in the  ordinary  course of
business.  Management  does not expect the resolution of these matters to have a
significant impact on the Company's financial position or results of operations.

13.  Other Related Party Transactions

During  1993,  the Company  acquired a 19-acre  tract of land in a  non-monetary
transaction  from a  partnership  whose  partners  include two former  executive
officers of the Company. The recorded value of the land was $748,000.  In return
for the land, the Company  assumed  certain  outstanding  debt and the remaining
purchase  price was settled by reducing  amounts owed to the Company by a tenant
whose majority  owners were also partners in the  partnership.  A review of this
and other transactions  resulted in J. Dixon Fleming,  Jr., the Company's former
Chairman and Chief Executive Officer,  agreeing to permit the Company to satisfy
certain asset  valuation  issues by  offsetting  amounts  otherwise  owed to Mr.
Fleming  pursuant to his  employment  agreement  or by the  acceptance  from Mr.
Fleming of some other cash or value  equivalent.  In 1997,  the Company  entered
into an  agreement  with Mr.  Fleming and sold to him the 19-acre land tract for
the sum of $750,000.

In 1997, J. Dixon Fleming,  Jr. resigned as Chairman and Chief Executive Officer
of the Company.  Pursuant to his three year employment agreement entered into on
December 15, 1995,  he was entitled to a lump sum  distribution  of the value of
the remaining term of the agreement. The Company charged $767,000 to general and
administrative expense in 1996 for the remaining value of his contract.



                                       20
<PAGE>

                             FAC REALTY TRUST, INC.

             Notes to Consolidated Financial Statements (continued)


14.  Terminated Acquisition

On  August  25,  1995,  the  Company  executed   definitive  written  agreements
("Agreements")  to acquire both the factory  outlet  centers owned by the Public
Employees  Retirement  System of Ohio  ("OPERS") and the management and business
operations  of the Charter Oak Group Ltd., a subsidiary  of  Rothschild  Realty,
Inc., ("RRI"), subject to certain terms and conditions. On December 7, 1995, the
Company   reported  that  RRI  had  terminated  the  Agreements  and  thus,  the
acquisitions did not take place.

Subsequent to the  termination  of the  Agreements,  RRI for itself on behalf of
OPERS made a demand for payment  with  respect to a $5 million  promissory  note
(the "Note") issued by the Company in connection  with its proposed  purchase of
the OPERS' centers and the  management and business  operations of RRI's Charter
Oak  Group,  Ltd.  The Note was  payable  only upon the  concurrence  of certain
conditions  relating  to the  termination  of the  Agreements  and  the  Company
asserted  that  certain  of the  required  conditions  were  not  met.  After an
unsuccessful  attempt  at  mediation  of the  dispute,  RRI  filed  for  binding
arbitration  of the  matter to settle the  dispute.  Following  the  arbitration
hearing held in late April 1997,  the Company  agreed to pay $2.9 million to RRI
on behalf of related  entities of OPERS in settlement of all outstanding  issues
between the Company and OPRES/RRI relating to the terminated merger. The Company
recorded  a charge of $1.7  million  in  December  1995 in  connection  with the
termination.  The remaining $1.2 million of the $2.9 million settlement, plus an
estimate for the Company's  legal fees was charged to  operations  in 1997.  All
amounts due to OPERS/RRI have been paid.

15. Subsequent Events

On January 7, 1998,  the Company  completed the purchase of a 55,909 square foot
shopping  center  located in Danville,  VA. This Food Lion  anchored  center was
purchased for $3.1 million.

On February 24, 1998,  Prometheus  Southeast Retail,  LLC, ("PSR") a real estate
investment affiliate of Lazard Freres Real Estate Investors,  LLC entered into a
definitive  agreement  with  the  Company  to  make  a  $200  million  strategic
investment  in the Company.  PSR has committed to purchase $200 million in newly
issued common shares of the Company at a purchase price of $9.50. The investment
will be made in stages  through the end of 1999  allowing  the Company to obtain
capital as needed to fund its future  acquisition and development  plans as well
as retire debt. On March 23, 1998,  the Company  received the first  installment
totaling $22.3 million which represents 2,350,000 common shares. Upon completion
of funding, PSR will own an equity interest in the Company of approximately 60%,
on a fully  diluted  basis,  not  including  any  further  issuance of Units for
transactions  under contract or  transactions  the Company may enter into in the
future.  As part of the  transaction,  three  representatives  of Lazard will be
nominated  to the  Company's  Board of  Directors,  bringing the total number of
directors to nine.

On February  24,  1998,  the  Company  announced  the  execution  of  definitive
agreements with Konover,  a privately held real estate development firm based in
Boca  Raton,   Florida,  to  acquire  11  community  shopping  centers  totaling
approximately  2.0 million  square feet and valued at nearly $100  million.  The
purchase  equates  to  approximately  $24  million in equity  consisting  of the
issuance  of Units at $9.50  per  unit,  and/or  cash,  plus the  assumption  of
approximately $76 million in debt. At closing, $17 million of the equity will be
paid in the form of Units or cash. The remaining $7 million will be paid in cash
over a three-year period with interest at 7.75% per annum.

As part of the  transaction,  the  Company  intends  to  operate  under the name
"Konover  Property Trust".  The Company will remain listed on the New York Stock
Exchange and intends to change its ticker symbol, from FAC to KPT pending formal
approval by shareholders in June, 1998.  Additionally,  the current employees of
Konover will join the Company as a result of the transaction.  The new employees
include development, leasing, property management, administrative and accounting
professionals.  The Company will continue to operate the Konover  office in Boca
Raton due to its strategic location in the Southeast.



                                       21
<PAGE>


                             FAC REALTY TRUST, INC.

             Notes to Consolidated Financial Statements (continued)

15.  Subsequent Events (continued)

Simon Konover,  founder of Konover & Associates, a $500 million real estate plus
company headquartered in West Hartford, Connecticut, will become Chairman of the
Board of the  Company  upon  completion  of the  transaction.  He will not be an
executive officer of the Company.

On March 11, 1998, the Company closed on a $75 million, 15-year permanent credit
facility secured by 11 properties previously securing the $150 million revolving
credit facility. The loan is at an effective rate of 7.73% and is amortized on a
338-month basis. The proceeds were used to pay down certain  outstandings on the
$150 million Nomura credit facility.

As of March 31, 1998, seven of the nine centers discussed in Note 11 had closed.
An eighth center is expected to close in second  quarter of 1998.  The ninth and
final  center  will be managed by the  Company and is expected to be acquired in
the year 2000. The loan assumption fee is currently  unreasonable,  however, the
loan is prepayable in the year 2000.

16.  Quarterly Information (Unaudited)

Selected  quarterly  financial data for the four quarters in 1997 and 1996 is as
follows (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                   Quarter ended
                                                 -----------------------------------------------------
                                                  March 31      June 30    September 30   December 31
                                                 -----------------------------------------------------
<S>                                              <C>           <C>           <C>           <C>       
1997:
    Total revenue                                $   11,922    $   13,475    $   13,614    $   14,715
                                                 ====================================================

    Net (loss) income applicable
       to common shareholders                    $   (2,422)   $      119    $      329    $      558
                                                 ====================================================

    Basic earnings (loss) per common share:
      (Loss) income before extraordinary items   $    (0.12)   $     0.01    $     0.03    $     0.04
      Extraordinary item                              (0.08)           --            --            --
                                                 ====================================================
      Net (loss) income                          $    (0.20)   $     0.01    $     0.03    $     0.04
                                                 ====================================================

    Diluted earnings (loss) per common share:
      (Loss) income before extraordinary item    $    (0.12)   $     0.01    $     0.02    $     0.04
      Extraordinary item                              (0.08)           --            --            --
                                                 ====================================================
      Net (loss) income                          $    (0.20)   $     0.01    $     0.02    $     0.04
                                                 ====================================================

1996:
    Total revenue                                $   11,261    $   11,736    $   12,065    $   12,108
                                                 ====================================================
     Net income (loss) applicable
     to common shareholders                      $      412    $      (94)   $     (510)   $   (6,260)
                                                 ====================================================

Basic and Diluted
    Earnings per common share:
     Income (loss) before extraordinary items    $     0.03    $    (0.01)   $    (0.04)   $    (0.52)
     Extraordinary item                                  --            --            --         (0.01)
                                                 ====================================================
     Net income (loss)                           $     0.03    $    (0.01)   $    (0.04)   $    (0.53)
                                                 ====================================================
</TABLE>


                                       22
<PAGE>


                             FAC Realty Trust, Inc.

             Schedule III - Real Estate and Accumulated Depreciation

                                December 31, 1997

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                    
                                                                                                                                    
                                                                                Cost Capitalized        Adjustment to Net Realizable
                                      Initial Cost to Companany            Subsequent to Acquisition               Value            
------------------------------------------------------------------------------------------------------------------------------------
Description             Encumbrances         Land           Bldg. and        Land           Bldg. and       Land        Bldg. and   
                                                             Imprvmts                       Imprvmts.                   Imprvmts.   
------------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>              <C>             <C>             <C>              <C>          <C>            <C>          
Boaz, AL                   5,193,054          34,998           42,004         4,232         1,138,129                               
------------------------------------------------------------------------------------------------------------------------------------
Casa Grande, AZ            5,751,418       2,220,397       10,557,446                         390,154    (1,362,190)    (6,037,810) 
------------------------------------------------------------------------------------------------------------------------------------
Mesa, AZ                   2,986,648       1,399,858        7,060,705        47,797         3,379,757                               
------------------------------------------------------------------------------------------------------------------------------------
Tucson, AZ                 1,117,314         772,231        3,572,837        20,215           156,035                               
------------------------------------------------------------------------------------------------------------------------------------
Lathrop, CA                5,711,373       2,842,636        7,048,844                       1,465,246    (1,148,083)    (3,751,917) 
------------------------------------------------------------------------------------------------------------------------------------
Vacaville, CA             35,675,827      30,008,142       49,464,506                         872,040                               
------------------------------------------------------------------------------------------------------------------------------------
Graceville, FL             2,539,121         556,765        2,544,654                         201,068                               
------------------------------------------------------------------------------------------------------------------------------------
Lake Park, GA              3,806,559       1,128,056        4,801,250                          39,827                               
------------------------------------------------------------------------------------------------------------------------------------
West Frankfort, IL           952,464         471,041        2,130,358                           8,945                               
------------------------------------------------------------------------------------------------------------------------------------
Story City, IA             2,646,945         601,802        2,737,481        22,653         2,032,760                               
------------------------------------------------------------------------------------------------------------------------------------
Carrollton, KY             1,034,889         340,190        1,555,641                          70,865                               
------------------------------------------------------------------------------------------------------------------------------------
Georgetown, KY             8,722,314         937,490        6,510,116                          40,761                               
------------------------------------------------------------------------------------------------------------------------------------
Hanson, KY                   833,406         308,876        1,408,641                           3,300                               
------------------------------------------------------------------------------------------------------------------------------------
Arcadia, LA                1,263,847         404,864        1,856,173         3,492         1,561,120                               
------------------------------------------------------------------------------------------------------------------------------------
Iowa, LA                   3,443,524         627,061        2,860,591                       2,382,847                               
------------------------------------------------------------------------------------------------------------------------------------
Kittery, ME                2,108,930         355,080        2,485,826                          98,547                               
------------------------------------------------------------------------------------------------------------------------------------
Branson, MO               13,486,815       5,702,365       24,600,479        31,999           686,237                               
------------------------------------------------------------------------------------------------------------------------------------
Lebanon, MO                2,142,765         403,915        1,889,710                          16,109                               
------------------------------------------------------------------------------------------------------------------------------------
Tupelo, MS                 1,424,309         430,765        1,956,158        11,484         1,106,554                               
------------------------------------------------------------------------------------------------------------------------------------
Nebraska City, NE          2,457,878         400,684        1,813,050        16,225         1,728,151                               
------------------------------------------------------------------------------------------------------------------------------------
Las Vegas, NV              9,826,865       7,158,719       18,761,605                         162,387                               
------------------------------------------------------------------------------------------------------------------------------------
Conway, NH                   701,910         324,652        2,277,122                         107,941     (151,997)     (1,048,003) 
------------------------------------------------------------------------------------------------------------------------------------
Lake George, NY            1,815,483         975,466        4,441,445                         328,567                               
------------------------------------------------------------------------------------------------------------------------------------
Smithfield, NC            24,553,566          77,667        9,064,651     1,262,314         7,290,072                               
------------------------------------------------------------------------------------------------------------------------------------
Crossville, TN             2,665,068         519,239        2,415,619        11,389         2,255,001                               
------------------------------------------------------------------------------------------------------------------------------------
Nashville, TN             25,877,039       5,947,579       10,078,170       665,849         5,024,214                               
------------------------------------------------------------------------------------------------------------------------------------
Tri-Cities, TN             3,340,193         353,983        5,648,812       651,897            26,479                               
------------------------------------------------------------------------------------------------------------------------------------
Union City, TN               970,781         296,580        1,343,859         2,983            88,011                               
------------------------------------------------------------------------------------------------------------------------------------
Corsicana, TX              1,172,219         336,335        1,533,169                          37,892                               
------------------------------------------------------------------------------------------------------------------------------------
Hempstead, TX              1,235,241         375,487        1,711,282      (99,997)            20,000                               
------------------------------------------------------------------------------------------------------------------------------------
LaMarque, TX               7,647,188       4,066,414       11,864,248                          26,711                               
------------------------------------------------------------------------------------------------------------------------------------
Livingston, TX             1,474,727         354,381        1,615,979                          35,331                               
------------------------------------------------------------------------------------------------------------------------------------
Mineral Wells, TX          1,487,331         315,944        1,441,675                           2,819                               
------------------------------------------------------------------------------------------------------------------------------------
Sulphur Springs, TX        2,357,042         512,898        2,326,326            62            88,308                               
------------------------------------------------------------------------------------------------------------------------------------
Draper, UT                 3,330,163         718,188        4,294,019        54,556         4,286,444                               
------------------------------------------------------------------------------------------------------------------------------------
North Bend, WA             9,597,907       8,428,229       12,052,296        41,432        13,542,535                               
------------------------------------------------------------------------------------------------------------------------------------
Eastgate, NC                 736,000         688,256        3,153,235     (416,436)             4,310                               
------------------------------------------------------------------------------------------------------------------------------------
Tower, NC                  4,487,202         659,677        4,459,411         7,087            67,106                               
------------------------------------------------------------------------------------------------------------------------------------
Northridge, NC             7,966,044       1,428,493        8,872,975        14,774           102,472                               
------------------------------------------------------------------------------------------------------------------------------------
Gateway, NC                3,062,894         816,566        3,246,925         8,628            32,619                               
------------------------------------------------------------------------------------------------------------------------------------
MacGregor, NC              6,667,781       1,428,513        7,694,110        14,742            89,251                               
------------------------------------------------------------------------------------------------------------------------------------
                         224,272,044      85,730,482      255,193,403     2,377,377        50,996,922   (2,662,270)    (10,837,730) 
------------------------------------------------------------------------------------------------------------------------------------

<CAPTION>            
-----------------------------------------------------------------------------------------------------------------------
                                                                                                                       
                                                                                                                       
                              Gross Amount at which                                                                    
                           Carried at Close of Period                                                                  
-----------------------------------------------------------------------------------------------------------------------
Description               Land                Bldg. and               Total           Accumulated         Date of      
                                               Imprvmts.                             Depreciation      Construction    
-----------------------------------------------------------------------------------------------------------------------
<S>                    <C>                    <C>                 <C>                  <C>                 <C>         
Boaz, AL                   39,230               1,180,133           1,219,363             224,514                      
-----------------------------------------------------------------------------------------------------------------------
Casa Grande, AZ           858,207               4,909,790           5,767,997           1,482,293                      
-----------------------------------------------------------------------------------------------------------------------
Mesa, AZ                1,447,655              10,440,462          11,888,117           1,478,046                      
-----------------------------------------------------------------------------------------------------------------------
Tucson, AZ                792,446               3,728,872           4,521,318             548,286                      
-----------------------------------------------------------------------------------------------------------------------
Lathrop, CA             1,694,553               4,762,173           6,456,726             564,141                      
-----------------------------------------------------------------------------------------------------------------------
Vacaville, CA          30,008,142              50,336,546          80,344,688           7,065,284                      
-----------------------------------------------------------------------------------------------------------------------
Graceville, FL            556,765               2,745,722           3,302,487             391,731                      
-----------------------------------------------------------------------------------------------------------------------
Lake Park, GA           1,128,056               4,841,077           5,969,133           2,035,470                      
-----------------------------------------------------------------------------------------------------------------------
West Frankfort, IL        471,041               2,139,303           2,610,344             308,527                      
-----------------------------------------------------------------------------------------------------------------------
Story City, IA            624,455               4,770,241           5,394,696             582,748                      
-----------------------------------------------------------------------------------------------------------------------
Carrollton, KY            340,190               1,626,506           1,966,696             228,231                      
-----------------------------------------------------------------------------------------------------------------------
Georgetown, KY            937,490               6,550,877           7,488,367           1,532,353                      
-----------------------------------------------------------------------------------------------------------------------
Hanson, KY                308,876               1,411,941           1,720,817             203,579                      
-----------------------------------------------------------------------------------------------------------------------
Arcadia, LA               408,356               3,417,293           3,825,649             558,650                      
-----------------------------------------------------------------------------------------------------------------------
Iowa, LA                  627,061               5,243,438           5,870,499             778,227                      
-----------------------------------------------------------------------------------------------------------------------
Kittery, ME               355,080               2,584,373           2,939,453             299,903                      
-----------------------------------------------------------------------------------------------------------------------
Branson, MO             5,734,364              25,286,716          31,021,080           1,649,746          1995        
-----------------------------------------------------------------------------------------------------------------------
Lebanon, MO               403,915               1,905,819           2,309,734             281,594                      
-----------------------------------------------------------------------------------------------------------------------
Tupelo, MS                442,249               3,062,712           3,504,961             387,316                      
-----------------------------------------------------------------------------------------------------------------------
Nebraska City, NE         416,909               3,541,201           3,958,110             455,907                      
-----------------------------------------------------------------------------------------------------------------------
Las Vegas, NV           7,158,719              18,923,992          26,082,711           2,666,995                      
-----------------------------------------------------------------------------------------------------------------------
Conway, NH                172,655               1,337,060           1,509,715             230,560                      
-----------------------------------------------------------------------------------------------------------------------
Lake George, NY           975,466               4,770,012           5,745,478             491,518                      
-----------------------------------------------------------------------------------------------------------------------
Smithfield, NC          1,339,981              16,354,723          17,694,704           4,377,840                      
-----------------------------------------------------------------------------------------------------------------------
Crossville, TN            530,628               4,670,620           5,201,248             785,367                      
-----------------------------------------------------------------------------------------------------------------------
Nashville, TN           6,613,428              15,102,384          21,715,812           2,366,330                      
-----------------------------------------------------------------------------------------------------------------------
Tri-Cities, TN          1,005,880               5,675,291           6,681,171           1,555,967                      
-----------------------------------------------------------------------------------------------------------------------
Union City, TN            299,563               1,431,870           1,731,433             207,867                      
-----------------------------------------------------------------------------------------------------------------------
Corsicana, TX             336,335               1,571,061           1,907,396             224,199                      
-----------------------------------------------------------------------------------------------------------------------
Hempstead, TX             275,490               1,731,282           2,006,772             246,694                      
-----------------------------------------------------------------------------------------------------------------------
LaMarque, TX            4,066,414              11,890,959          15,957,373           1,632,396                      
-----------------------------------------------------------------------------------------------------------------------
Livingston, TX            354,381               1,651,310           2,005,691             234,544                      
-----------------------------------------------------------------------------------------------------------------------
Mineral Wells, TX         315,944               1,444,494           1,760,438             213,454                      
-----------------------------------------------------------------------------------------------------------------------
Sulphur Springs, TX       512,960               2,414,634           2,927,594             349,440                      
-----------------------------------------------------------------------------------------------------------------------
Draper, UT                772,744               8,580,463           9,353,207           1,259,813                      
-----------------------------------------------------------------------------------------------------------------------
North Bend, WA          8,469,661              25,594,831          34,064,492           3,479,677                      
-----------------------------------------------------------------------------------------------------------------------
Eastgate, NC              271,820               3,157,545           3,429,365              81,001                      
-----------------------------------------------------------------------------------------------------------------------
Tower, NC                 666,764               4,526,517           5,193,281             114,990                      
-----------------------------------------------------------------------------------------------------------------------
Northridge, NC          1,443,267               8,975,447          10,418,714             232,987                      
-----------------------------------------------------------------------------------------------------------------------
Gateway, NC               825,194               3,279,544           4,104,738              86,311                      
-----------------------------------------------------------------------------------------------------------------------
MacGregor, NC           1,443,255               7,783,361           9,226,616             204,561                      
-----------------------------------------------------------------------------------------------------------------------
                       85,445,589             295,352,595         380,798,184          42,099,057                      
-----------------------------------------------------------------------------------------------------------------------

<CAPTION>          
--------------------------------------------------------------       
                                       Life on           
                                        Which            
                                     Depreciation                    
                                       in Latest                     
-----------------------------------     Income                       
Description         Date Acquired    Statements if                   
                                      Computed (1)                   
---------------------------------------------------                  
<S>                     <C>           <C>                            
Boaz, AL                1993          5-31.5 yrs.                    
---------------------------------------------------                  
Casa Grande, AZ         1994          5-31.5 yrs.                    
---------------------------------------------------                  
Mesa, AZ                1993          5-31.5 yrs.                    
---------------------------------------------------                  
Tucson, AZ              1993          5-31.5 yrs.                    
---------------------------------------------------                  
Lathrop, CA             1994          5-31.5 yrs.                    
---------------------------------------------------                  
Vacaville, CA           1993          5-31.5 yrs.                    
---------------------------------------------------                  
Graceville, FL          1993          5-31.5 yrs.                    
---------------------------------------------------                  
Lake Park, GA           1993          5-31.5 yrs.                    
---------------------------------------------------                  
West Frankfort, IL      1993          5-31.5 yrs.                    
---------------------------------------------------                  
Story City, IA          1993          5-31.5 yrs.                    
---------------------------------------------------                  
Carrollton, KY          1993          5-31.5 yrs.                    
---------------------------------------------------                  
Georgetown, KY          1993          5-31.5 yrs.                    
---------------------------------------------------                  
Hanson, KY              1993          5-31.5 yrs.                    
---------------------------------------------------                  
Arcadia, LA             1993          5-31.5 yrs.                    
---------------------------------------------------                  
Iowa, LA                1993          5-31.5 yrs.                    
---------------------------------------------------                  
Kittery, ME             1993          5-31.5 yrs.                    
---------------------------------------------------                  
Branson, MO                           5-31.5 yrs.                    
---------------------------------------------------                  
Lebanon, MO             1993          5-31.5 yrs.                    
---------------------------------------------------                  
Tupelo, MS              1993          5-31.5 yrs.                    
---------------------------------------------------                  
Nebraska City, NE       1993          5-31.5 yrs.                    
---------------------------------------------------                  
Las Vegas, NV           1993          5-31.5 yrs.                    
---------------------------------------------------                  
Conway, NH              1993          5-31.5 yrs.                    
---------------------------------------------------                  
Lake George, NY         1993          5-31.5 yrs.                    
---------------------------------------------------                  
Smithfield, NC          1993          5-31.5 yrs.                    
---------------------------------------------------                  
Crossville, TN          1993          5-31.5 yrs.                    
---------------------------------------------------                  
Nashville, TN           1993          5-31.5 yrs.                    
---------------------------------------------------                  
Tri-Cities, TN          1993          5-31.5 yrs.                    
---------------------------------------------------                  
Union City, TN          1993          5-31.5 yrs.                    
---------------------------------------------------                  
Corsicana, TX           1993          5-31.5 yrs.                    
---------------------------------------------------                  
Hempstead, TX           1993          5-31.5 yrs.                    
---------------------------------------------------                  
LaMarque, TX            1994          5-31.5 yrs.                    
---------------------------------------------------                  
Livingston, TX          1993          5-31.5 yrs.                    
---------------------------------------------------                  
Mineral Wells, TX       1993          5-31.5 yrs.                    
---------------------------------------------------                  
Sulphur Springs, TX     1993          5-31.5 yrs.                    
---------------------------------------------------                  
Draper, UT              1993          5-31.5 yrs.                    
---------------------------------------------------                  
North Bend, WA          1993          5-31.5 yrs.                    
---------------------------------------------------                  
Eastgate, NC            1997          5-31.5 yrs.                    
---------------------------------------------------                  
Tower, NC               1997          5-31.5 yrs.                    
---------------------------------------------------                  
Northridge, NC          1997          5-31.5 yrs.                    
---------------------------------------------------                  
Gateway, NC             1997          5-31.5 yrs.                    
---------------------------------------------------                  
MacGregor, NC           1997          5-31.5 yrs.                    
---------------------------------------------------                  
                                                                     
---------------------------------------------------                  
</TABLE>

(1)  Buildings and  improvements  are depreciated  based on a 15-31.5 year life.
     Tenant improvements are depreciated over the estimated terms of the leases,
     which range from 5 to 10 years.

(2)  Aggregate cost of the real estate  property for federal income tax purposes
     is approximately $304, 877,000.


                                       23
<PAGE>



                             FAC Realty Trust, Inc.
             Notes to Consolidated Financial Statements (continued)


The changes in total real estate for years ended  December  31,  1997,  1996 and
1995 are as follows:

<TABLE>
<CAPTION>
                                           1997             1996             1995
                                    ------------------------------------------------

<S>                                  <C>              <C>              <C>          
Balance, beginning of period         $ 345,890,739    $ 340,166,756    $ 308,586,835
Developed or acquired properties        30,619,827       10,339,504       24,819,456
Improvements                             6,550,712          547,694       15,474,668
Adjustment to net realizable value              --       (5,000,000)      (8,500,000)
Sales                                   (2,263,094)        (163,215)        (214,203)
                                    ================================================
Balance, end of period               $ 380,798,184    $ 345,890,739    $ 340,166,756
                                    ================================================
</TABLE>

The changes in accumulated  depreciation for years ended December 31, 1997, 1996
and 1995 are as follows:

<TABLE>
<CAPTION>
                                        1997            1996           1995
                                   -------------------------------------------

<S>                                <C>             <C>            <C>         
Balance, beginning of period       $ 31,198,623    $ 20,386,741   $ 12,561,252
Developed or acquired properties      7,561,802       8,865,743      6,857,428
Improvements                          3,684,308       1,946,139        968,061
Sales                                  (345,676)             --             --
                                   ===========================================
Balance, end of period             $ 42,099,057    $ 31,198,623   $ 20,386,741
                                   ===========================================
</TABLE>


                                       24